Responding to Department of Justice Investigations, written by Peter J. Henning, Professor of Law at Wayne State University Law School and Scott W. MacKay, Esq., Vice President and Deputy General Counsel at Lockheed Martin Corporation, discusses the issues that companies and individual officers 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. 

Responding to Department of Justice Investigations 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. This 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. 

This Portfolio is written for executive management and the directors of corporations and larger professional organizations that may face criminal and civil enforcement investigations of misconduct within the organization. There is probably no worse moment for a corporation than when it receives word of potential criminal wrongdoing in its ranks. Whether it is the arrival of a subpoena, FBI agents showing up with a search warrant, or an employee's call to a whistleblower hotline, the question is how the corporation will respond to the report of wrongdoing and, if it proves true, deal with the consequences. The process of a criminal investigation and, in some instances, a subsequent decision to charge the company and individuals with a crime, is usually far outside the purview of managers and directors, whose focus is quite properly on operating the business. There is no single blueprint for dealing with the government when a company learns that it is involved in an investigation, but there are certain steps that can be taken to deal with the issues raised by a criminal and related civil investigation. 

The goal of this Portfolio is to provide readers with a framework for understanding how the Department of Justice conducts a criminal investigation, and the means by which parallel civil investigations and enforcement actions can arise in conjunction with a criminal case. In addition to a broad overview of corporate criminal liability and the types of violations that arise most frequently in the corporate context, this Portfolio looks at the means by which the government conducts criminal and civil investigations.  

While prosecutors rely largely on grand jury subpoenas to gather documents in an investigation, they are using search warrants like the one executed at Reddy Ice to secure materials and, in some cases, send a message to companies about the seriousness of the investigation. 

The primary focus of this Portfolio is on the investigation of a corporation or other business organization for possible misconduct, and that process will often implicate individuals in the company who may be prosecuted individually for their conduct. While some cases may result in the filing of no criminal charges, the Department of Justice is using the threat of prosecution of a corporation and its employees to a much greater extent than ever before. It is now almost a matter of routine for the FBI and other investigative agencies to look into the collapse of a public corporation or market disruptions that cause substantial losses to determine whether there was criminal conduct.  

The years since the collapse of Enron have seen an unprecedented number of prosecutions of former CEOs of publicly traded corporations, and some defendants have received sentences once seen only for drug dealers and mobsters. Thus, managers and executives may be in a situation in which both the corporation and their personal conduct is the object of a criminal investigation that can result in charges being filed. 

This Portfolio’s purpose here is to provide sufficient information so that executives, directors, and managers can evaluate a situation at an early stage to determine whether there is a need to call experienced counsel to deal with the government. Perhaps the greatest mistake any officer or employee can make is to ignore a problem that could result in a criminal prosecution in the hope that it will go unnoticed or unreported. The goal is to help foster an understanding of what can trigger an investigation, the process by which the Department of Justice gathers information and determines whether to pursue charges, and the issues related to how a company, along with its managers and employees, should respond if there is an investigation.

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 Deputy General Counsel at Lockheed Martin and has extensive experience representing clients in internal investigations and dealing with federal prosecutors and civil attorneys.

Responding to Department of Justice Investigations allows you to benefit from: 

• Hundreds of hours of original research on specific tax planning topics from leading practitioners in this area.
• Invaluable practice documents including tables, charts and lists.
• Guidance from world-class experts.
• Real-world and in-depth analysis that lets you explore various options.
• Time-saving access to relevant sections of tax laws, regulations, court cases, IRS documents and more.
• Alternative approaches to both common and unique tax scenarios. 

This Portfolio is included in the Accounting Policy & Practice Series, a comprehensive series of titles which explain, explicate, and offer commentary on a wide range of accounting and financial management topics, including revenue recognition, income taxes, leasing, business combinations, debt instruments, risk management, internal controls and more. 

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

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: