The Attorney-Client and Work Product Privileges in the Tax Context

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A recent case reveals the perils of maintaining the attorney-client and work product privileges. As it demonstrates, additional precautions may be necessary in the context of privileged documents that are utilized in the tax context, particularly where those documents are used to support a reporting position.


United States v. Sanmina Corporation & Subsidiaries involved a dispute between the IRS and Sanmina Corporation that started with a large worthless stock deduction related to one of the taxpayer’s subsidiaries. In anticipation of IRS scrutiny regarding this deduction, Sanmina enlisted a large, well-known law firm to prepare a valuation report. A footnote in the report referenced two memoranda prepared by Sanmina’s in-house counsel relating to the relevant stock, and the text of the report stated that these documents were relied upon in writing the report. The IRS subsequently investigated Sanmina, and in response, Sanmina provided the valuation report. The IRS demanded the memoranda be turned over as well, but Sanmina refused, claiming attorney-client privilege and attorney work-product protection. The IRS filed a motion to enforce the summons in the Northern District of California, claiming these protections were waived when Sanmina provided the memoranda to the law firm, and the court agreed.

In its analysis, the court first found that the memoranda were originally protected by attorney-client privilege and the work product doctrine; however, it found that these protections were waived when Sanmina disclosed the memoranda to the law firm, DLA Piper. The court noted that DLA Piper relied upon the documents to form an opinion regarding the valuation, adding that the purpose of the resultant report was to support Sanmina’s deduction should the IRS examine the company’s tax liabilities.

Applying the rule from Weil v. Investment/Indicators, Research & Management, Inc., 647 F.2d 18, 24 (9th Cir. 1981) that “voluntary disclosure of the content of a privileged attorney communication constitutes waiver of the privilege as to all other communications on the same subject,” the court determined that the memoranda were disclosed to the law firm voluntarily and not for the purpose of receiving legal advice; therefore, privilege related to the memoranda had been waived. A party “cannot disclose a privileged attorney communication relevant to an issue of material fact, then invoke privilege to shield that communication from discovery.” Sanmina, 2018 BL 367300, at *3.  Additionally, the court rejected Sanmina’s contention that the law firm did not rely on the memoranda in making its conclusions regarding valuation because the report clearly indicated the memoranda were used in creating the report.

Further, the court held that, even if privilege had survived the disclosure to DLA Piper, disclosure of the law firm’s valuation report to the IRS would have constituted waiver. The court reasoned that it would be unfair to provide the IRS with the valuation report but not allow it to review the documents relied upon to create the report because this would require that the IRS “accept the opinion without access to the foundation material.”  Sanmina, 2018 BL 367300, at *3. Relying on principles of fundamental unfairness, the court shut down Sanmina’s attempt to disclose only the facts that support its position (i.e. the valuation report) and shelter less favorable information by claiming the memoranda are privileged, despite the fact that this left the valuation report’s claims unsupported.

Finally, while Sanmina claimed the IRS did not provide any evidence of unfairness, the court held that it is Sanmina’s burden to “establish[] all elements of the privilege, including non-waiver.”  Sanmina, 2018 BL 367300, at *4. The principle that the burden of proving privilege, including proving that there was no waiver, falls on the party asserting such privilege is supported by Weil.

This recent case demonstrates the importance of protecting the attorney-client privilege and the work-product privilege, as well as the lurking complexities at play with respect to these privileges in the tax context.