By Benjamin A. Cohen-Kurzrock and Andrew R. Comiter via May/June 2021 issue of Probate & Property

Benjamin A. Cohen-Kurzrock is a senior associate at Baker Botts L.L.P. in Houston, Texas. Andrew R. Comiter is a partner at Comiter, Singer, Baseman & Braun LLP in Palm Beach Gardens, Florida.

Estate planning is complicated, and often it is affected by issues associated with tax exposure, complex family dynamics, and unique asset mixes. Attorneys frequently take a team-based approach to meeting the challenge of developing and implementing an estate plan that best achieves a client’s multifaceted goals, typically collaborating with accountants, financial planners, other lawyers, and valua- tion professionals.

Undoubtedly, these professionals play important roles throughout the planning process, from identifying opportunities to reporting the resulting transfers to the IRS. While clients often benefit from the team-based approach, it is not without risk. For example, it is not uncommon for various parts of the planning team to send written communications (typically emails) detailing opportunities, risks, strengths, weaknesses, and motivations with respect to a given plan. Sometimes these communications are sent in the interest of full disclosure to ensure that the client is fully advised on the risks, benefits, and alternatives to various parts of the estate plan. They also can be a helpful aid for ancillary professionals when trying to understand technical aspects of the client’s plan. Other times, however, these communications can unintentionally highlight arguments to the IRS, resulting in a potentially protracted legal battle over whether and the extent to which they are protected from discovery by privilege.

The Ninth Circuit’s recent decision in United States v. Sanmina Corporation, 968 F.3d 1107 (9th Cir. 2020), demonstrates these concerns well. The case involves an income tax dispute with the IRS that has spawned nearly five years of litigation on one discovery issue: whether the taxpayer inadvertently waived privilege by disclosing privileged memoranda in a footnote to a valuation report that was voluntarily given to the IRS in support of a return position. In this article, we summarize this decision and offer privilege considerations for practitioners as they work with their estate planning teams.

United States v. Sanmina Corporation

Background and Procedural History

This case involved a $503 million worthless-stocks deduction claimed by Sanmina Corporation on its 2008 income tax return. The deduction arose from its ownership of shares of stock in a Swiss subsidiary. To support the deduction, Sanmina provided the IRS with a 102-page valuation report prepared by

DLA Piper (the DLA Report), which, in turn, cited—in a footnote—memoranda authored by Sanmina’s in-house counsel (the Attorney Memos). The Attorney Memos contained substantive legal and tax analyses, and one of them, dated March 11, 2009, was even marked “Confidential—Work Product Privilege.” Each page of the DLA Report was marked “Attorney-Client Privilege—Confidential Draft.” Id. at 1113–14.

Sanmina’s worthless-stock deduction caught the attention of the IRS, which ultimately issued a summons for Sanmina to produce the Attorney Memos. Sanmina objected to the summons on the basis of attorney- client privilege and the work product doctrine, agreeing, however, to provide the non privileged documents on which the memoranda were based. A privilege log that Sanmina subsequently prepared showed that it had shared the Attorney Memos with only DLA Piper and its accountants, Ernst & Young and KPMG, all of which provided tax advice to Sanmina on the worthless-stock deduction it claimed on its 2008 income tax return.

In 2015, the IRS petitioned the US District Court for the Northern District of California to enforce the summons for the Attorney Memos. The district court  denied  enforcement, finding  that  the Attorney Memos were privileged and not subject to a waiver. On appeal, in 2017, the Ninth Circuit remanded the case to the district court for an in camera review and, in 2018, issued a supplemental order clarifying the remand’s scope because of a dispute among the parties. On remand, the district court made the following findings: First, the Attorney Memos were protected by the attorney-client privilege and the work product doctrine; and second, Sanmina waived those privileges when it “disclosed the memoranda to DLA Piper to obtain an opinion on value [and] then turned over the valuation report to the IRS.” Id.

The case then went to the Ninth Circuit again, but this time only on the issue of whether a waiver occurred because the parties agreed that the Attorney Memos were privileged attorney-client communications and attorney work product. Thus, as the Ninth Circuit explained, to uphold the district court’s decision, it had to determine de novo that a waiver of each protection occurred.

The Ninth Circuit’s Analysis and Holding on the Attorney-Client Privilege

As to the attorney-client privilege, the Supreme Court in Upjohn Co. v. United States recognized that the privilege protects confidential communications between attorneys and clients made for the purpose of giving legal (as opposed to nonlegal) advice. 449 U.S. 383, 389 (1981). Like other jurisdictions, Ninth Circuit case law extends the privilege to communications with third parties who assist an attorney in providing legal advice and to communications with a client’s agents. There is a presumption that a client’s hiring of an attorney is to obtain legal advice from the attorney, although that presumption may be rebutted when facts demonstrate that the client hired the attorney “without reference to his knowledge and discretion in the law.” See, e.g., United States v. Richey, 632 F.3d 559, 566 (9th Cir. 2011); United States v. Landof, 591 F.2d 36, 39 (9th Cir. 1978).

It is relatively easy to raise a question about whether a client waived the attorney-client privilege. A waiver can, for example, occur when privileged information is voluntarily disclosed by a client to a third party outside of the privilege group, which is called an “express waiver.” Bittaker v. Woodford, 331 F.3d 715, 719 (9th Cir. 2003). The privilege may also be waived “by implication” if an attorney’s performance is put at issue because there is a fairness principle that courts apply when considering the extent to which privileged materials are protected from discovery. Id.; Chevron Corp. v. Pennzoil Co., 974 F.2d 1156, 1162 (9th Cir. 1992). When such a waiver is made, it tends to be a narrowly construed subject matter waiver applying only to the matters at issue in the relevant communication. Bittaker, 331 F.3d at 719; Chevron Corp., 974 F.2d at 1162.

In this case, the Ninth Circuit opined that the waiver issue turned on whether the district court clearly erred in finding that Sanmina hired DLA Piper to provide nonlegal (i.e., valuation) advice. If there was no clear error, then Sanmina expressly waived the attorney-client privilege by providing the Attorney Memos to DLA Piper. If, however, there was a clear error, then the court would have to address whether a waiver by implication occurred.

The Ninth Circuit held that the district court did not clearly err, reasoning that the DLA Report stated that Sanmina sought valuation advice from DLA Piper. At the same time, an opposite finding likely would have withstood challenge on appeal because the record “suggest[s] that Sanmina shared the Attorney Memos with DLA Piper for the purpose of seeking both legal and nonlegal advice.” Sanmina Corp., 968 F.3d at 1118. Nevertheless, the evidence was insufficient to overturn the district court’s evidentiary finding on this issue. Consequently, the Ninth Circuit skipped the question of whether a waiver by implication occurred as to the attorney client privilege when Sanmina provided the DLA Report to the IRS.

The Ninth Circuit’s Analysis and Holding on the Work Product Doctrine

The work product doctrine, on the other  hand, is  a “qualified  privilege” protecting  documents  and tangible things prepared by a party or its representative in anticipation of litigation. United States v. Nobles, 422 U.S. 225, 237–39 (1975). It is designed to “shelter[ ] the mental processes of the attorney.” Id.

 Although the work product doctrine is not absolute, it is more robust than the attorney-client privilege from a waiver standpoint. In particular, a voluntary waiver of the work product doctrine requires a voluntary disclosure during the litigation “to an adversary” or “[in a manner that] is otherwise inconsistent with the purpose of the work product doctrine.” Sanmina Corp., 968 F.3d at 1120. An adversary for tax matters is limited to the adversary in the sort of litigation that the work product document addresses, typically the IRS or a state taxing authority. United States v. Deloitte LLP, 610 F.3d 129, 140–41 (D.C. Cir. 2010). And, thus, there would be a waiver of the work product doctrine if a party voluntarily produces attorney work product to the IRS or places those documents in “a conduit to an adversary[, namely the IRS].” Deloitte LLP, 610 F.3d at 140–41. Deloitte LLP addressed factors that

might show that attorney work product was placed into a “conduit to an adversary,” resulting in a waiver, such as “whether the disclosing party has engaged in self-interested selective disclosures by revealing its work product to some adversaries but not others” and “whether  the  disclosing  party  had  a  reasonable basis for believing that the recipient would keep the disclosed material confidential.” Id. Principles of fundamental fairness applicable to a waiver of the attorney client privilege by implication also may affect the analysis. Sanmina Corp., 968 F.3d at 1121–22.

As applied to this case, the Ninth Circuit readily determined that Sanmina’s disclosure of the Attorney Memos to DLA Piper was not a voluntary disclosure of attorney work product to an adversary because the IRS was the adversary anticipated by those documents, not DLA Piper. Likewise, the court rejected the notion that Sanmina placed the Attorney Memos into a conduit to the IRS by providing them to DLA Piper because “Sanmina’s enlistment of DLA Piper’s assistance in anticipation of litigation with the IRS indicates a ‘common litigation interest’ between Sanmina and DLA Piper insofar as the Attorney Memos are concerned.” Sanmina Corp., 968 F.3d at 1122–23. The Ninth Circuit further reasoned that a contrary holding would contravene “the record, [which] support[s] a reasonable belief on Sanmina’s part that the Attorney Memos were maintained within a confidential relationship with DLA Piper.” Id.

These holdings left open a “more difficult” question: whether Sanmina waived the protection provided by the work product doctrine by providing the DLA Report to the IRS. Id. at 1123. The Ninth Circuit held that it did, reasoning that, “under the totality of the circumstances, Sanmina acted in such a way that [was] inconsistent with the maintenance of secrecy against its adversary [—the IRS—] in regards to the Attorney Memos” in part because “Sanmina could have chosen to substantiate the [worthless-stock] deduction with other documents that did not make reference to the Attorney Memos but did not.” Id. at 1124.

The Ninth Circuit took a narrow view on this waiver, rebuking the district court for taking an expansive view that reached the core opinion work product contained in the Attorney Memos. To the Ninth Circuit, mere footnote disclosure of the Attorney Memos was not sufficient to waive the strong protection provided to core opinion work product, even if it was “foundational material” to DLA Piper’s opinion, because the IRS failed to establish sufficient need. Id. The Ninth Circuit suggested that it was especially hard for the IRS to explain why it needed the core opinion work product in this case because, “[e]ven without access to the Attorney Memos, the IRS could still proceed with its examination of Sanmina’s returns, conclude that Sanmina has failed to adequately support its claimed deduction with the DLA Piper Report and other documents provided, and disallow the deduction.” Id. (citing Interstate Transit Lines v. Comm’r, 319 U.S. 590, 593 (1943)). Thus, the only disclosure of the Attorney Memos that the Ninth Circuit required Sanmina to make to the IRS was “the disclosure of the factual, non-opinion, work product contained in the Attorney Memos on which the DLA Report relies.” Id. at 1125.

Considerations Going Forward

There is little doubt that the COVID-19 pandemic and recent changes in the US political landscape have presented unique estate planning opportunities and urgencies for high-net-worth individuals. In early 2020, the stock market sell off incentivized estate planning techniques based on estate tax freezes because of the reduced value of domestic equity securities, followed, for the most part, by their rapid growth leading up to year-end. During this same period, the emergency programs implemented by the Federal Reserve caused the applicable federal rate (the AFR) to approach zero percent, which, in turn, increased the likelihood of AFR-based estate planning structures (e.g., AFR notes and annuity trusts) being economical and tax-efficient.

The 2020 election results made estate planning all the more interesting because of the alignment and composition of the White House and Congress. Consequently, one can expect that there will be a particular focus on estate planning for high-net-worth individuals designed to transfer assets outside of the gross estate. And while the uptick in work for estate planners (whether caused by economic concerns or legislative concerns) has been widespread and welcomed, certain risks make the lessons from Sanmina Corporation important. For example, the planning techniques that produce positive results if assets appreciate outside of the gross estate (e.g., estate tax freezes and AFR-based transfers) also have attendant valuation risks. These risks are more relevant when hard-to-value assets or business interests are in play. In this situation, an appraisal often is necessary and provided to the IRS if the transfer is disclosed on a return, which is not atypical. The concern is that, like what happened in Sanmina Corporation, something about the disclosure, whether on the return or in the appraisal, will inadvertently provide the IRS with a potential avenue for accessing privileged, substantive communications between the estate planner and the appraiser (such as those that include comments and draft reports) and, as a result, affect the appraisal’s strength.

The story of Sanmina Corporation demonstrates how this could unintentionally increase the cost and delay the finality of good planning if the IRS takes a real interest in obtaining the information over which the taxpayer’s counsel claims privilege. To mitigate that risk, keeping some of the points below in mind may be helpful.

1. Be mindful of and balance the benefits and costs of transmitting information to the matter team in writing—especially via email—and make sure that written communications are drafted with an eye toward protecting
2. Beware of “dual purpose” communications of legal and nonlegal advice, which is common in estate planning The test applied by jurisdictions to determine whether privilege applies varies; some use a “primary purpose” test and others apply a “because of” test based on the totality of the circumstances. See id. at 1119 n.5.
3. Carefully and fully consider the material that is disclosed to the IRS, whether on a tax return or in response to an information request, in particular when it comes to valuation