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Responding to Department of Justice Investigations (Portfolio 5515)

Bloomberg BNA Tax and Accounting Portfolio 5515-2nd, Responding to Department of Justice Investigations (Accounting Policy and Practice Series), discusses the issues that companies and individual officers and employees may face when the Department of Justice conducts a federal investigation of potential criminal violations. 

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Bloomberg BNA Tax and Accounting Portfolio 5515-2nd, Responding to Department of Justice Investigations (Accounting Policy and Practice Series), discusses the issues that companies and individual officers and employees may face when the Department of Justice conducts a federal investigation of potential criminal violations. The investigative process can be intimidating and the potential threat of criminal liability could be significant. A company must view a criminal investigation as a serious issue for its continuing operations that must be resolved expeditiously. For individual officers and employees, their conduct may be scrutinized. In recent years, there has been an increase in the number of senior officers, including CEOs, charged with crimes related to their work at a corporation.
While the government usually must establish an individual's involvement in a crime, including the intent to commit an offense, a company can be held vicariously liable for the conduct of its employees and officers, even if they are acting for their own personal benefit. This Portfolio analyzes in practical terms the range of criminal offenses that a corporation might encounter that can trigger a government investigation. The potential for a criminal investigation does not depend on the size of the organization, and a large number of statutes can be the basis for a criminal prosecution in addition to parallel civil enforcement proceedings.
This Portfolio discusses the structure of the Department of Justice and notes how different offices can become involved in an investigation. The process by which a criminal investigation may unfold is discussed in detail. The Portfolio also discusses the issues that can arise in the internal investigation, and some important steps a company needs to take to protect itself and its employees in that process.
While there are a number of nuanced issues involved in any criminal investigation, this Portfolio provides thorough, practical analysis of the process so that corporate officers and counsel can comprehend the potential liability a company faces and the variety of means available to conduct an investigation. Experienced counsel should be consulted in any case in which there is potential criminal liability for the organization or its employees.
The co-authors are former federal prosecutors, having represented the government in investigations of corporate crime. Professor Henning has written extensively on issues associated with corporate criminal liability and white collar crime. Mr. MacKay serves as the Vice President and General Counsel of Lockheed Martin IS&GS and has extensive experience representing clients in internal investigations and dealing with federal prosecutors and civil attorneys.
This Portfolio may be cited as Bloomberg BNA Tax and Accounting Portfolio 5515-2nd, Henning and MacKay, Responding to Department of Justice Investigations (Accounting Policy and Practice Series). Within the Accounting Portfolio Series, however, references to the Portfolios will include only the Portfolio numbers and titles.


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AUTHORS

PETER J. HENNING
Peter J. Henning, B.A. (Philosophy), Loyola Marymount University; M.A. (Philosophy), Fordham University; J.D., Georgetown University Law Center. Professor Henning has been on the faculty of Wayne State University Law School since 1994. Prior to entering law teaching, he was a Senior Attorney in the Division of Enforcement at the U.S. Securities & Exchange Commission from 1987 to 1991, and a Trial Attorney in the Criminal Division of the U.S. Department of Justice from 1991 to 1994. He is a co-author of casebooks on criminal law and white collar crime, treatises on public corruption and securities crimes, and three volumes of Federal Practice & Procedure: Criminal (with the late Professor Charles Alan Wright). Professor Henning can be contacted at peter.henning@wayne.edu.

SCOTT W. MACKAY, ESQ.
Scott W. MacKay, B.S. (Engineering), United States Military Academy; J.D., Boston University School of Law. Mr. MacKay has been the Vice President and General Counsel of Lockheed Martin IS&GS since 2010. Headquartered in Gaithersburgh, Maryland, IS&GS is one of five principal business segments of Lockheed Martin Corportion and provides management services, information technology and mission solutions, and advanced technology expertise across a board spectrum of applications to U.S. Government international customers. Previously, Mr. MacKay was the Vice President and Deputy General Counsel for Lockheed Martin Corporation. Mr. MacKay began working at Lockheed Martin in 1995, and was responsible for managing and conducting corporate litigation, including criminal and civil fraud matters, coordinating the Corporation's response to government investigations and requests for information, conducting internal investigations, and other compliance issues. From 1988 to 1995, he was a Senior Trial Attorney in the U.S. Department of Justice Criminal Division's Fraud Section where he investigated and prosecuted procurement fraud cases as well as cases involving violations of the Foreign Corrupt Practices Act, perjury before a grand jury, telemarketing fraud, public corruption, and fraud relating to classified contracts. Before joining the Fraud Section, Mr. MacKay served in the Army's Judge Advocate General's Corps in a variety of criminal justice assignments and as a legal advisor in the Office of the Secretary of the Army. Mr. MacKay can be contacted at scott.w.mackay@lmco.com.

TABLE OF CONTENTS

Detailed Analysis

I. Introduction

Introductory Material

A. No Federal, Judicially-Created Privilege for Communications Between Non-Attorney Tax Practitioners and Clients

1. Couch v. U.S.

2. U.S. v. Arthur Young & Co.

3. U.S. v. Frederick

B. The Section 7525 Privilege - Overview

1. Section 7525 in General

2. Effective Date

C. The Kovel Doctrine

D. State-Created Accountant-Client Privileges

E. Work Product Doctrine

F. Fifth Amendment Protection of Tax Documents

G. Ethical Rules

II. The Section 7525 Privilege

Introductory Material

A. Legislative History

B. Extension of Attorney-Client Privilege

1. Relationship Between Attorney-Client Privilege and Section 7525

2. Scope of Attorney-Client Privilege - In General

C. Applies Only to "Federally Authorized Tax Practitioners"

D. Applies Only to "Tax Advice"

1. Meaning of "Tax Advice"

2. Oral Advice

3. Pre-Return Advice

4. "Tax Advice" Contrasted With "Business Advice"

E. Applies Only to "Communications"

1. "Communications" Do Not Include Underlying Facts

2. Communication Must Be Made "by or for the Client"

F. Applies Only to Communications That Are "Confidential"

1. General Rule

2. Privilege Extends to Email and Other Electronic Communications

G. Privilege Belongs to the Client

H. The Privilege Must Be Claimed

1. I.R.S. Position on Oral Assertions of Section 7525

2. Privilege Logs

I. Burden of Proof

1. Interaction of Section 7525 and Section 6112

2. List Maintenance Requirements for Reportable Transactions

3. Asserting the Section 7525 Privilege in Response to a Request for List Information

III. Limitations on the Section 7525 Privilege

Introductory Material

A. Statutory Exception for Written Communications in Connection With the Promotion of a Statutorily Defined "Tax Shelter"

1. In General

2. Promotion of Direct or Indirect Participation in a "Tax Shelter"

B. Statutory Exception for Criminal Matters

C. Privilege Applies Only to Certain Federal Tax Matters and Proceedings

D. Privilege May Not Apply to Client Identity and Nature of Fee Arrangement

1. Client Identity Generally Not Privileged

2. Fee Arrangements Generally Not Privileged

3. Exceptions to General Rule

4. Cases Limiting Section 7525's Protection of Client Identity

E. Privilege Does Not Apply to "Tax Return Preparation"

1. Attorney-Client Privilege Does Not Extend to Tax Return Preparation

a. General Rule

b. "Research and Interpretation" Generally Not Necessary

c. Lawyer as "Scrivener"

d. Information Intended to Be Disclosed on Return

2. What Constitutes "Tax Return Preparation"

a. "Lawyer's Work" Versus "Accountant's Work"

b. Accountant-Attorneys - Dual Capacity Advisors

c. Advice Underlying a Return Position

d. Information Underlying Data on Return

3. Section 7525 Case Law on Application of Privilege to Tax Return Preparation

4. I.R.S. Position on Representation Letters and Tax Accrual Workpapers

F. Privilege Does Not Apply to Communications in Furtherance of a Crime or Fraud

G. Privilege Does Not Apply to Transfer of Pre-Existing Records

H. Privilege Does Not Apply if It Has Been Waived

1. General Rule

2. Failure to Claim Privilege

3. Intentional Disclosure

4. Inadvertent Disclosure

5. The Effect of Waiver: Subject-Matter Waiver

6. Effect of Filing Amended Return

7. Electronic Communications and Waiver

I. In-House Tax Practitioners

IV. The Kovel Doctrine: Privilege When Accountants and Other Non-Attorneys Assist Attorneys

Introductory Material

A. The Kovel Doctrine

1. U.S. v. Kovel

2. Extension of Kovel

3. Kovel Factors

a. Assisting Attorney in Providing Legal Advice

b. Assisting Versus Providing Legal Advice

c. Tax Return Preparation Exception

d. Serving as a "Translator"

e. Under Direction of Attorney

f. Attorney's Understanding of Subject Matter

4. Types of Communications Protected by Kovel

5. The Kovel Letter

B. The Kovel Doctrine in the Section 7525 Context

V. State Law Issues

Introductory Material

A. State Attorney-Client Privilege Law

B. State-Created Accountant-Client Privileges

1. Section 7525 Not Applicable to State Tax Proceedings

2. Overview of State-Created Accountant-Client Privileges

a. Types of State Privileges

b. Not Subject to Limitations of Section 7525

VI. Work Product Doctrine

Introductory Material

A. Distinguished From Attorney-Client Privilege and Section 7525 Privilege

1. Long-Term Capital Holdings v. U.S.

2. Black & Decker Corp. v. U.S.

B. Overview of Work Product Doctrine

1. Federal Rule of Civil Procedure 26(b)(3)

a. In General

b. Requirements for Application

c. May Be Overcome by Opposing Party

2. Meaning of "In Anticipation of Litigation"

a. Tax Return-Related Documents

b. Dual Purpose Documents

3. Application to Attorneys and Other Party Representatives

4. Accountants as Consultants

5. Ordinary Work Product Protection

6. Core or Opinion Work Product Protection

C. Claiming Work Product Protection

D. Crime-Fraud Exception

E. Waiver

1. Putting Information at Issue

2. Disclosure to Third Party

a. Disclosure to Outside Auditors

3. No Subject Matter Waiver as a General Rule


WORKING PAPERS

Working Papers

TABLE OF WORKSHEETS

Worksheet 1 Internal Revenue Code § 7525

Worksheet 2 Articles, Public Statements, and Letters Regarding Enactment of Accountant's Privilege (1997-1998)

Worksheet 3 Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. No. 105-206, § 3411(a) (1998)

Worksheet 4 H.R. 2676, 105th Congress, § 341 and § 3411

Worksheet 5 Excerpts From Congressional Record

Worksheet 6 Excerpts of Hearings Before the Committee on Finance, United States Senate, 105th Congress, Second Session, on H.R. 2676 (January 28, 29; February 5, 11, and 25, 1998)

Worksheet 7 Excerpts of Federal Reports Accompanying H.R. 2676

Worksheet 8 Staff of Joint Committee on Taxation, 105th Congress, General Explanation of Tax Legislation Enacted in 1998, at 86-88 (Committee Print 1998) (Blueblook)

Worksheet 9 American Jobs Creation Act of 2004, Pub. L. No. 108-357, § 813 (2004)

Worksheet 10 H.R. 4520, 108th Congress, § 613, § 406, and § 813

Worksheet 11 Federal Reports Accompanying H.R. 4520

Worksheet 12 Circular 230

Worksheet 13 Internal Revenue Manual

Worksheet 14 Internal Revenue Manual, Part IX, Criminal Investigation, Special Agents Handbook, MT 9781-149, § 344.2, Oct. 19, 1982

Worksheet 15 Articles, Public Statements, and Letters Regarding Tax Accrual Workpapers (2003-2005)

Worksheet 16 Sample Privilege Log Entries

Bibliography

OFFICIAL

Federal Statutes:

Treasury Regulations & Preambles:

State Statutes:

Public Laws:

Legislative History:

Court Rules:

Internal Revenue Manual:

I.R.S. Releases:

Securities and Exchange Commission:

SEC Releases:

Cases:

UNOFFICIAL

Books & Treatises:

Periodicals:

Miscellaneous: