NO. 91-242 

IN THE SUPREME COURT OF THE STATE OF MONTANA 

1992 

PACIFICOW, an Oregon Corporation, 

Petitioner and Appellant, 

-vsTHE DEPARTMENT OF REVENUE OF THE STATE 

OF MONTANA and THE STATE TAX APPEAL 

BOARD OF THE STATE OF MONTANA, 

Respondent and Cross-Appellant. 

APPEAL FROM: District Court of the First Judicial District, 

In and for the County of Lewis & Clark, 

The Honorable Jeffrey Sherlock, Judge presiding. 

COUNSEL OF RECORD: 

For 

For 

For 

Appellant: 

Terry B. Cosgrove argued, Luxan & Murfitt, 

Helena, Montana 

Milo E. Ormseth argued and Peter R. Jarvis, Stoel, 

Rives, Boley, Jones & Grey, Portland, Oregon 

Respondent: 

David Woodgerd argued, Legal Counsel, Dept. of 

Revenue, Helena, Montana 

Amicus Curiae: 

Benjamin Frederick Miller, California Franchise Tax 

Board, Multistate Tax Affairs Bureau, 

Sacramento, California 

Paul1 Mines, Multistate Tax Commission, 

Washington, D.C. 

John L. Alke, Hughes, Kellner, Sullivan & Alke, 

Montana Taxpayer's Association, Helena, Montana 

Submitted: May 21, 1992 

Decided: August 21, 1992 

Clerk 

_I 
Justice Terry N. Trieweiler delivered the opinion of the Court. 

The Montana Department of Revenue (DOR), defendant and 

respondent in this Court, pursuant to Rule 23(h), M.R.App.P., 

appeals from two final orders of the District Court of the First 

Judicial District, Lewis & Clark County. The District Court 

reversed the State Tax Appeal Board's (STAB) admission of eight 

documents into evidence based on PacifiCorp's attorney-client 

privilege, and remanded the case to STAB for a new hearing. 

Appellant PacifiCorp cross-appealed from an order of the District 

Court which upheld STAB'S denial of Pacificorp's motion to compel 

the DOR to produce audit report documents generated by the 

Multistate Tax Commission. 

The Montana Taxpayers Association (MTA) filed an amicus curiae 

brief supporting PacifiCorp's position. The Multistate Tax 

Commission (MTC) and the California Franchise Tax Board (FTB) 

submitted amicus curiae briefs in support of the DOR's position. 

We affirm in part and reverse in part. 

The issues on appeal are: 

1. Did the District Court err in affirming STAB'S decision 

that the audit reports performed by California for MTC at the 

request of Petitioner are not subject to discovery? 

2. Did the District Court err when it found that PacifiCorp 

did not waive its attorney-client privilege by producing eight 

documents during discovery? 

2 
3. Did the District Court err when it remanded this case to 

STAB for a new trial, based on the finding that eight documents 

were privileged and improperly admitted into evidence? 

On October 6, 1986, the parties submitted an agreed statement 

of facts, which is summarized as follows: 

PacifiCorp is the parent of an affiliated group of 

corporations engaged in business within Montana. The DOR conducted 

an audit covering PacifiCorp's corporation license tax returns from 

1974 to 1979. On November 5, 1982, PacifiCorp filed amended 

returns for refunds for the years 1971 through 1979. In a letter 

dated June 3, 1983, the DOR informed PacifiCorp of a proposed 

additional tax assessment for the tax years 1974 to 1979, and also 

denied PacifiCorp's refund claims. 

On June 28, 1983, PacifiCorp protested the deficiencies 

asserted in the DORIS June 3, 1983, letter. On June 29, 1983, 

PacifiCorp also filed a complaint with STAB appealing the DORIS 

denial of refunds. On August 2, 1983, pursuant to stipulation of 

the parties, STAB ordered that the refund appeal be held in 

abeyance pending a final decision on the tax deficiency protest. 

The DOR obtained tax audit reports on PacifiCorp from tax 

authorities in Oregon, Idaho, and California, and determined that 

Montana was treating PacifiCorp's Montana operations differently 

than the other states. 

PacifiCorp contacted MTC and requested that it review the 

proposed assessment of additional taxes by Montana. The MTC is an 

association of about 20 states including Oregon, Idaho, California, 

3 
and Montana. 

of the Multistate Tax compact is to facilitate the following: 

The MTC's amicus curiae brief states that the purpose 

1. Equitable tax apportionment of multistate 

2. Uniformity among various state tax systems, 

3. Avoidance of duplicative taxation, 

4. Discussion of apportionment disputes, 

5. Avoidance of state judicial procedures by 

providing an informal forum for dispute resolution, 

businesses, 

6. Taxpayer convenience, 

7. Good relations between taxpayers and the state. 

In response to the request, MTC requested California to 

conduct a special audit of PacifiCorp and to provide reports to MTC 

and its members. 

Both Montana and California are signatories to an Agreement on 

Exchange of Information between MTC members stating: 

6. No information obtained pursuant to this Agreement 

shall be disclosed to any person not authorized by the 

laws of the undersigned states. 

On May 3, 1985, the DOR sent PacifiCorp its final notice of 

additional tax due and denied all refund claims. On May 31, 1985, 

PacifiCorp appealed to STAB the DORIS additional tax assessment. 

This appeal was combined with the pending claim filed with STAB in 

1983. 

On July 15, 1985, PacifiCorp filed its first interrogatories 

and request for production of documents. Included within the 

request for production was a requirement that the DOR identify any 

and all documents which were "used, reviewed, created or considered 

4 
by the Department which played any part in the Department's 

decision that Western and Resource did not constitute a unitary 

business with Pacific." The DOR identified and produced the audit 

report which its staff produced. However, the DOR identified, but 

refused to produce the Oregon and MTC audit reports. 

On November 21, 1985, PacifiCorp filed with STAB a motion to 

compel the DOR to produce the documents which it identified but 

failed to produce. The DORIS brief of January 7, 1986, opposed the 

motion to compel and directed PacifiCorp to request the documents 

directly from the individual states. On May 14, 1986, STAB denied 

the motion to compel. 

PacifiCorp attempted to obtain copies directly from the 

states. Oregon provided copies of its audit report. The FTB 

provided certain portions ofthe requested information, but did not 

release any portions from the first & second audit reports (1981 

and 1982) which included the following: 

1. Opinions, recommendations, judgments, or analysis in the 

audit narrative; 

2. Proprietary-type of information about the internal 

decision making process which it thought the taxpayer could use to 

manipulate the system (audit guidelines, audit criteria, 

operational criteria, and memos); 

3. Third-party information, unrelated to the taxpayer; or 

4. Protest hearing reports. 

The FTB also withheld the entire third report dated May 24, 

1984, and state that a fourth report dated May 29, 1985, had not 

5 
been specifically requested by PacifiCorp. Its letter explained 

that the undisclosed audit information was confidential under 

California law and would not be given to the taxpayer (PacifiCorp) . The 1984 and 1985 reports from FTB were given to Oregon, Montana, 

Idaho, and MTC. 

The letter also stated that FTB was providing the following 

information from the first and second reports (1981 & 1982): 

1. Returns, reports, etc., that had been furnished to the 

department by the taxpayer; 

2. The factual data contained in audit narratives and 

supporting workpapers; and 

3. Authority relied upon to make adjustments. 

PacifiCorp also attempted to obtain audit reports directly 

from MTC, but MTC refused to provide copies. 

On June 12, 1986, PacifiCorp filed a petition for judicial 

review. It sought an order reversing STAB and allowing discovery 

of the audit reports. The District Court found that it lacked 

jurisdiction and that a review would have to await final agency 

action. STAB entered judgment for the DOR on February 28, 1989. 

On November 22 , 1989, the District Court reversed and remanded this 

decision due to unlawful ex parte procedures on the part of STAB 

and the DOR. On March 15, 1990, STAB once again entered judgment 

for the DOR. PacifiCorp appealed to the District Court, and the 

parties agreed to resolve the discovery and evidentiary issues 

before reviewing the merits. The District Court found the 

information in the audit was privileged under 5 15-1-601, MCA, and 

6 
affirmed STAB'S ruling. This is the basis of Pacificorp's 

cross-appeal. 

During discovery, PacifiCorp inadvertently produced eight 

documents in response to the DORIS request. PacifiCorp moved to 

exclude the documents under the attorney-client privilege, but STAB 

admitted the documents, finding that PacifiCorp had waived its 

privilege. The District Court found that the eight documents were 

protected by the attorney-client privilege and remanded the case 

back to STAB for consideration without benefit of the information 

found in the documents. 

I. 

Did the District Court err in affirming STAB'S decision that 

the audit reports performed by California for MTC at the request of 

Petitioner are not subject to discovery? 

There is no dispute that the availability of the MTC audit 

report is governed by Article VIII, 5 6, of the Multistate Tax 

Compact. Section 6 is adopted by and set forth in § 15-1-601, MCA: 

Information obtained by any audit pursuant to this 

article shall be confidential and available only for tax 

purposes to party states, their subdivisions, or the 

United States. Availability of information shall be in 

accordance with the laws of the states or subdivisions on 

whose account the commission performs the audit and only 

through the appropriate agencies or officers of such 

states or subdivisions. 

The dispute concerns the interpretation of the above statute, 

particularly the meaning of the second sentence. The District 

Court found that the first sentence precludes a party state from 

distributing the MTC audit report to the taxpayer. 

7 
The DOR maintains that the first sentence authorizes 

dissemination of MTC audit information to the member states, their 

subdivisions, or the United States for tax purposes only. The DOR 

contends that such disseminated information must remain 

confidential because the first sentence establishes a statutory 

privilege for information obtained during an MTC audit. The DOR 

argues that the second sentence, regarding availability, does not 

defeat the privilege because it refers to dissemination to a 

state's taxing authority for tax purposes only. We disagree. 

We conclude that the first sentence does not preclude the 

state from distributing the audit to the taxpayer. Although the 

first sentence of the statute provides that the audit information 

is confidential, the second sentence provides that it will be 

available according to state law. The second sentence states that 

the laws of each state or subdivision "on whose account the audit 

is performed" govern the availability of the audits. Montana was 

provided the report as a state Iton whose account" the audit was 

performed, thus, the MTC audit is a Montana audit. The second 

sentence allows discovery of the audit report pursuant to Montana 

law. SeeMuItistate Tar Comgn v. Merck& Co., Inc. (Or. 1980), 617 P.2d 1371, 

1375, where the Oregon Supreme Court held that an MTC audit is 

essentially an Oregon audit performed under Oregon law by its 

agent, MTC. Montana disclosure laws apply. California privilege 

laws are not applicable, except in tax litigation arising in 

California. 

8 
The DOR contends that public disclosure would undermine MTC's 

ability to function as an informal forum for issue resolution. The 

DORIS inconsistent disclosure practices belie this argument. The 

DOR admitted during oral argument that MTC audits suuuortinq 

Montana tax assessments are often released to the taxpayer. There 

is no logical basis for releasing the information in some cases, 

but not in others. Given the inexplicable disparate treatment, 

arguments that disclosure will undermine MTC or Montana's 

participation are not persuasive. 

Because MTC derives powers from and on behalf of its member 

states, it exercises no more power than the states already possess. 

Kinnear v. Hertz Cop. (Wash. 1976), 545 P.2d 1186. The MTC's audit 

information is not subject to any greater burden of confidentiality 

than Montana law commonly imposes on tax information gathered by 

the DOR. Any further "confidentiality" violates Montana's 

constitutional right to know provision.' 

Constitutional Considerations 

The District Court did not discuss PacifiCorp's right to know 

under Article 11, 5 9, of the Montana Constitution, nor did it 

' Article 11, 5 9, of the Montana Constitution, provides: 

Risht to Know: No person shall be deprived of the right to 

examine documents or to observe the deliberations of all public 

bodies or agencies of state government and its subdivisions, except 

in cases in which the demand of individual privacy clearly exceeds 

the merits of public disclosure. 

9 
address the right to privacy asserted by the DOR under Article 11, 

5 10 of the Montana constitution.' 

Article 11, 5 9, of the Montana Constitution is the law of 

this State and gives PacifiCorp the right to examine these public 

documents unless some individual privacy interest is threatened. 

The DOR compares its refusal to disclose information obtained 

from MTC with the refusal of the state auditor in Belth v. Bennett 

(1987), 227 Mont. 341, 740 P.2d 638, to provide information 

received from a multistate insurance regulation association on the 

basis that the information was privileged under Montana statute. 

In Belth, a newspaper was trying to obtain information about an 

insurance company. We held in Belth that a state agency can assert 

the privacy interest of another. In Belth, the statute allowed the 

state auditor to withhold information because the insurance 

company's right to privacy outweighed the public's right to know. 

The instant case, however, is not a situation where a citizen is 

attempting to obtain a file about another taxpayer; here, the 

taxpayer is requesting its own file. The privacy exception within 

the right to know clause only applies when a member of the public 

is requesting information about someone else. The State cannot 

assert the privacy right of the person requesting the disclosure. 

If so, the State could circumvent the individual's right to know. 

Article 11, 5 10, provides: 

Riaht to Privacv. The right of individual privacy is 

essential to the well-being of a free society and shall not be 

infringed without the showing of a compelling state interest. 

10 
The DOR also contends that it is claiming the right to privacy 

for MTC and its members. It asserts that because California and 

MTC have not waived their privilege, Montana cannot disclose the 

information. The DOR points out that in Belth we held that 

corporations may assert the right of privacy because the right is 

not limited to individuals. The DOR explains that the MTC is 

analogous to a corporation, not a government agency, because it is 

an organization comprised of members. However, MTC's amicus brief 

supporting the DOR contradicts the DOR by stating that the MTC is 

"properly classified as an instrumentality of state government, 

and in this capacity "represents the executive branch of member 

states. If 

PacifiCorp's right to know prevails because no individual or 

corporate privacy is involved. Montana, California, and MTC cannot 

assert the right to privacy. They are not v1individualsf8 under 

Montana law--they are government entities. The only privacy 

interest implicated here is the taxpayer's. We hold that MTC audit 

reports are subject to discovery under 5 15-1-601, MCA, consistent 

with PacifiCorp's constitutional right to examine public documents. 

11. 

Did the District Court err when it found that PacifiCorp did 

not waive its attorney-client privilege by producing eight 

documents during discovery? 

PacifiCorp invoked the attorney-client privilege pursuant to 

5 26-1-803(2), MCA, for eight documents produced during discovery. 

Rule 503, M.R.Evid., provides that waiver of a privilege occurs if 

11 
"the holder of the privilege voluntarily discloses or consents to 

disclosure of any significant part of the privileged matter," 

unless the disclosure itself is privileged. 

PacifiCorp's production of eight attorney-client documents was 

in response to a voluminous document request covering thousands of 

documents. Montana law has not yet addressed whether inadvertent 

production in large document cases constitutes waiver. Application 

of the test for waiver of the attorney-client privilege outlined in 

State v. Statczar (1987), 228 Mont. 446, 743 P.2d 606, requires 

consideration of two elements: (1) the element of implied 

intention: and (2) the element of fairness and consistency. Statczar 

743 P.2d at 610. We will consider the element of implied intention 

first . 

In Statczar, we defined waiver as "the intentional or voluntary 

relinquishment of a known right or conduct which implies 

relinquishment of a known right." This is consistent with the 

Commission Comments to Rule 503, M.R.Evid., which provide that 

subjective intent is not the only factor for determining waiver-- 

conduct can also constitute waiver. The Comments also state that 

knowledge is not a required element for waiver. Here, it is clear 

that PacifiCorp did not have knowledge of the inadvertent 

production of the documents until later. However, we still must 

determine whether PacifiCorpls conduct at any time implied 

relinquishment of a known right. 

12 
In Kuiperv. D&rictCourt (1981), 193 Mont. 452, 460, 632 P.2d 694, 

698, we stated that if no legal action is taken to protect against 

wide dissemination of the materials, voluntary relinquishment of 

the right could be found.3 Here, wide dissemination did not occur, 

and PacifiCorp immediately requested the return of the documents as 

soon as it became aware of the production. PacifiCorp took prompt 

reasonable steps to protect its privilege. PacifiCorp objected to 

any use being made of these documents and refused to permit 

questions to be asked about them as soon as the issue arose during 

depositions. Voluntary relinquishment was not established by lack 

of legal action in this case. 

Moreover, the mere inadvertent production itself is not enough 

to establish voluntary relinquishment of a known right. Mendenhall 

v. Barber-Greene Co. (N.D.111. 1982), 531 F. supp. 951, 954. 

We are taught from first year law school that waiver 

imports the "intentional relinquishment or abandonment of 

a known right. Inadvertent production is the antithesis 

of that concept. 

Mendenhall at 955. Seeaho, Unitedstatesv. Zoh (9th Cir. 1987), 809 F.2d 

1411, 1417 (secretary's delivery of tapes under the mistaken 

impression that they were blank did not waive privilege because the 

disclosure was Irsufficiently involuntary and inadvertent as to be 

inconsistent with a theory of waiver"), afld in relevantpart and vacated in 

SeealsoInreGrandJuiyProceedings (4th Cir. 1984), 727 F.2d 1352, 

1356 (efforts taken to rectify error and extent of disclosure are 

factors in determining waiver) ; FDIC v. Emt & Whinney (E.D.Tenn. 

1991), 137 F.R.D. 14 (prompt objection and request for return of 

documents). 

13 
part (1989), 491 U.S. 554, 109 S. Ct. 2619, 105 L. Ed. 2d 469. 

Because PacifiCorp did not voluntarily relinquish a known right, an 

implied intention to waive the privilege cannot be found. 

In addition to considering the element of implied intention, 

we must also consider the element of fairness and consistency. 

Statczar 743 P.2d at 610. In this case, PacifiCorp objected to use 

of the documents from the first time they were referred to during 

discovery. The DOR knew well in advance of trial that use of the 

documents was an issue, and therefore, should not be surprised or 

unprepared because of their exclusion. Fairness and consistency 

are served by the exclusion of the privileged documents. 

Accordingly, we affirm the District Court's conclusion that 

PacifiCorp did not waive its attorney-client privilege when it 

inadvertently produced eight documents during discovery. 

111. 

Did the District Court err when it remanded this case to STAB 

for a new trial, based on the finding that eight documents were 

privileged and improperly admitted into evidence? 

When reviewing conclusions of law by an agency, Workers' 

Compensation Court, or a trial court the standard of review is 

whether the tribunal 's conclusions are correct. "The reasoning for 

simply determining if the court's conclusions are correct is that 

no discretion is involved when a tribunal arrives at a conclusion 

of law -- the tribunal either correctly or incorrectly applies the 

14 
law." Steerv. Dept.ofRevenue (1990), 245 Mont. 470, 474, 803 P.2d 601, 

603. We find that the District Court correctly applied the law. 

The District Court's review of STAB'S agency findings is 

governed by 5 2-4-704(2), MCA. The District Court properly noted 

that the statute allows reversal of an agency decision "where such 

decision violates constitutional or statutory provisions or is 

affected by other error of 1aw.I' See § 2-4-704(2) (a) (i) and (iv), 

MCA. The District Court found that the admission of the eight 

documents violated PacifiCorp's statutory right to claim the 

attorney client privilege pursuant to 5 26-1-803, MCA. 

We must determine whether the above statutory violation 

prejudiced substantial rights of the appellant. Section 

2-4-704(2), MCA. If substantial rights were prejudiced, then 

reversal is appropriate. See Frasceli v. State Dept. of Revenue (1988) , 235 

Mont. 152, 766 P.2d 850. 

The test of prejudicial error requiring reversal is 

whether there is a reasonable possibility the 

inadmissible evidence might have contributed to the 

verdict. 

Brodniakv. State (1989), 239 Mont. 110, 779 ~.2d 71 (quoting Statev. Gray 

(1983) 207 Mont. 261, 268, 673 P.2d 1262, 1266). 

After reviewing the record, we conclude that there is a 

reasonable possibility that the eight privileged documents 

contributed to STAB'S decision. We hold that admission of the 

eight documents prejudiced substantial rights of Pacif iCorp, and 

did not constitute harmless error. 

15 
We affirm the District Court's conclusions that PacifiCorp did 

not waive its attorney-client privilege and that remand to STAB was 

necessary. We reverse the District Court's conclusion that the MTC 

audit was not discoverable under Montana law. 

This case is remanded to the State Tax Appeal Board for 

further proceedings consistent with this opinion. 

We concur: 

_r 

'Chief' Justice 

16 
Justice John Conway Harrison dissenting. 

I totally disagree with the majority's reasoning in this 

opinion and therefore dissent to its holding herein. 

17