## Facts

- Aldrich H. Ames, a CIA employee from 1962 to 1994, sold classified information to Soviet/Russian intelligence and received covert payments.
- Ames used the cash and bank deposits to fund personal spending and did not report the payments as income.
- The IRS determined Ames received espionage payments of $745,000 (1989), $65,000 (1990), $91,000 (1991), and $187,000 (1992), and issued a notice of deficiency for 1989–1992 with accuracy-related penalties under I.R.C. § 6662(a).
- Ames petitioned the U.S. Tax Court for redetermination; the case was tried on a fully stipulated record while Ames was incarcerated.
- Ames had pleaded guilty in 1994 to conspiracy to commit espionage and to a tax conspiracy charge, receiving life imprisonment for espionage and an additional prison term for the tax offense.
- Ames, a cash-method taxpayer, argued the espionage income should be treated as constructively received in 1985, when he was told $2 million had been “set aside” for him, rather than in 1989–1992 when payments were made and deposited.
- During discovery, Ames sought an IRS “criminal reference letter” recommending prosecution; the IRS resisted production on work-product grounds.

## Issues

1. Whether a cash-method taxpayer constructively received espionage income in 1985 based on a statement that funds were “set aside,” or instead received the income when paid and deposited in 1989–1992.
2. Whether Ames was liable for accuracy-related penalties under I.R.C. § 6662(a) for 1989–1992.
3. Whether assessing and collecting tax and civil penalties on the espionage income after Ames’s criminal conviction violated the Fifth Amendment Double Jeopardy Clause.
4. Whether the IRS criminal reference letter was protected from discovery by the work-product doctrine.
5. If work-product protection applied, whether Ames showed substantial need sufficient to compel production.

## Decision

- The court held Ames did not constructively receive the espionage income in 1985; the income was taxable in 1989–1992 when specific amounts were actually paid and made available through deposits.
- The court sustained the deficiencies and upheld the I.R.C. § 6662(a) accuracy-related penalties for 1989–1992.
- The court rejected Ames’s double jeopardy claim, holding federal income tax and the accuracy-related penalty were civil and remedial rather than criminal punishment.
- The court held the IRS criminal reference letter was protected attorney work product prepared in anticipation of litigation.
- The court found Ames failed to establish substantial need or undue hardship that would justify production of the protected document.

## Legal Principles

- For cash-method taxpayers, gross income is included in the year actually or constructively received.
- Constructive receipt requires that funds be credited, set apart, or otherwise made available so the taxpayer can draw on them at any time, and not be subject to substantial limitations or restrictions.
- A general promise of future payment, without present, unrestricted access to a definite sum, does not create constructive receipt.
- Accuracy-related penalties under I.R.C. § 6662(a) apply to qualifying underpayments, including those attributable to negligence or substantial understatement, absent reasonable cause and good faith.
- Assessment of tax and civil accuracy-related penalties is generally remedial and does not, without more, constitute a second “punishment” barred by the Double Jeopardy Clause after a criminal conviction for related conduct.
- The work-product doctrine protects materials prepared by or for counsel in anticipation of litigation, including internal prosecution referral recommendations, absent a showing of substantial need and inability to obtain the substantial equivalent without undue hardship.

## Conclusion

The Tax Court treated Ames’s espionage proceeds as taxable income in the years the payments were actually received and deposited, sustained accuracy-related penalties, held that civil tax liabilities and penalties did not violate double jeopardy despite prior criminal punishment, and denied discovery of an IRS prosecution referral letter as protected work product.


Ames v. Commissioner, 112 T.C. 304 (1999)