Ames v. Commissioner

Majority - Gerber, Judge

No, the petitioner did not constructively receive the income from his illegal espionage activities in 1985; he received it when the cash was actually delivered and deposited into his bank accounts during the years 1989 through 1992. The court reasoned that while income is constructively received when set apart or made available so a taxpayer can draw upon it, this principle does not apply if the taxpayer's control over receipt is subject to substantial limitations or restrictions. In this case, petitioner's access to the funds purportedly 'set aside' by the Soviet Union in 1985 was not 'unfettered.' He had to use complex and risky communication methods (signal sites) to contact the Soviets, who then had to arrange for cash transfers and secret dead drops into the U.S. These conditions represented substantial risks and restrictions, meaning delivery was not solely dependent on petitioner's volition, and the Soviets retained ultimate control over the funds. Therefore, petitioner had no legally enforceable claim to the funds until they were physically made available to him. Yes, petitioner is liable for the section 6662(a) accuracy-related negligence penalty for each of the taxable years 1989, 1990, 1991, and 1992. The court found that 'negligence' involves a failure to make a reasonable attempt to comply with internal revenue laws, and 'disregard' means careless, reckless, or intentional disregard. Petitioner admitted to intentionally and fraudulently concealing his espionage income, not merely attempting to comply with tax laws. The court stated that fraudulent concealment 'goes far beyond and is inclusive of 'negligence or disregard of rules or regulations.'' While fraud and negligence penalties are mutually exclusive if both apply, they can be asserted in the alternative. Since the fraud penalty was not at issue here, the negligence penalty was appropriate given petitioner's clear intentional concealment and the failure of his constructive receipt argument. No, the imposition of income tax liability on petitioner’s espionage income and the assessment of accuracy-related penalties under section 6662 do not violate the Double Jeopardy Clause of the Fifth Amendment. The court reaffirmed that civil tax liabilities and penalties are remedial in nature, not criminal punishments. Applying the two-step Hudson v. United States analysis, the court first noted Congress's clear intent for the negligence penalty and tax liability to be civil sanctions. Second, evaluating the 'useful guideposts' for punitive effect, the court found that civil tax liabilities or penalties do not constitute an 'affirmative disability or restraint' nor have they historically been regarded as punishment. Their primary purpose is to safeguard revenue and reimburse the government for investigation and loss. The court concluded that only the 'clearest proof' could override legislative intent that a remedy be civil, and such proof was absent here. Yes, the work product doctrine protects respondent's criminal reference letter (CRL) from discovery in this civil proceeding, and no, petitioner has not shown substantial need to overcome this privilege. The court found that the CRL, prepared in anticipation of petitioner's criminal tax litigation, is a 'classic example of attorney work product' containing legal analysis, mental impressions, and conclusions. The privilege extends to this subsequent civil proceeding because there is a 'subject matter identity' and a 'foreseeable and reasonable expectation' that civil tax liability would follow the criminal investigation. Allowing discovery would frustrate the doctrine's purpose of enabling lawyers to work privately. Petitioner's claim of 'substantial need'—to demonstrate respondent's punitive motive to support a Double Jeopardy argument—was deemed insufficient because respondent's motive is irrelevant to the legal question of whether a civil penalty constitutes a criminal punishment under the Double Jeopardy Clause.