United States v. Sanmina Corp.
| Decision Date | 07 August 2020 |
| Docket Number | No. 18-17036,18-17036 |
| Citation | 968 F.3d 1107 |
| Parties | UNITED STATES of America, Petitioner-Appellee, v. SANMINA CORPORATION and Subsidiaries, Respondent-Appellant. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Michael C. Lieb (argued) and Leemore L. Kushner, Ervin Cohen & Jessup LLP, Beverly Hills, California, for Respondent-Appellant.
Bethany B. Hauser (argued) and Deborah K. Snyder, Attorneys; Richard E. Zuckerman, Principal Deputy Assistant Attorney General; Tax Division, United States Department of Justice, Washington, D.C.; for Petitioner-Appellee.
Before: Johnnie B. Rawlinson and Consuelo M. Callahan, Circuit Judges, and Susan R. Bolton,* District Judge.
Sanmina Corporation ("Sanmina") claimed a worthless stock deduction on its federal tax return, which triggered an audit by the United States Internal Revenue Service ("IRS") of Sanmina's tax returns. To support the deduction, Sanmina provided to the IRS a valuation report that had been prepared by DLA Piper, LLP, which in turn cited two memoranda authored by Sanmina in-house counsel. The IRS issued a summons for the memoranda, and Sanmina objected on the basis that they were protected both by attorney-client privilege and the attorney work-product doctrine.
After the district court initially denied enforcement of the summons, the IRS appealed to this court. We remanded for in camera review of the memoranda but retained jurisdiction over the appeal. United States v. Sanmina , 707 F. App'x 865 (9th Cir. 2017). On remand, the district court determined that the memoranda were covered by both attorney-client privilege and work-product protection, but that those privileges had been waived.
We affirm in part and reverse in part the district court's findings. We agree that Sanmina's disclosure of the memoranda to DLA Piper waived the attorney-client privilege. However, such disclosure did not waive their work-product protection, except for the factual content of the memoranda. Accordingly, we grant in part and deny in part the IRS's enforcement petition, and remand to the district court to issue a disclosure order consistent with this opinion.
In its federal tax return, Sanmina claimed a worthless stock deduction arising from its ownership of shares of stock in a Swiss subsidiary, Sanmina International AG ("Sanmina AG," also referred to internally as "Swiss-3600"). The deduction totaled $503 million and offset all of Sanmina's taxable income for the 2008 tax year, with carryforward losses. The IRS subsequently initiated an examination of Sanmina's federal income tax liabilities of Sanmina Corporation and subsidiaries for the 2008, 2009, and 2010 taxable periods.
To support the worthless stock deduction, Sanmina provided the IRS with a valuation report prepared by DLA Piper (the "DLA Piper Report"), which referred to two memoranda authored by Sanmina's in-house counsel (the "Attorney Memos") in a footnote of the report. The IRS then issued a summons for the Attorney Memos. In response, Sanmina declined to produce the memoranda, invoking attorney-client privilege and attorney work-product protection. However, Sanmina agreed to disclose to the IRS the "non-privileged documents on which the analyses contained in the [Attorney Memos] are based."
The DLA Piper Report is 102 pages and titled on the cover page as "Sanmina-SCI Corporation – Estimate of Fair Market Value of Sanmina International AG – Valuation as of June 30, 2009." Each page contains the label "Attorney-Client Privilege – Confidential Draft." The report begins with a two-page letter, which is addressed to Sanmina's in-house counsel, and signed by a DLA Piper partner and economist. It states in part:
DLA Piper ... has concluded a fair market value ("FMV") analysis supporting your assessment of insolvency of Sanmina International AG .... We understand our summary report will be used solely for tax compliance purposes, specifically for confirming the worthlessness of Sanmina International AG's common shares. Our estimate of value does not constitute a fairness opinion or an estimate of FMV for any other purpose and should not be relied upon as such.
The two-page letter concludes:
In the report's Executive Summary, a section headlined "Nature of Engagement" states:
Sanmina ... has asked DLA Piper ... to provide an estimate of the fair market value ("FMV") of 100 percent of the common stock of its wholly-owned subsidiary .... as of June 30, 2009 ("Valuation Date"). We understand that this analysis will be used by Sanmina's management ("Management") to make a determination of value on liquidation of Subject Company as of the Valuation Date in the context of a restructuring of Sanmina's international operations. In this content [sic], it is Management's intent to assess whether Sanmina AG's common stock as of the Valuation Data [sic] was worthless. Furthermore, it is our understanding that Sanmina will not disclose our analysis to third parties other than its financial auditors and interested tax authorities without our expressed written consent.
The footnote referencing the Attorney Memos is found on page 56 of the report within the following paragraph:
We believed that the book value of each liability provides the best estimation of its FMV. However, based on interviews with Management and related documents provided by Management,6 we concluded that the intercompany loan between Sanmina Holding AB and Sanmina Kista (about US$ 90 million) as well as the intercompany non-trade receivable between Sanmina-SCI and Sanmina AG [i.e., Swiss 3600] (about US$ 113 million) should be disregarded.
In the text of footnote 6 above, three documents are listed without further explanation: (1) "Memo draft: Stock and Debt Losses on Swiss-3600, March 11, 2009"; (2) "Capital Contribution Agreement between Sanmina-SCI Corporation and Sanmina International AG, July 3, 2006; and (3) "Memo: Guarantee and Capital Contribution Agreement Concerning Sanmina International AG, July 2, 2006." The first and third documents listed are the Attorney Memos at issue in this case.
The Attorney Memos are described by Sanmina's in-house counsel as follows:
A privilege log produced by Sanmina demonstrates that the Attorney Memos were shared outside of Sanmina only with Ernst & Young, KPMG, LLP, and DLA Piper. Sanmina's Director of Tax Controversy and Tactical Support, Brian Dulkie, explains in an affidavit that the Attorney Memos were "were provided to Ernst & Young ... and KPMG to support Sanmina's taking of a worthless stock deduction" and both those firms "provided tax advice related to Sanmina's decision to take the worthless stock." According to Dulkie:
Given the significance of that tax treatment, Sanmina proceeded with the expectation that IRS would likely call upon Sanmina to defend the worthless stock deduction. Anticipating the possibility that the Service might adopt an adverse position, Sanmina sought advice from DLA Piper, Ernst & Young and KPMG concerning the propriety of the deduction.
In January 2015, the IRS filed a petition to enforce the summons for the Attorney Memos, and the district court issued an order to show cause to Sanmina. After briefing from the parties and a hearing, the district court (Magistrate Judge Paul S. Grewal) issued an order denying enforcement of the summons, finding that the memoranda were privileged and that the privileges were not waived. The IRS appealed.
In December 2017, a panel of this court remanded the case "for the district court to review the 2006 and 2009 memos in camera to determine whether the documents requested by the government are privileged to any degree" and "retain[ed] jurisdiction over this appeal." Sanmina , 707 F. App'x at 866. In June 2018, after some dispute between the parties regarding the scope of the remand and a request for clarification from the district court, this court issued another order defining the scope of remand as: (1) whether the memoranda are privileged in the first instance and (2) whether such privilege was waived.
On remand, the district court (Judge William H. Alsup) issued an order that affirmed "Judge Grewal's finding that the memoranda are protected by the attorney-client privilege and attorney work-product doctrine," but found that the privileges were "waived when Sanmina disclosed the memoranda to DLA Piper to obtain an opinion on value, then turned over the valuation report to...
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