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Yes, he was a spy. But was he negligent?
Aldrich Ames was a famous spy during the Cold War era. While working for the CIA in 1984, he began meeting with officials of the Soviet Union’s embassy in Washington, D.C. Authorized by the CIA and the FBI, these meetings were designed to allow Ames to gain access to classified information and recruit informants for the CIA.
In 1985, KGB agents turned the tables and recruited Ames to provide U.S. secrets in exchange for cash.The KGB informed Ames that $2 million had been set aside for him in an account located in the Soviet Union.
Ames provided the KGB with Top Secret information, including identities of Soviet military and intelligence officers who were cooperating with the CIA. In exchange, Ames received $50,000 in 1985 and over $1 million during 1989-92.
In 1994, Ames pled guilty to charges of conspiracy to commit espionage and criminal tax fraud for failure to report the income. He was sentenced to life imprisonment on the espionage charge and 27 months’ imprisonment on the tax charge. As part of the plea agreement, Ames had to forfeit all assets related to his espionage activities.
The IRS then assessed negligence penalties against Ames for failure to report his espionage income from 1989 through 1992. Ames took the case to Tax Court (Aldrich H. Ames v. Commissioner, 112 TC No. 20, May 28, 1999), raising two arguments:
1. His espionage profits were constructively received in 1985, when the KGB set the money aside or otherwise made it available to him. Of course, Ames did not report the income on his 1985 return, or on any other year’s return.
The constructive receipt doctrine is a favorite tool of the IRS, when it wants to argue that a cash method taxpayer effectively had access to unreported income. The argument is seldom, if ever, used by taxpayers.
In this case, the IRS had not assessed penalties for the 1985 tax year. When the IRS began their tax case, the statute of limitations had probably expired for that year. So Ames argued that he should have reported the income in 1985, he failed to report the income in that year, the IRS had not assessed a penalty for that year, so he should not be liable for any penalty.
2. Not reporting the income was an intentional act. If he had reported the income, the government would have known he was accepting bribes. He was not being negligent. Ames argued that maybe he should be assessed a criminal penalty for fraud; but not a civil penalty for negligence.
The Tax Court sent Ames back to his cell in Allentown, Pa., and told him to pay the penalty.
The technical information here is necessarily brief. No final conclusion on these topics should be drawn without further review and consultation. Please be advised that, based on current IRS rules and standards, the information contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty assessed by the IRS.
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