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United States v. Amerada Hess Corp.

decided: January 18, 1980.



Before Gibbons and Higginbotham, Circuit Judges, and Ziegler,*fn* District Judge.

Author: Gibbons


Amerada Hess Corporation (Amerada) appeals from a final order of the district court directing enforcement, pursuant to 26 U.S.C. ยงยง 7402(b), 7604(a) (1967), of two Internal Revenue Service (IRS) summonses. Amerada resisted enforcement: (1) because the summonses were issued for an improper criminal investigative purpose; and (2) because one summons sought information protected by the attorney-client privilege and the work product rule. The district court rejected these contentions. We affirm.

I. Pre-Enforcement Proceedings

In May 1975, a revenue agent of the Audit Division (presently the Examinations Division) of IRS commenced a civil audit of the federal tax returns of Amerada for the tax years 1972 through 1974. The IRS investigation coincided with what was apparently a much larger investigation of certain activities of major corporations, involving possible corporate payments to foreign officials and citizens which were suspected of having been improperly treated by the corporations on their tax returns. Simultaneously, the Securities Exchange Commission had filed lawsuits against several major corporations, three of which, like Amerada, were oil companies, alleging the failure of the corporations to disclose improper foreign payments. Amerada's outside counsel, Milbank, Tweed, Hadley & McCloy (Milbank), advised Amerada to conduct an internal investigation to inform the corporate management of any such foreign payments Amerada might have made. In April 1976, Amerada established a special internal investigative committee, consisting of four outside directors, for which Milbank conducted a series of interviews of Amerada officers and employees. Upon completion of this internal investigation, the special committee filed its report with Amerada's board of directors. The committee's report revealed what were termed as "questionable practices," including payments and gifts to local officials, political candidates, and foreign officials, totalling approximately $12,000. In that section of the committee's report to the board of directors which dealt with the procedure of the investigation it was reported that fifty of Amerada's officers and employees had been interviewed by Milbank. The committee's report indicated in a footnote that a list of the names of the persons interviewed was attached. For some reason, however, the list was not attached to the report and the footnote was not corrected. It is not disputed that such a list was in fact included with the report of Milbank to the special committee and is in Amerada's possession. Amerada furnished the revenue agent with a copy of the special committee report to its board of directors, but not with the Milbank report to the committee or the list of persons Milbank had interviewed. Amerada also furnished the revenue agent with answers to eleven standard questions which the IRS had formulated and addressed to major corporations seeking information about improper payments.

In June 1977, as a result of the information in the special committee report and of Amerada's answers to the eleven questions, the revenue agent suspended his examination and made a fraud referral to the Intelligence Division of IRS, now designated the Criminal Investigation Division. Special Agent Kenneth J. Kalemba was assigned to join the Amerada case to investigate possible criminal violations of the Internal Revenue Code in addition to civil liability for unpaid taxes and penalties. Kalemba, after evaluating the Audit Division's reference, requested, and received, from his superior in the Intelligence Division permission to open a file on Amerada.

On September 5, 1977, Special Agent Kalemba, his Intelligence Division supervisor John Kuper, and William Huntley of the Audit Division, met with representatives of Amerada, including counsel. In this meeting the Amerada representatives were told by representatives of the IRS that the civil audit would, if Amerada preferred, be suspended pending Kalemba's criminal investigation, but that if Amerada preferred to have the civil audit continue document requests made by the revenue agent and those made by the Special Agent would be separately identified. During the meeting Special Agent Kalemba requested a list of documents. The list was prepared by him and not by the revenue agent. Amerada's counsel requested time to consider the request. Some time after the September meeting a representative of Amerada informed Kalemba that before it would respond to his document request it wished to seek review by higher authorities in the IRS of the decision to initiate a criminal investigation. In October 1977, Amerada's counsel asked David E. Gaston, Chief of the IRS Criminal Tax Division, to review the matter. Mr. Gaston referred the request to the Chief of the Intelligence Division, who in turn referred it to the District Director of the Newark District. A meeting with the District Director in Newark was scheduled for mid-January 1978. Before it took place Special Agent Kalemba issued the two summonses for which enforcement is sought. They require production of the same documents Kalemba requested at the September 5, 1977, meeting. One summons asks for production of the list of names of persons interviewed by Milbank on behalf of the special committee. The second asks for nine categories of Amerada corporate documents.*fn1 Amerada resisted enforcement of both summonses as issued for an improper criminal purpose, and of the first as requiring the production of protected materials.

II. Enforcement Proceedings

When Amerada refused to comply with the summonses the United States and Special Agent Kalemba filed a Section 7402(b) and 7604(a) complaint and obtained an order directing Amerada to show cause why it should not be ordered to comply. Amerada filed an answer and opposing affidavits. It also served on IRS employees subpoenas duces tecum for the production of the entire case file of the Intelligence Division for the tax years in issue, and notices of deposition of various IRS employees. The government moved to quash the subpoenas and for a protective order with respect to the depositions. The trial court permitted a deposition of Special Agent Kalemba. It reserved determination of the motion to quash subpoenas, requiring that the witnesses on which they were served remain available for a hearing on the order to show cause. At that hearing Special Agent Kalemba testified and was extensively cross-examined. His testimony establishes that the IRS decision to open a criminal investigation was made as a result of the disclosures in the special committee report to Amerada's board of directors, that the revenue agent's audit was suspended at the time the IRS summonses were issued, that the information sought is not in possession of the IRS, that it is information relevant to the purpose of determining Amerada's tax liability, and that because such tax liability had not yet been determined he had not yet decided whether or not to recommend prosecution. The court also heard the testimony of two other persons: revenue agent Caputo of the Audit Division, who testified that a civil audit of Amerada for the years in question was incomplete; and Roger B. Oresman, an attorney with Milbank, and a member of the Amerada special committee, who testified primarily about the creation of the special committee and the manner in which Milbank conducted an investigation on its behalf. Oresman's testimony established that the list of interviewees, which is the subject of the first IRS summons, was annexed to a report by Milbank to the special committee. Finally, the trial court examined, in camera, the Intelligence Division file on Amerada.

The trial court held that no additional discovery was appropriate in order to rule on Amerada's LaSalle-Genser*fn2 objection, that the objection was meritless, and that neither the attorney-client privilege, nor the work product rule, prevented disclosure of the list of interviewees.

III. The LaSalle-Genser Objection

In United States v. Genser, 595 F.2d 146, 152 (3d Cir. 1979) (Genser II ) this court discussed the circumstances in which a taxpayer would be entitled to discovery against the government in order to meet the burden of overcoming the presumption of validity applicable to an IRS summons issued prior to a recommendation of prosecution. We held:

Where this information or other evidence introduced by the taxpayer reveals (1) that the IRS issued summonses after the investigating agents recommended prosecution, (2) that inordinate and unexplained delays in the investigation transpired, or (3) that the investigating agents were in contact with the Department of Justice, the district court must allow the taxpayer to investigate further. In proper cases, this investigation could include the opportunity to examine the IRS agents or officials involved, or to discover documents. Such examination/discovery, however, should be carefully tailored to meet the purpose of ...

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