Opinion
7132-19
02-02-2022
ESTATE OF MARY K. SAKIOKA, DECEASED, JEREMY T. SAKIOKA AND TRACI KIYAMA, EXECUTORS AND CO-TRUSTEES, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Travis A. Greaves, Judge
On November 17, 2020, respondent filed a Motion to Compel Production of Documents (Motion to Compel), asking the Court to require petitioners to produce documents petitioners withheld as protected by one or more of the attorney-client privilege, the section 7525 tax practitioner privilege, and the work-product doctrine. The parties agree that the work-product doctrine protects six of the withheld documents from disclosure. We therefore will deny the motion as to these documents, and, as explained infra, hold the motion in abeyance as to the remaining withheld documents.
Unless otherwise noted, all section references are to the Internal Revenue Code, Title 26 U.S.C., in effect at all relevant times, all regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure.
Two days after filing the Motion to Compel, respondent filed a Motion to Enforce Subpoena (Motion to Enforce), asking the Court to require Palmieri, Tyler, Wiener, Wilhelm & Waldron LLP (Palmieri), a law firm that represented decedent in planning her estate, to produce documents the firm withheld on various grounds. We will hold this motion in abeyance until the Court rules on the Motion to Compel. 1
Background
I. Estate Planning Transactions
These consolidated cases concern alleged Federal estate and gift tax liability arising from decedent Mary K. Sakioka's purported sales of interests in a California limited liability company called Marjack LLC. Marjack holds the Sakioka family assets-cash, marketable securities, and income-producing real estate-either directly or through other entities including a general partnership called Sakioka Farms. When decedent's husband Jack died in 1993, the couple's assets were divided into two trusts: the Jack Toshiki Sakioka Trust (Family Trust), an irrevocable marital trust held for decedent's benefit during her life and funded with Jack's half of the community property, and the Mary Kiyoko Sakioka Trust (Survivor's Trust), a revocable trust funded with decedent's half of the community property. As of 2010, decedent held about 95% of Marjack equity through her beneficial interests in the Family Trust and the Survivor's Trust.
California is a community property State. Cal. Civ. Code § 5110 (West 1993). A spouse residing in a community property State generally has a vested interest in, and is owner of, one-half of the spouses' community property. See United States v. Mitchell, 403 U.S. 190, 195 (1971).
On December 10, 2010, the Sakioka family established the JTS Children's Trust Nos. 1 and 2 (Children's Trusts), one for the benefit of each of decedent's two children Phyllis and Roy, and the MKS Children's Trust Nos. 1-6 (Grandchildren's Trusts), one for the benefit of each of decedent's six grandchildren.
The following transactions occurred on December 31, 2010:
• Decedent, as trustee of the Survivor's Trust, gifted a 0.8% Marjack interest to each grandchild (Gift).
• Decedent, Phyllis, and Roy, as co-trustees of the Family Trust, purported to sell a 22.8% Marjack interest to each of the two Children's Trusts in exchange for a $27 million note from each trust (each note, a Children's Note, and the purported sale, Transfer 1).
• Decedent, as trustee of the Survivor's Trust, purported to sell a 7.4% Marjack interest to each of the six Grandchildren's Trusts in exchange for an $8.7 million note from each trust (each note, a Grandchildren's Note, and the purported sale, Transfer 2).
Almost two years later, on December 1, 2012, each Grandchildren's Trust purported to purchase for $5.8 million the Grandchildren's Note it had issued to the Survivor's Trust in 2010 (Transfer 3). 2
The descriptions of Transfers 1-3 in this Order provide approximate percentages and dollar values.
Decedent reported the Gift on a 2010 Federal gift tax return, but reported no Federal gift tax liability as to Transfer 1 or Transfer 2. Her Federal estate tax return did not include the value of the transferred Marjack interests in her gross estate.
Palmieri, attorney Wayne J. Casey, and accounting firm Kelley & Associates advised decedent on the above transactions. Petitioners allege that these estate planners each represented decedent, her children and grandchildren, and Sakioka family entities including Marjack and Sakioka Farms in connection with the above estate planning transactions. Although petitioners have not produced engagement letters from any of the above, Mr. Casey and Palmieri attorney Cynthia M. Wolcott confirm as much in unsworn declarations under penalty of perjury. Petitioners add that advising the family required the estate planners to communicate confidential information among themselves and Sakioka family members, as well as senior-level employees of Sakioka family entities such as Sakioka Farms chief operating officer Jeffrey Littell.
Petitioners did provide an unsigned copy of an engagement letter from Mr. Casey addressed solely to Jeremy Sakioka, one of decedent's grandchildren. Mr. Casey believes this is the version the parties executed.
Palmieri notified Phyllis and Roy in a conflict waiver letter dated November 12, 2010, that Palmieri understood Phyllis to have retained separate counsel to represent her in connection with matters relating to potential changes in the management structure of Marjack and other Sakioka family entities, which the letter called the "Sakioka Business Planning." The letter explained that Palmieri would represent only decedent and Roy in connection with the Sakioka Business Planning, but would represent decedent, Roy, and Phyllis in connection with the 2010 estate planning transactions.
II. Tax Court Proceedings
Respondent asserts a $19, 758, 847 Federal estate tax deficiency on the theory that the value of the 7.4% Marjack interests transferred to the Grandchildren's Trusts in Transfer 2 should be included in decedent's gross estate under sections 2035, 2036, and 2038. Alternatively, respondent contends that the excess of the value of the transferred 7.4% Marjack interests over the value of the Grandchildren's Notes received in exchange is a section 2503 taxable gift, which means such amount is subject to Federal gift tax and should be included in decedent's estate tax base as part of section 2001(b)(1)(B) adjusted taxable gifts. Respondent also asserts a $15, 836, 961 Federal gift tax deficiency for 2010 because decedent sold property in Transfer 1 for less than an adequate and full consideration in money or money's worth.
Petitioners filed petitions as to both notices of deficiency on May 6, 2019, and the Court consolidated the estate and gift tax cases by Order dated August 21, 2020. Petitioners deny that the 7.4% Marjack interests should be included in decedent's gross estate because (1) Transfer 2 was a bona fide sale for an adequate and full 3 consideration in money or money's worth within the meaning of sections 2036 and 2038, or alternatively, (2) decedent did not retain any section 2036 or 2038 interest or power in the 7.4% Marjack interests. Petitioners contest any gift tax deficiency on the grounds that (1) both Transfer 1 and Transfer 2 were transfers made in the ordinary course of business within the meaning of Treasury Regulation § 25.2512-8, or alternatively, (2) decedent received an adequate and full consideration in money or money's worth for each transferred Marjack interest.
On December 26, 2019, pursuant to Rule 72, respondent served on petitioners' counsel his First Request for Production of Documents. Petitioners produced documents responsive to the request, including a letter dated December 8, 2010, to Phyllis and Roy from Ms. Wolcott, providing advice about Transfer 2 and related transactions. The first sentence explains that the letter describes and memorializes the decisions Phyllis and Roy "collectively made" relating to estate planning for decedent, and the top of each page of the Wolcott letter says, in bold, underlined, all-capital letters, "Confidential: Attorney-Client Privileged Communication and Attorney Work Product." Petitioners had already disclosed the Wolcott letter to the IRS examination division.
Petitioners declined to produce the documents listed in a privilege log they submitted August 24, 2020, and supplemented November 2, 2020. On November 17, 2020, respondent filed the Motion to Compel, which asks the Court to enter an order pursuant to Rules 72(b) and 104(b) requiring petitioners to produce the withheld documents. Petitioners withheld documents in response to requests for the following:
• All documents in the possession of the Sakioka family, petitioners' current or former attorneys, or decedent's attorneys, related to services provided in connection with Transfer 2 or Transfer 3, including without limitation engagement letters, contracts, memoranda, correspondence, meetings, time records, and statements of work performed;
• Any and all minutes or other records of meetings, including votes taken pursuant to the governing agreements, of the partners of Sakioka Farms and Marjack from 2010 to June 2015; and
• All correspondence, memoranda, emails, faxes, notes, and contracts (1) relating to Transfer 1, Transfer 2, the Children's Notes, or the Grandchildren's Notes, or (2) between and among the Sakioka family and various individuals and entities involved in providing legal or accounting advice with respect to Transfer 1, Transfer 2, the Children's Notes, or the Grandchildren's Notes.
Petitioners filed a response objecting to the Motion to Compel on February 11, 2021, which included an amended and restated privilege log dated February 4, 2021, and a request to tender the withheld documents to the Court for in camera inspection. Respondent lodged a reply to petitioners' response on February 23, 2021, and petitioners lodged a sur-reply on March 11, 2021. 4
Discussion
Rule 70(b) provides that "[t]he information or response sought through discovery may concern any matter not privileged and which is relevant to the subject matter involved in the pending case." Section 7453 provides that, with exceptions not relevant here, "the proceedings of the Tax Court and its divisions shall be conducted in accordance with . . . the Federal Rules of Evidence" (FRE). See also Rule 143(a). FRE 501 provides that "[t]he common law-as interpreted by United States courts in the light of reason and experience-governs a claim of privilege unless any of [the United States Constitution, a federal statute, or rules prescribed by the Supreme Court] provides otherwise." And of course, under the rule of Golsen v. Commissioner, 54 T.C. 742, 757 (1970), aff'd, 445 F.2d 985 (10th Cir. 1971), the Tax Court will follow a Court of Appeals decision which is squarely on point where appeal from our decision lies to that Court of Appeals alone. An appeal in this case would lie in the U.S. Court of Appeals for the Ninth Circuit unless the parties agree otherwise. See § 7482(b).
The attorney-client privilege "applies to communications made in confidence by a client to an attorney for the purpose of obtaining legal advice, and also to confidential communications made by the attorney to the client if such communications contain legal advice or reveal confidential information on which the client seeks advice." Bernardo v. Commissioner, 104 T.C. 677, 682 (1995) (quoting Hartz Mountain Indus. Inc. & Subs. v. Commissioner, 93 T.C. 521, 525 (1989)); see also Upjohn Co. v. United States, 449 U.S. 383, 390 (1981). The party invoking the attorney-client privilege, in this case petitioners, has the burden of proving it applies. Weil v. Inv./Indicators, Research & Mgmt., Inc., 647 F.2d 18, 25 (9th Cir. 1981); Bernardo, 104 T.C. at 682.
Section 7525 provides, with exceptions not relevant here, that with 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." The tax practitioner privilege is thus coextensive with the attorney-client privilege as to "tax advice" from "any federally authorized tax practitioner," defined in section 7525(a)(3).
Respondent argues that petitioners waived the attorney-client privilege, and by extension the tax practitioner privilege, on the following grounds:
I. Petitioners Put Decedent's Intent at Issue
Petitioners take the position that the value of the 7.4% Marjack interests should not be included in decedent's gross estate because Transfer 2 was a bona fide sale within the meaning of sections 2036 and 2038. Respondent points us to the theory of implied waiver of the attorney-client privilege set forth in Karme v. Commissioner, 73 T.C. 1163, 1184 (1980) 5 (quoting Hearn v. Rhay, 68 F.R.D. 574, 581 (E.D. Wash. 1975)), aff'd, 673 F.2d 1062 (9th Cir. 1982), whereby the privilege does not apply to information a party puts at issue if withholding the information would deny the opposing party access to information "vital to his defense." See also AD Inv. 2000 Fund LLC v. Commissioner, 142 T.C. 248, 255 (2014) (a party may forfeit the attorney-client privilege by putting into issue his subjective intent in deciding how to comply with the law); Bernardo, 104 T.C. at 690-691 (citing cases where courts have held that a party impliedly waived the privilege by invoking its own knowledge, intent, or state of mind, or the reasonableness of its actions, as the basis for a claim or defense). Respondent says petitioners' argument that Transfer 2 was a bona fide sale requires the Court to examine decedent's intent in transferring the 7.4% Marjack interests. Apparently reasoning that the communications among the estate planners and their clients would demonstrate decedent's intent, respondent contends that petitioners' litigating position requires disclosure of the materials petitioners have withheld.
A party impliedly waives the attorney-client privilege when it makes an argument the opposing party can refute only by reference to the privileged communications. See Chevron Corp. v. Pennzoil Co., 974 F.2d 1156, 1162 (9th Cir. 1992); Johnston v. Commissioner, 119 T.C. 27, 35-36 (2002), aff'd, 461 F.3d 1162 (9th Cir. 2006). In Chevron and Johnston, the client of an attorney cited advice of counsel as an affirmative defense against the opposing party's position, in the former case that the client had not complied with shareholder disclosure requirements, and in the latter case that the taxpayer-client had incurred a fraud penalty. See Chevron, 974 F.2d at 1162; Johnston, 119 T.C. at 40. The Court held in each case that the privilege did not shield the very advice of counsel the client sought to use as a sword against the opposing party. See Chevron, 974 F.2d at 1162; Johnston, 119 T.C. at 40.
However, privileged communications do not become discoverable where they simply are relevant to issues raised in the litigation or where they are only one of several forms of indirect evidence about an issue. In re Geothermal Res. Int'l, Inc., 93 F.3d 648, 653 (9th Cir. 1996); Johnston, 119 T.C. at 39 (citing cases); see also TIFD III-E, Inc. v. United States, 223 F.R.D. 47, 49-50 (D. Conn. 2004) (explaining that a party does not waive the attorney-client privilege merely by invoking its own intent). In Geothermal, a bankruptcy trustee sought to avoid payment on employment contracts of two high-level employees of the bankrupt company, arguing that the employees had negotiated the contracts in breach of their fiduciary duty. Geothermal, 93 F.3d at 652. The Ninth Circuit declined to allow the employees to depose the company's outside counsel, who advised the company on the propriety of the contracts, because the counsel's advice "would be only one form of indirect evidence" regarding the employees' good faith. Id. at 652-53.
Petitioners have not waived the attorney-client privilege by arguing that Transfer 2 is a bona fide sale because, like the trustee in Geothermal, petitioners have not raised any issue "touching directly upon the substance or content of an attorney-client communication." See id. at 652-53. Assuming arguendo that bona fide sale status hinges on transferor intent, petitioners have not invoked communications between the estate planners and their client(s) to demonstrate decedent's intent, and 6 respondent need not rely on such communications to establish decedent's intent in any event. Respondent can develop a case based on the nonprivileged documents and the objective terms of Transfer 2 and the surrounding circumstances.
II. Petitioners Disclosed Privileged Material to the IRS
Voluntary disclosure of a privileged attorney communication to a third party waives the privilege as to the disclosed communication itself. Chevron, 974 F.2d at 1162. FRE 502(a) provides that if a party discloses privileged material "in a federal proceeding or to a federal office or agency," the waiver extends to an undisclosed communication or information only if (1) the waiver is intentional, (2) the disclosed and undisclosed communications concern the same subject matter, and (3) the disclosed and undisclosed communications "ought in fairness to be considered together." Respondent argues based on FRE 502(a) that petitioners waived the attorney-client privilege as to the withheld documents by disclosing the Wolcott letter to the IRS. Petitioners note that FRE 502(a) applies only when a party discloses privileged material, and deny that the Wolcott letter was privileged. Petitioners explain that the letter was not a confidential attorney-client communication because Palmieri sent the letter to both Phyllis and Roy at a time when Phyllis had retained separate counsel and "was adverse to some of the parties."
We need not address this issue until the Court determines whether and to what extent decedent waived the privilege by disclosing privileged material to family members and employees of family entities, discussed infra.
III. Decedent Disclosed Privileged Material to Her Children and Grandchildren and to Employees of Family Entities
Respondent argues that the withheld documents are not privileged communications because they were not confidential and did not necessarily pertain to legal advice. In particular, respondent points out that decedent or the estate planners shared the documents with third parties including decedent's children and grandchildren and employees of the Sakioka family entities. Relying on the declarations of Mr. Casey and Ms. Wolcott, petitioners counter that these parties in addition to decedent were clients of the estate planners, not third parties. They also argue that communications with certain high-level employees of the family entities facilitated the estate planners' advice.
The Court must answer two questions to resolve this dispute. First, we have to determine whether each withheld communication was made in confidence by a client to an attorney for the purpose of obtaining legal advice, or was a confidential communication made by the attorney to the client that contains legal advice or reveals confidential information on which the client seeks advice. See Bernardo, 104 T.C. at 682. The attorney-client privilege does not apply to communications pertaining to business advice, as opposed legal advice. Olender v. United States, 210 F.2d 795, 806 (9th Cir. 1954); Zaentz v. Commissioner, 73 T.C. 469, 475 (1979). Where the communication does pertain to legal advice, the client waives the privilege by 7 voluntarily disclosing the communication to a third party. Chevron, 974 F.2d at 1162; Bernardo, 104 T.C. at 684.
Second, if we find that petitioners have waived the privilege as to any of the withheld documents, we must determine the scope of the waiver based on the "fairness doctrine," which aims to prevent a party from selectively disclosing privileged material to the detriment of its adversary. See In re von Bulow, 828 F.2d 94, 101-102 (2d Cir. 1987) (describing the fairness doctrine); see also Chevron, 974 F.2d at 1162 (citing von Bulow in rejecting the claim that a party's release of documents to an outside auditor waived the privilege as to other communications on the same subject). Applying the law of the Ninth Circuit, the U.S. Court of Appeals for the Federal Circuit declined to sustain a finding of waiver as to communications on the same subject as a disclosed letter without evidence of any prejudice the opposing party would suffer "by assertion of privilege to matters beyond the four corners of the letter." See Wi-LAN, 684 F.3d at 1369-1371 (observing Chevron's citation of von Bulow).
FRE 502(a), discussed supra, codifies the fairness doctrine in the context of disclosure "made in a federal proceeding or to a federal office or agency." See Wi-LAN, Inc. v. Kilpatrick Townsend & Stockton LLP, 684 F.3d 1364, 1369 (Fed. Cir. 2012).
The Court cannot answer these questions, and therefore cannot sustain petitioners' claims of privilege, based on the current state of the record. The Court therefore will take petitioners up on their offer to tender the withheld documents to the Court for in camera inspection.
IV. Petitioners Plan to Solicit Testimony from the Estate Planners
Petitioners announced in their pretrial memorandum that they intend to have some of the estate planners testify at trial about the facts and circumstances surrounding Transfer 2 and the related transactions. Respondent notes that a client waives the attorney-client privilege by calling its attorney to testify concerning facts learned through the employment relationship. See Karme, 73 T.C. at 1184.
Petitioners thereafter filed a status report dated December 16, 2021, wherein they agreed not to call as witnesses any of the estate planners other than Wayne Casey, and to limit the testimony they elicit from Mr. Casey to nonprivileged matters related to whether petitioner satisfied the requirements of section 7491 to shift the burden of proof to respondent. Nevertheless, the Court reserves the right to strike testimony or find a waiver of privilege based on testimony presented at trial. Cf. id. at 1183-84 (holding that the taxpayer waived the privilege where his attorneys already had testified on his behalf).
It is therefore, ORDERED that respondent's Motion to Compel Production of Documents filed November 17, 2020, is denied as to the six documents the parties agree are protected 8 by the work-product doctrine, and held in abeyance as to all other withheld documents. It is further
ORDERED that this case will be assigned to a Special Trial Judge of this Court solely to determine whether and to what extent documents as to which the Motion to Compel is held in abeyance are privileged. It is further
ORDERED that respondent's Motion to Enforce Subpoena filed November 19, 2020, is held in abeyance until the Court rules on the Motion to Compel. It is further
ORDERED that respondent's motion for leave, filed February 23, 2021, is granted and the Clerk of the Court shall file as of the date of this Order the reply to response to motion to compel production of documents lodged by respondent. It is further
ORDERED that petitioners' motion for leave, filed March 11, 2021, is granted and the Clerk of the Court shall file as of the date of this Order the sur-reply to reply to response to motion to compel production of documents lodged by petitioners. 9