Opinion
7132-19 7138-19
10-18-2023
ESTATE OF MARY K. SAKIOKA, DECEASED, JEREMY T. SAKIOKA AND TRACI KIYAMA, EXECUTORS AND CO-TRUSTEES, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Adam B. Landy, Special Trial Judge.
Pending before the Court is the Commissioner's Motion to Compel Production of Documents, filed November 17, 2020. The Commissioner seeks compliance and responses to seven requests from his Request for Production of Documents issued to petitioners on December 26, 2019. The Commissioner argues that he is entitled to the requested documents because petitioners failed to carry their burden of demonstrating that the withheld documents are privileged, and petitioners waived any associated privileges because they disclosed privileged documents to third parties and to the Internal Revenue Service (IRS). Petitioners counter that they are not required to produce the withheld documents listed on the privilege logs because they are protected by either the attorney-client privilege or the federally authorized tax practitioner privilege created by section 7525 (hereinafter referred to as the "section 7525 privilege").
Unless otherwise indicated, statutory references are to the Internal Revenue Code, Title 26 U.S.C., in effect at all relevant times, and Rule references are to the Tax Court Rules of Practice and Procedure. Furthermore, this Order does not address any issues related to the work product doctrine as the Court addressed issues related to that specific privilege in its Order served February 2, 2022.
Background
We state the following background facts solely for the purpose of determining whether and to what extent the withheld documents are privileged and if privileged, whether a waiver occurred but not as findings of fact in this case. See Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff'd, 17 F.3d 965 (7th Cir. 1994).
After Mary K. Sakioka died on June 22, 2015, an estate was opened in California by the named executors and co-trustees. In addition, petitioners and most of the beneficiaries resided in California at the time the Petition was filed. A decision in this case is appealable to the U.S. Court of Appeals for the Ninth Circuit, pursuant to section 7482(b)(1)(A), absent the parties' stipulation to the contrary.
Petitioners in this case are the Estate of Mary Sakioka, Deceased (Mary) with her grandchildren Jeremy Sakioka and Traci Kiyama, née Yokoyama as executors and co-trustees of her estate. The relevant members of the Sakioka family consists of Mary, her children Phyllis Sakioka (Phyllis) and Roy Sakioka (Roy), and her grandchildren, Phyllis's children Traci Yokoyama (Traci) and Jenna Yokoyama (Jenna), and Roy's children Jeremy Sakioka (Jeremy), Justin Sakioka (Justin), Calvin Sakioka (Calvin), and Hana Sakioka (Hana) (collectively, the "Sakioka Grandchildren" and with their parents and grandmother, the "Sakioka Family"). As part of their intergenerational business and estate planning, the Sakioka Family, individually or collectively, owned, or served as trustee of, several businesses and trusts, including the Mary K. Sakioka Trust, the Jack T. Sakioka Trust, the JTS Children's Trust Nos. 1 and 2, the MKS Children's Trust Nos. 1 through 6, the Roy T. Sakioka Trust, the Phyllis T. Sakioka Trust, Marjack LLC, Sakioka Farms, GP (Sakioka Farms), and various other entities owned or controlled by the Sakioka Family (collectively, the "Sakioka Family Entities").
In or around 2010 the law firm Palmieri, Tyler, Wiener, Wilhelm & Waldron LLP (Palmieri) was engaged to assist in estate and business planning for Mary. Attorneys Cynthia Wolcott (Wolcott), Chadwick Bunch (Bunch), Richard Salus (Salus), and Heather Whitehead communicated with various members of the Sakioka Family between 2010 and 2013. In 2012 Wayne Casey, an attorney at Casey Estate & Business Planning (Casey), was additionally engaged in advising on business-succession planning. The record only contains two letters detailing the terms of the Sakioka Family's engagement of the attorneys. The first, a letter dated November 12, 2010, discusses the terms of Palmieri's representation of Phyllis and Roy for business and estate planning purposes. The second, an email dated November 17, 2020, discusses the terms of Jeremy's retention of Casey. No engagement letters have been provided by petitioners addressing any of the remaining Sakioka Grandchildren's retention of Palmieri or Casey, or the engagement of Barbara Kelley or Kelley & Associates, Inc. by the Sakioka Family.
Petitioners assert that Mary met with Palmieri to discuss her intergenerational estate and business planning goals, and that Roy was aware of these discussions. They further assert that Roy and Phyllis were simultaneously discussing retiring from Sakioka Farms and their own estate planning issues with Palmieri in addition to the issues related to Mary's estate, the family trusts, and the family businesses. However, in or around November 2010, Phyllis retained Nancy Ferruzzo (Ferruzzo) as separate counsel. It is not completely clear why Phyllis retained Ferruzzo, as petitioners initially asserted in their Reply to the Motion to Compel that there was a "temporary difference of opinion" as to whether the estate transfers should treat each grandchild equally or each "family line" equally. However, in response to the Court's February 3, 2023, Order, petitioners stated that Ferruzzo was retained by Phyllis to assist with her retirement from the family business and subsequent succession planning but that representation "spilled over" to include estate planning. Petitioners additionally assert that Mary, the remaining Sakioka Family members, the trustees of the family trusts, and the Sakioka Family Entities were clients of Barbara Kelley, a certified public accountant (CPA) at Kelley & Associates, Inc. accounting firm (Kelley).
In calendar year 2012 the Sakioka Grandchildren held "Family Council" meetings, where they discussed issues related to the Sakioka Family and Sakioka Family Entities, including the contemplated estate planning transactions for Mary, Phyllis, and Roy. Occasionally, Jeffrey Littell, a senior-level employee of Sakioka Farms, and Kent Rhodes, a business agent, attended these meetings. However, the record and submitted privilege logs show that many of the Sakioka Grandchildren, other than Jeremy, had little interaction with the attorneys and Kelley regarding the estate planning transactions. Much of their involvement was limited to being carbon copied on or forwarded emails between the Palmieri attorneys, Casey, Kelley, and Roy, Phyllis, or Jeremy.
On November 17, 2020, the Commissioner filed a Motion to Compel Production of Documents (Motion to Compel) seeking to compel petitioners to produce documents withheld during discovery. The documents requested consisted of emails, letters, memoranda, unexecuted draft agreements, notes and minutes from attorney-client meetings, handwritten notes, planning computations, and minutes from Sakioka Family Council Meetings related to the sale of interests in Marjack, LLC, the sale of notes owned by the MKS Children's Trusts, and the Sakioka Family Promissory Notes. Petitioners claim that the withheld documents at issue are covered by the attorney-client privilege, section 7525 privilege, and work product doctrine. In subsequent responses, the Commissioner alleged that any privilege related to those documents has been waived by (1) putting the underlying transaction for which the advice was provided at issue in litigation; (2) the disclosure of privileged documents to third parties, including the Sakioka Grandchildren, Kent Rhodes, and Jeffrey Littell; and (3) the disclosure of a letter, dated December 8, 2010 (hereinafter referred to as the "December Letter"), sent from Palmieri to Roy and Phyllis, marked as confidential attorney-client privileged communications, to the IRS Examination Division and counsel for the Commissioner during informal discovery.
By Order served February 2, 2022, the Court determined that petitioners did not waive the attorney-client privilege through their own affirmative conduct by putting the underlying transaction and decedent's intent at issue in this litigation.
By Order served March 2, 2022, the undersigned was assigned to conduct an in-camera review of the 219 withheld documents listed on the three privilege logs to determine (1) whether the withheld documents are covered by the attorney-client privilege or the section 7525 privilege; (2) whether the claimed privilege or protection offered by the claimed privilege has been waived; and (3) the scope of the waiver based on the "fairness doctrine." The Court has reviewed the parties' motion papers, the withheld documents subject to in-camera review, and now states our findings regarding the application of a protected privilege to the withheld documents.
Discussion
I. In-Camera Reviewed Documents
A. Attorney-Client Privilege
1. The Commissioner's Arguments
The Commissioner challenges petitioners' assertion of the attorney-client privilege to the withheld documents listed on petitioners' Amended and Restated Privilege Log, petitioners' Amended and Restated Supplemental Privilege Log, and petitioners' Privilege Log in Response to Respondent's Third Request for Production of Documents (collectively, the "Privilege Logs"). The Commissioner argues that any privilege, if existing, has been waived to the extent (1) that the documents or communications were shared directly with the Sakioka Grandchildren by Palmieri, Casey, or their parents when it is evident the grandchildren were not clients of Palmieri or Casey; (2) that allegedly privileged documents were shared with Jeffrey Littell and Kent Rhodes during Sakioka Family Council meetings which were memorialized through meeting minutes; (3) that the Sakioka Grandchildren were not Mary's agents; and (4) that petitioners voluntarily provided the IRS with a copy of the December Letter from Wolcott to Roy and Phyllis discussing the estate planning transactions which constituted an intentional waiver of the attorney-client privilege.
In petitioners' Response to the Commissioner's Motion to Compel, petitioners concede that the Sakioka Grandchildren were not Mary Sakioka's agents or in an agency relationship with Mary, but they maintain that the Sakioka Grandchildren were direct clients of Palmieri, Wayne Casey, and Kelley.
2. Petitioners' Arguments
In their Response and Sur-Reply to the Commissioner's Motion to Compel, and Response to the Court's February 3, 2023, Order, petitioners maintain that: (1) the documents in question are privileged attorney-client communications; (2) the privilege was not waived because each individual member of the Sakioka Family was a client of and jointly represented by Palmieri and Casey, and the communications with the Sakioka Grandchildren were necessary for rendering legal advice; (3) Jeffery Littell, as a senior-level employee of a Sakioka family entity, had "unique knowledge" of the Sakioka Family and his inclusion on the communications was necessary for rendering legal advice, and the inclusion of Kent Rhodes did not waive the privilege as he was an agent of the Sakioka Family Entities; (4) Phyllis was adverse to some members of the Sakioka Family and was represented by separate counsel from mid-November 2010, until December 31, 2010, so the December Letter was not privileged and the disclosure to the IRS did not constitute a waiver; and (5) the attorney-client privilege was not waived by the discussion of legal advice at the Sakioka Family Council meetings since the Sakioka Grandchildren were clients of Palmieri and Casey, and that there is no legal requirement for an attorney to be in earshot to maintain privilege over confidential discussions about their attorneys' advice.
To support the finding of an implied-in-fact, attorney-client relationship between Palmieri, Casey, and the Sakioka Family, petitioners filed unsworn Declarations of Jeremy, Wolcott (a former partner at Palmieri), and Casey. Petitioners' Declarations state that the Sakioka Family and Sakioka Family Entities became clients of (1) Palmieri, in 2009, for "intergenerational estate and business-succession planning", the preparation and filing of various estate and gift tax returns, and receipt of legal advice related to gifts and sales of Marjack, LLC interests and the sale of notes receivable by Mary, in 2010 and 2012, respectively; and (2) Casey, in 2012, to advise the family and businesses on work being done, including the gift and estate federal tax examinations.
The Declaration for Wolcott states that "[p]rior to 2010 [she] did not represent Jenna or Traci in any capacity, and Phyllis Sakioka retained separate counsel during this period to represent her individual interests."
The Declaration of Jeremy states that "[i]t was [his] intent and, I believe, the intent of other members of [the Sakioka] Family that the communications and documents [listed on the Privilege Logs] were confidentially made (1) to obtain or convey the advice of Palmieri Tyler Attorneys, [Wayne] Casey, and Kelley, (2) based on, memorializing, reflecting, or pertaining to their advice, and (3) in some cases, because we anticipated litigation." Similarly, Wolcott and Casey state that it was their opinion that the attorney-client privilege applied to the documents listed on the Privilege Logs because the documents included confidential communications with the Sakioka Family and Sakioka Family Entities, and it was their intent that the communications and documents would be subject to the attorney-client privilege at the time the communications were made, and the documents were created.
The Court notes that petitioners have not raised the fiduciary exception or the common interest doctrine as an exception to waiver of the attorney-client privilege in their motion papers. See In re Pac. Pictures Corp., 679 F.3d 1121, 1129 (9th Cir. 2012); In re Grand Jury Proc. Grand Jury No. 97-11-8 , 162 F.3d 554, 556-57 (9th Cir. 1998); United States v. Evans, 796 F.2d 264, 265-66 (9th Cir. 1986). Therefore, the Court determines that petitioners have conceded these possible issues and arguments. 3K Inv. Partners v. Commissioner, 133 T.C. 112, 121 n.9 (2009).
Proceedings in the Tax Court are conducted in accordance with the Federal Rules of Evidence (FRE). See § 7453; Rule 143. "Federal common law governs the attorney-client privilege when courts adjudicate issues of federal law." Eastman v. Thompson, 594 F.Supp.3d 1156, 1175 (C.D. Cal. 2002)(citing United States v. Ruehle, 583 F.3d 600, 608 (9th Cir. 2009)); see also Fed. R. Evid. 501, 1101(c); United States v. Zolin, 491 U.S. 554, 562 (1989); AD Inv. 2000 Fund LLC v. Commissioner, 142 T.C. 248, 254 (2014). Therefore, the Court applies the jurisprudence articulated by the federal courts, including the U.S. Court of Appeals for the Ninth Circuit and the California federal district courts, in resolving the issues raised.
The party asserting the privilege has the burden to establish the relationship and the privileged nature of the communication. Ruehle, 583 F.3d at 609; see also Ralls v. United States, 52 F.3d 223, 225 (9th Cir. 1995). "Because it impedes full and free discovery of the truth, the attorney-client privilege is strictly construed." Eastman, 594 F.Supp.3d at 1175 (quoting United States v. Martin, 278 F.3d 988, 999 (9th Cir. 2002)); see also United States v. Plache, 913 F.2d 1375, 1379 (9th Cir. 1990). The burden is not discharged by mere conclusory or ipse dixit assertions. In re Bonanno, 344 F.2d 830, 833 (2d Cir. 1965).
The attorney-client privilege applies to communications made in confidence (1) by a client to an attorney for the purpose of obtaining legal advice and (2) by an attorney to a client, where the communication contains legal advice or reveals confidential information relating to such advice. Upjohn Co. v. United States, 449 U.S. 383, 390 (1981); Bernardo v. Commissioner, 104 T.C. 677, 682 (1995). "Whether a communication or document is covered by the attorney-client privilege is determined by an eight-part test: (1) where legal advice of any kind is sought (2) from a professional legal adviser in his capacity as such, (3) the communications relating to that purpose, (4) made in confidence, (5) by the client, (6) are at his instance permanently protected (7) from disclosure by himself or by the legal adviser, (8) unless the protection be waived." Eastman, 594 F.Supp.3d at 1175; see also Ruehle, 583 F.3d at 607 (citing In re Grand Jury Investigation, 974 F.2d 1068, 1071 n.2 (9th Cir. 1992)(quoting United States v. Margolis (In re Fischel), 557 F.2d 209, 211 (9th Cir. 1977)); see also United States v. Graf, 610 F.3d 1148, 1156 (9th Cir. 2010) (citations omitted).
"An attorney-client relationship is formed when an attorney renders advice directly to a client who has consulted him seeking legal counsel." Waggoner v. Snow, Becker, Kroll, Klaris & Krauss, 991 F.2d 1501, 1505 (9th Cir. 1993) (citations omitted). "A formal contract is not necessary to show that an attorney-client relationship has been formed." Id. "The court may look to the intent and conduct of the parties to determine whether the relationship was actually formed." Id. Courts may also consider "whether the client believed an attorney-client relationship existed." Waggoner, 991 F.2d at 1505; Eastman, 594 F.Supp.3d at 1176 (citing Boskoff v. Yano, 57 F.Supp.2d 994, 998 (D. Haw. 1998) (quoting Research Corp. Tech., Inc. v. Hewlett-Packard Co., 936 F.Supp. 697, 700 (D. Ariz. 1996)).
According to the Ninth Circuit:
An attorney-client relationship is contractual and consensual, and such a relationship can be formed only with the consent of the attorney and individual seeking representation. The consent of the parties must be personal and must flow between the particular individuals, and a finding of an attorney-client relationship should not be based on the acts
of an intermediary, because such a finding would be contrary to the fundamental principles of attorney-client representation.Boskoff v. Yano, 57 F.Supp.2d at 998 (citing In re Johore Investment Company, 157 B.R. 671, 676 (D. Haw. 1985) (citations omitted)).
Petitioners contend that an attorney-client relationship in a joint representation is formed "by some form of contract, express or implied, formal or informal." Fox v. Pollack, 181 Cal.App.3d 954, 955, 226 Cal.Rptr. 535 (Cal Ct. App. 1986). Petitioners further argue that California courts have stated that "no formal agreement or compensation is necessary to create an attorney-client relationship for purposes of the privilege." Kerner v. Superior Ct., 206 Cal.App.4th 84, 141 Cal.Rptr.3d 504, 529 (Cal.Ct.App. 2012). Petitioners maintain that "[t]he keys to determining the scope of a joint representation are the parties' intent and expectations and so a district court should carefully consider (in addition to the content of the communications themselves) any testimony from the parties and their attorneys on those areas." In re Teleglobe Commc'ns Corp., 493 F.3d 345, 363 (3d Cir. 2007).
The Commissioner does not dispute that Mary, Roy, and Phyllis were clients of Palmieri for estate planning purposes beginning on or around November 12, 2010, and that Roy and Mary were Palmieri clients for business planning. Applying the law stated above, reviewing the withheld documents, and Jeremy's Declaration as it relates to him individually, the Court determines that Jeremy was a client of Palmieri and Casey in his capacity as a grandchild in 2010 and as a grandchild and co-Trustee of the Mary K. Sakioka Trust in 2011 and 2012.
Petitioners, however, have not provided the Court with sufficient evidence to support the assertion that Palmieri or Casey represented each of the remaining Sakioka Grandchildren except as expressly stated herein. Even if the Court determined that the Declarations sufficiently reflected the grandchildren's intent to form an implied attorney-client relationship, this relationship is only shown between Jeremy, Palmieri, and Casey. The Declarations by themselves do not serve the purpose of showing a common intent and belief by each Sakioka grandchild that an attorney-client relationship formed and existed with Palmieri or Casey. Although the Sakioka Grandchildren were the beneficiaries of estate planning transactions for Mary, Roy, and Phyllis, the record does not show that any of the Sakioka Grandchildren had the power or ability to propose changes to the contemplated estate planning transaction for their grandmother or parents. The Sakioka Grandchildren simply were potential beneficiaries of their grandmother and parents' estate planning.
Neither the record nor Declarations show that Calvin, Justin, Hana, or Traci requested legal representation from Palmieri or Casey, and there is no specific evidence, other than the attorneys' Declarations, that Palmieri or Casey contemporaneously consented to this representation. In reviewing the withheld documents, the Court notes that the Palmieri attorneys excluded the Sakioka Grandchildren as parties listed on the written legal advice issued to Roy and Phyllis regarding a possible conflict of interest or when discussing their contemplated estate planning transactions. The Court determines that the Declarations also do not contain sufficient facts for which we can make any reasonable and personal inferences or conclusions that any grandchild other than Jeremy and Jenna, as discussed below, formed an attorney-client relationship with Palmieri or Casey.
The record is clear that Traci and Hana were not clients of Palmieri or Casey. Other than being copied on eight and six emails, respectively, of the total withheld documents, no evidence indicates that Traci and Hana directly consulted the lawyers for legal advice, provided any documents or information to the lawyers, or otherwise had any direct communication with Palmieri or Casey. Neither Traci nor Hana have provided any evidence to show either had a reasonable belief that they were clients of Palmieri or Casey. Although both Traci and Hana are beneficiaries of the MKS Grandchildren's Trust No. 1 and 5, respectively, and their individual trusts, they have not argued or otherwise shown that their respective positions elevated them to the status of a client. The Court determines that an attorney-client relationship did not exist between Traci or Hana and Palmieri or Casey in 2010, 2011, and 2012.
There is no evidence that Jenna, prior to 2011, directly consulted Palmieri or Casey for legal advice despite being copied on seven emailed communications between Palmieri and the Sakioka Family. Moreover, she did not provide any documents or information to the lawyers for their consideration, or otherwise have any direct communication with Palmieri. Therefore, the Court determines that Jenna was not a client of Palmieri in 2010. After the execution of the contemplated estate planning transaction for Mary on or around December 31, 2010, Jenna became a co-manager of Marjack, LLC, and Sakioka Farms, and she became a co-Trustee of the Mary K. Sakioka Trust. In this representative capacity as a co-manager of several Sakioka Family Entities and co-Trustee of the Mary K. Sakioka Trust, the Court determines that an attorney-client relationship existed between Jenna and Palmieri and Casey in 2011 and 2012.
Consistent with the analysis above, there is no evidence that either Calvin or Justin had direct contact with Palmieri or provided confidential documents or information to Palmieri regarding the estate planning transaction in 2010. The Court determines that the Declarations are insufficient to show that Calvin or Justin formed an attorney-client relationship in 2010 with Palmieri. With respect to 2011 and 2012, petitioners state that Calvin and Justin were employees of Sakioka Farms. There is some evidence that Calvin and Justin provided information and communicated with Palmieri or Casey in their capacity as employees of Sakioka Farms.
Conversely, there is no evidence that Calvin or Justin sought legal advice from Palmieri or Casey in 2011 or 2012 with respect to any estate planning matters. In most cases, Calvin and Justin were simply copied on emails where otherwise privileged communications were discussed or privileged documents were exchanged. Calvin and Justin are beneficiaries of the MKS Grandchildren's Trust No. 4 and 3, respectively, and their individual trusts, but they, too, have not argued or otherwise shown that their respective positions elevated them to the status of a client. The Court determines that an attorney-client relationship existed between Calvin and Justin and Palmieri and Casey for 2011 and 2012 in their representative capacities as employees of Sakioka Farms and for no other purposes.
Also included in the communications on the Privilege Logs are Jeffrey Littell, the Chief Operating Officer of Sakioka Farms, GP; Terry Frech, a senior employee of Sakioka Farms, GP; and Kent Rhodes, a consultant, business agent, and member of the Sakioka Family Council. The attorney-client privilege extends to communications between employees of a business and the attorneys of that business for communications that concern matters within the scope of the employee's duties. See Upjohn Co. 449 U.S. at 394. Further, the attorney-client privilege can extend to communications involving an outside consultant when that consultant is the "functional employee" of the company and has "information necessary to allow corporate counsel to give the corporation fully informed legal advice[.]" United States v. Graf, 610 F.3d at 1158-59.
According to Jeremy's Declaration, Kent Rhodes was hired to assist the Sakioka Family in understanding their ownership of the Sakioka Family Entities and took part in Sakioka Family Council meetings in this role. As such, disclosure of the legal advice given to the Sakioka Family at the Family Council meetings related to the business does not waive the attorney-client privilege. However, petitioners have not shown how any discussions, including those involving Mary's estate planning, would fall under this privilege. Thus, if the Sakioka Family Council meetings addressed estate planning matters while Kent Rhodes was present, the privilege as to those discussions is waived. Conversely, Jeremy's Declaration stated that the Sakioka Family relied on employees, including Jeffrey Littell, to assist the family in its work with Palmieri, Casey, and Kelley "because of their important and unique knowledge of the [Sakioka Family's] situation." Consequently, the Court determines that communications regarding Sakioka Farms with Jeffrey Littell, Kent Rhodes and Terry Frech present are therefore privileged.
B. Section 7525 Privilege
1. The Commissioner's Arguments
The Commissioner argues that the Sakioka Grandchildren were not clients of Kelley, and therefore any 7525 privilege that may have attached to those communications was waived by disclosure to the Sakioka Grandchildren.
The parties do not dispute that Mary, Roy, and Phyllis were clients of Kelley.
2. Petitioners' Arguments
Petitioners assert that Kelley, a CPA, jointly represented each member of the Sakioka Family as a federally authorized tax practitioner, and therefore communications between Kelley and the Sakioka Family are privileged under section 7525. To support their assertion that Kelley represented the entire Sakioka family, petitioners, again, rely on unsworn Declarations from Wolcott, Casey, and Jeremy Sakioka. Petitioners did not provide an unsworn declaration from Kelley regarding her representation of the Sakioka Family and Sakioka Family Entities.
Jeremy's Declaration states that "Mary's Family, the Trustees, and the Family Businesses" became clients of Kelley "[i]n 2006, or sometime before then" for "a range of matters, including general accounting and bookkeeping, tax-return preparation, and audit assistance" as well as "financial and tax matters[.]" Wolcott's Declaration similarly stated the Sakioka Family were clients of Kelley during "the 2010 through 2012 timeframe[.]" Casey's Declaration states he began representing the Sakioka family in 2012, and at that time "the Sakioka Family Entities were clients of Barbara Kelley" and he "worked closely together" with her in connection with his representation of the Sakioka Family. Petitioners also point to Kelley's communications with the Sakioka Family to show the Sakioka Grandchildren were clients of Kelley.
3. Law and Application
Under section 7525, "[w]ith respect to tax advice, the same common law protections of confidentiality which apply to a communication between a taxpayer and an attorney shall also apply to a communication between a taxpayer and any federally authorized tax practitioner to the extent the communication would be considered a privileged communication if it were between a taxpayer and an attorney." § 7525(a); see also Countryside Ltd. P'ship v. Commissioner, 132 T.C. 347, 349 (2009). These protections also include those regarding waiver. Schaeffler v. United States, 806 F.3d 34, 38 (2d Cir. 2015). Communications between attorneys representing the same clients are privileged. Evergreen Trading, LLC v. United States, 80 Fed.Cl. 122, 143 (2007). Federally authorized tax practitioners include certified public accountants. 31 U.S.C. § 330; Circular 230 § 10.3. Therefore, communications between federally authorized tax practitioners regarding the same client's tax matters do not waive the privilege. "Petitioners have the burden of proving the preliminary facts necessary to establish the privilege[.]" Countryside Ltd. P'ship, 132 T.C. at 349 (citing United States v. BDO Seidman, L.L.P., 492 F.3d 806, 821 (7th Cir. 2007)).
"'Congress expressly modeled the [s]ection 7525 privilege' on [the] attorney-client privilege." United States v. Burga, No. 18-CV-01633-BLF, 2019 WL 3859157, at *6 (N.D. Cal. Aug. 16, 2019)(quoting United States v. McEligot, No. 14-CV-05383-JST, 2015 WL 1535695, at *6 (N.D. Cal. Apr. 6, 2015)). A party seeking to assert the section 7525 privilege must establish each element of the privilege, including that the tax practitioner-client communication was made for the purpose of obtaining tax advice. United States v. BDO Seidman, 337 F.3d 802, 821 (7th Cir. 2003); see also United States v. McEligot, 2015 WL 1535695, at *5. An implied joint attorney-client relationship, and therefore a tax practitioner relationship under section 7525, can be formed by examining a variety of factors, including the conduct of the party and counsel, the quantity and quality of the communications between the party and counsel, and whether the party played a decision-making role in the relationship. BDO Seidman, 337 F.3d at 810; California Pol'y Center v. Nevada Pol'y Rsch. Inst., 2016 WL 11755177, at *3 (C.D. Cal. Jan. 8, 2016). Subjective declarations of the existence of a tax practitioner relationship do not need to be relied upon to determine objectively whether that relationship existed. Fox v. Pollack, 181 Cal.App.3d at 959, 226 Cal.Rptr. at 535. Instead, the Court focuses its analysis on the intent and conduct of the parties, including contemporaneous communications between the parties and the terms of their relationship. Fink v. Montes, 44 F.Supp.2d 1052, 1060 (C.D. Cal. 1999); Eastman, 594 F.Supp. at 1176.
Petitioners rely on Valero Energy Corp. v. United States, No. 06-CV-6730, 2007 WL 4179464 (N.D. Ill. Aug. 23, 2007) to support their position that declarations alone are sufficient to show a taxpayer's reasonable belief that a confidential relationship existed between a tax practitioner and a client for purposes of the section 7525 privilege. In Valero, like in this case, the petitioners did not produce an engagement letter to show a confidential relationship between the accountant and taxpayer existed. Valero, 2007 WL 4179464, at *7. Instead, they relied on declarations from the purported client's Director of Tax and the tax practitioner that provided the services in question. Id. The district court concluded that the declarations show the client's reasonable belief that it had a confidential relationship with the tax adviser, and therefore the tax practitioner privilege applied to their communications. Id. In Valero, the determination that the tax practitioner privilege applied to the communications was not based on the mere existence of the declarations, but on the declarations providing support to show the client had a reasonable belief that a tax practitioner relationship existed. Id.
While Jeremy's Declaration supports his reasonable belief that a tax practitioner relationship existed between him and Kelley, petitioners have not provided a declaration from Kelley or any of the other members of the Sakioka Family to show they had a reasonable belief that a confidential accountant-client relationship existed separately between them. Further, in Valero, the declarations of both Valero's Director of Tax and tax practitioner were sufficient to establish a confidential relationship on behalf of the corporation, but in this case, petitioners have not provided any support for their contention that one family member's declaration is sufficient to show the reasonable belief of that individual's siblings and cousins.
Further, petitioners point to the communications between Kelley and the Sakioka Family to show the tax practitioner relationship existed. Jeremy's Declaration stating he was a client of Kelley during the period in question is sufficient to show his reasonable belief that he was, in fact, a client. Therefore, communications between him and Kelley are privileged under section 7525 unless the privilege has been waived as to that communication. Upon review of the communications submitted by petitioners for in-camera review, the Court finds that these documents do not support the existence of a tax practitioner-client relationship between Kelley and Justin, Calvin, Hana, or Traci for calendar years 2010 through 2012. Similarly, this is the case for Jenna for calendar year 2010.
Now, we turn to communications between Kelley and other members of the Sakioka Family. Justin's only direct communication with Kelley involved forwarding an email to several recipients, including members of his immediate family and Kelley. On a few occasions, either Justin or Kelley was included as a recipient of an email sent by the other, but these emails were all sent to several recipients and the text of the emails indicate that they were addressed to someone else. These documents are not sufficient to show that Justin sought tax advice from Kelley, or that he had a reasonable belief that he was a client of Kelley.
Jenna exchanged direct emails with Kelley regarding her individual tax returns that may provide some support for the contention that she was a client of Kelley. Additionally, Jenna communicated with Kelley to discuss the preparation and review of various other tax returns and how tax matters for Iscina-Sunflower would be managed in her temporary absence. However, these emails discussed tax return preparation, which is not privileged under section 7525. See In re Grand Jury, 23 F.4th 1088, 1091 (9th Cir. 2021). Therefore, while the documents may indicate that Jenna was an individual client of Kelley, many of the emails between her and Kelley are not privileged under section 7525. Additionally, any communications between Jenna and Kelley regarding the estate planning beginning in 2011 would be privileged as Jenna became a client of Kelley in her role as co-trustee.
Calvin's only direct communication with Kelley involved forwarding an email he received to Kelley and others. This email is not sufficient to show Calvin had a reasonable belief that he was a client of Kelley. Traci and Hana had no direct communication with Kelley. Petitioners have not provided any evidence to show that Traci or Hana had a reasonable belief that they were a client of Kelley.
In sum, petitioners have not established that Kelley had a tax practitioner-client relationship with Justin, Calvin, Traci, or Hana, and any communications between them are therefore not privileged under section 7525. Petitioners have established that a tax practitioner-client relationship existed between Kelley and Jeremy and Jenna, and any communications between them are privileged under section 7525, unless the privilege was otherwise waived.
C. Scope of Waiver of the Privileges and the Fairness Doctrine
1. The Commissioner's Arguments
On December 8, 2010, Wolcott from Palmieri sent Roy and Phyllis the December Letter describing and memorializing decisions made related to Mary's estate planning and the associated risks. The December Letter is labeled as "CONFIDENTIAL: ATTORNEY-CLIENT PRIVILEGED COMMUNICATION AND ATTORNEY WORK PRODUCT" on each page. In his Motion to Compel, the Commissioner states the December Letter, attached as an exhibit, was produced to him on three separate occasions, once to the IRS during the examination and twice to his counsel. The Commissioner alleges that the December Letter was an attorney- client privileged communication and by intentionally producing it to him and his counsel, petitioners voluntarily waived the attorney-client privilege.
2. Petitioners' Arguments
Petitioners contend that the December Letter was not privileged because Phyllis was not a client of Palmieri when the communication was issued on December 8, 2010. Therefore, the December Letter was not an attorney-client communication, and petitioners' disclosure of the communication to the Commissioner did not waive any privilege. Petitioners state, without specificity, that between late October and early November 2010, Phyllis had a difference of opinion with the rest of the Sakioka Family, apparently including her two daughters, Traci and Jenna, as to whether the structure of Mary's estate planning should treat each family line equally or each grandchild equally, as Phyllis only has two children while Roy has four children. Petitioners state an additional conflict arose between Phyllis and the rest of the Sakioka Family surrounding the business succession and retirement planning for Phyllis and Roy's potential retirement from their respective positions in the Sakioka Family Entities.
3. Law and Application
Under FRE 502(a), when a party "waives the attorney-client privilege or work-product protection, the waiver extends to an undisclosed communication ... only if: (1) the waiver is intentional; (2) the disclosed and undisclosed communications or information concern the same subject matter; and (3) they ought in fairness to be considered together." Fed.R.Evid. 502(a)(1)-(3).
Generally, then, a waiver extends to all communications on the same subject matter. Cormack v. United States, 118 Fed.Cl. 39, 43 (2014) (citing cases); see also Weil v. Inv./Indicators, Rsch. & Mgmt., Inc., 647 F.2d 18, 24 (9th Cir. 1981) ("[V]oluntary disclosure of the content of a privileged attorney communication constitutes waiver of the privilege as to all other such communications on the same subject."). There is no bright-line test for evaluating the scope of a waiver; instead, courts weigh the circumstances of the disclosure, the nature of the legal advice, and the prejudice to the parties of permitting or prohibiting further disclosures. Cormack, 118 Fed.Cl. at 43. Courts are concerned with fairness and avoiding the inequitable results that can attend the selective waiver of privilege. See id. In general, the waiver should be no broader than fairness requires. Bittaker v. Woodford, 331 F.3d 715, 720 (9th Cir. 2003); see also Staley v. Gilead Scis., Inc., No. 19-CV-02573-EMC (LB), 2022 WL 1836820, at *2-3 (N.D. Cal. June 3, 2022); Wi-LAN, Inc. v. Kilpatrick Townsend & Stockton LLP, 684 F.3d 1364, 1373 (Fed. Cir. 2012).
The Ninth Circuit has stated that in cases of express waivers, that is, "when a party discloses privileged information to a third party who is not bound by the privilege, or otherwise shows disregard for the privilege by making the information public[,]" the role of the courts is to "merely recognize the waiver after it has occurred." Bittaker v. Woodford, 331 F.3d at 719. Therefore, "once documents have been turned over to another party voluntarily, the privilege is gone, and the litigant may not thereafter reassert it to block discovery of the information and related communications by his adversaries." Id. at 720.
When a party raises a claim which in fairness requires disclosure of protected communication, the privilege may be implicitly waived; for example, in cases where a party puts at issue that its tax position is reasonable based on the advice of counsel, fairness dictates that the party cannot deny access to the advice at the center of the dispute. United States v. Sanmina Corp., 968 F.3d 1107 (9th Cir. 2020); Chevron Corp. v. Pennzoil, 974 F.2d 1156 (9th Cir. 1992). However, when the scope of the waiver is limited to subsidiary tax issues, fairness only dictates waiver "as to communications about the matter actually disclosed." Chevron, 974 F.2d at 1162 (citing Weil, 674 F.2d at 25). Further, when the disclosure of privileged communication does not result in any obvious legal prejudice, courts have declined to find any waiver except as to the particular document or testimony that has already been disclosed. In re von Bulow, 828 F.2d 94, 102 (2d Cir. 1987).
Sometime around mid-November 2010 Phyllis retained Ferruzzo to represent her interests related to business and retirement planning, but not the estate planning. Petitioners claim that at some time after Phyllis initially retained Ferruzzo but before December 8, 2010, Ferruzzo's representation of Phyllis expanded to include estate planning and her attorney-client relationship with Palmieri was terminated for purposes of estate planning. On November 12, 2010, Palmieri sent a letter to Phyllis and Roy advising them that Palmieri would no longer represent Phyllis for purposes of Sakioka business planning due to her retention of Ferruzzo, but Palmieri would continue to represent Phyllis for purposes of estate planning despite the potential conflict of interest (hereinafter referred to as the "Conflict Letter"). The Conflict Letter defined "business planning" as changes to the structure of Marjack, LLC, Sakioka Farms, and other Sakioka Family business ventures, including a proposed retirement package for Phyllis and Roy. The Conflict Letter provided that "estate planning" included estate planning strategies to be implemented prior to the end of 2010. As part of this arrangement, Phyllis consented to Palmieri disclosing to Ferruzzo attorney work-product related to her estate planning as needed for Ferruzzo to render legal advice to Phyllis relating to the business planning.
The Conflict Letter is attached as Exhibit A to the Reply to Response to the Motion to Compel.
Petitioners support their contention that Ferruzzo began representing Phyllis for purposes of estate planning, thereby terminating Palmieri's representation, by pointing to emails sent on November 16, 2010, where Ferruzzo took the position that Phyllis' retirement planning was "tie[d] into the whole issue of cash distributions out of Marjack which permeate[d] all of the current planning" and that "[t]here must be an overall plan" involving the proposed intentionally defective grant trusts (IDGTs). However, as noted in the Conflict Letter, it was anticipated by the parties that Palmieri and Phyllis may need to disclose information to Ferruzzo related to the estate planning for the purposes of rendering legal advice as to Phyllis' business and retirement planning, and the end of the November 16, 2010, email states that Ferruzzo was asking these questions to determine "a clear idea of the practical impact on Phyllis if the proposed plans are put into effect, and if Phyllis agrees to retire." Additionally, this email was sent by Ferruzzo in response to an email from Wolcott asking for Phyllis and Ferruzzo's "comments and ideas on the proposed management/retirement matters," not estate planning matters. No further statements within that email chain indicate that Palmieri, Ferruzzo, or Phyllis believed that Palmieri stopped representing Phyllis for purposes of estate planning, only that it was necessary for Palmieri to disclose some attorney work product to Ferruzzo to render legal advice related to the business and retirement planning, as contemplated in the Conflict Letter.
Further, additional disclosed emails indicate that Palmieri was still representing Phyllis for purposes of estate planning at the time the December Letter was sent. In an email sent November 19, 2010, Wolcott asked Ferruzzo whether any matters Ferruzzo discussed with Phyllis would impact the estate planning. Ferruzzo stated that she was not "aware that any matters being discussed with Phyllis will impact the estate planning." On December 8, 2010, the same day the December Letter was sent, Ferruzzo sent an email to Wolcott expressing concern that the December Letter was sent to Phyllis and not copied to her, and Wolcott responded by stating that the December Letter was not sent to her as "[Palmieri] thought that the estate planning matters for Phyllis were being handled by our firm. Phyllis signed a waiver of conflict letter indicating that our firm would represent her in such matters."
Under the California Rules of Professional Conduct, an attorney cannot represent more than one client in a matter in which the interests of the clients potentially conflict unless they obtain informed written consent from each client. Cal. R. Prof. Conduct 3-310(C)(1) (1992); see Great Lakes Construction, Inc. v. Burman, 186 Cal.App.4th 1347, 1355-56, 114 Cal.Rptr.3d 301, 307 (2010). Further, when an attorney withdraws their representation of a client, the attorney is required to give due notice to the client, and when the employment is terminated, the attorney is required to release to the client all client papers and property upon the client's request. Cal. R. Prof. Conduct 3-700(A)(2), (D)(1) (1992); see Ramirez v. Sturdevant, 21 Cal.App.4th 904, 915, 26 Cal.Rptr.2d 554, 559 (1994).
In sending the Conflict Letter, Palmieri acted in accordance with the California Rules of Professional Conduct and how a reasonable attorney should act when suspecting a conflict of interest in the continued representation related to estate planning and terminating the attorney-client relationship for purposes of business planning. The Conflict Letter terminated Palmieri's representation of Phyllis for business and retirement planning and acknowledged the conflict that arose in the estate planning but explicitly stated that Palmieri continued to represent Phyllis for purposes of estate planning. Petitioners have not provided any additional letters, emails, or further communication between Phyllis and Palmieri to show that Palmieri withdrew from their representation of Phyllis or that Phyllis terminated the attorney-client relationship for purposes of estate planning. To the contrary, the contemporaneous communication discussed above shows that Palmieri believed that the attorney-client relationship for estate planning purposes remained intact at the time the December Letter was sent on December 8, 2010, and Phyllis did not communicate any intention to terminate the relationship on or before that date. In sum, Phyllis was a client of Palmieri for the purpose of estate planning on December 8, 2010.
For the attorney-client privilege to apply, a communication must be made in confidence between an attorney and client related to the purpose of the representation. Ruehle, 538 F.3d at 607. The December Letter is a communication regarding estate planning, the subject of the representation, between Palmieri and their clients, Phyllis and Roy, and was marked as a confidential attorney-client communication. Therefore, the December Letter is covered by the attorney-client privilege. By providing the December Letter to the IRS and counsel for the Commissioner, petitioners waived the attorney-client privilege.
Boilerplate designations marking a document as confidential or attorney work product do not mechanically confer privilege. Oracle Am., Inc. v. Google, Inc., No. C-10-03561-WHA DMR, 2011 WL 3794892, at *4 (N.D. Cal. Aug. 26, 2011); see Manriquez v. Huchins, No. 09-CV-456, 2011 WL 3290165, at *8 (E.D.Cal. July 27, 2011); Enns Pontiac, Buick & GMC Truck v. Flores, 07-CV-1043, 2011 WL 2746599, at *5 (E.D.Cal. July 13, 2011). Similarly, merely including an attorney in a communication does not confer privilege. See Upjohn Co., 449 U.S. at 395-96; United States v. ChevronTexaco Corp., 241 F.Supp.2d 1065, 1069-70, 1075.
Here, petitioners waived the attorney-client privilege as to the December Letter by intentionally providing the letter to the Commissioner on multiple occasions. The parties do not dispute that the disclosed communications (the December Letter) and the undisclosed communications (the withheld documents listed on the Privilege Logs) concern the same subject matter. The Commissioner asserts that because of this waiver, fairness dictates that emails concerning Mary's estate planning transactions at issue in this case must also be disclosed, or he will be unfairly prejudiced by petitioners' selective claims of privilege over documents relating to the transactions at issue in this case. Petitioners claim that the waiver should be limited to the four corners of the letter as its disclosure does not prejudice the Commissioner.
The disclosure of the December Letter does not implicate considerations of fairness that require a subject matter waiver that goes beyond the letter. This Court has already determined, in an Order dated February 2, 2022, that petitioners did not impliedly waive privilege as to these documents by putting Mary's intent at issue, and the Commissioner has not shown how this letter, memorializing decisions made with respect to Mary's estate planning, prejudices his ability to show that the transactions at issue were not bona fide and at arm's length, to an extent that the privilege should be waived as to all emails regarding the estate planning transactions.
Upon due consideration of the parties' filings with respect to the Motion to Compel Production of Documents, and for cause, it is
ORDERED that the Court makes the following determinations as to the privileged nature of the withheld documents reviewed by the undersigned as follows:
The Court determines that the attorney-client or the section 7525 privileges did not attach to the following documents:
• Amended and Restated Privilege Log: Document Number (Doc.) 4, 7, 8, 11, and 29.
• Amended and Restated Supplemental Privilege Log: 2; 5 and 6; 11 and 12; 25; 115.
The Court determines that the stated privilege did not attach to Roy's email sent on December 3, 2010, at 10:06 pm or Jeremy's email sent on December 3, 2010, at 8:15 pm. The remainder of the redacted portion of Doc. 7 is privileged on the stated ground.
The Court determines that the stated privilege did not attach to Wolcott's email to Bunch sent on November 16, 2010, at 4:01 pm. The remaining redacted portions of Doc. 11 are protected by the stated privilege.
The Court determines that the stated privilege did not attach to Jeremy's email sent on December 15, 2010, at 2:02 pm. The remaining portions of Doc. 29 are subject to the stated privilege but are waived as discussed in footnote 20 below.
The Court determines that the email from Salus to Wolcott sent on October 28, 2011, at 8:58 am is subject to the stated privilege. The remaining portion of this document is not protected by the stated privilege.
The Court determines that the attorney-client or the section 7525 privileges attached and applies to the following documents:
• Amended and Restated Privilege Log: Docs. 1 through 3; 5 through 7; 9 through 13; 16 through 18; 20 through 31; 34 through 39; 41 through 51; 53 through 70.
• Amended and Restated Supplemental Privilege Log: 1; 2; 4; 7 through 10; 13; 16; 18 through 21; 23 and 24; 26 through 74; 76 through 114; 116 through 157.
• Petitioners' Privilege Log in Response to Respondent's Third Request for Production of Documents: Docs. 1 through 3.
Docs. 7 and 11 are subject to the stated privilege with the exceptions of the explanations provided in footnotes 9 and 10 above.
The Court determines that the communications beginning with the email from Kelley to Phyllis sent on December 20, 2012, at 12:51 pm on page SAK PRIV 01155 through SAK PRIV 01165 are subject to the stated privileges. The Court determines that the communications beginning at page SAK PRIV 01153 through the top of SAK PRIV 00155 are not privileged on the stated grounds.
The Court determines that the attorney-client or the section 7525 privileges attached, but petitioners waived the privilege by disclosure to an unrepresented Sakioka grandchild or a third party with respect to the following documents:
• Amended and Restated Privilege Log: Docs. 1; 3; 5; 7; 9 through 11; 13; 17; 20; 21; 26 and 27; 28; 29; 30; 41 through 44; 46 through 50; 53 through 64; 68. • Amended and Restated Supplemental Privilege Log: 1; 24; 26 through 29; 38; 39 through 53; 56 through 65; 68; 70; 72 through 74; 76 through 78; 19 80 through 90; 92 through 102; 105; 107 through 109; 110; 111 and 112; 116; 118 through 120; 122 through 126; 130; 132; 133; 135 through 144; 146 through 148; 150 and 151; 153 through 157. • Petitioners' Privilege Log in Response to Respondent's Third Request for Production of Documents: Docs. 2 and 3.