New York Law Journal: Constructive Deceit

By Jeffrey A. Galant

The tools of intelligence (and counterintelligence) gathering, e.g., espionage, spying and the like, have been utilized since time immemorial by states, sovereign and otherwise, for both legitimate and nefarious reasons.

The income that is subject to a man’s unfettered command and that he is free to enjoy at his own opinion may be taxed to him as his income whether he sees fit to enjoy it or not.

Holmes, J.

Corliss v. Bowers, 281 U.S. 376 (1930)

Aldrich Ames, while serving as an officer of the U.S. Central Intelligence Agency, deceived the United States by divulging classified information to the Soviet Union. Ames also defrauded the U.S. by failing to report for income tax purposes the $2 million or more in payments received from the Soviets in exchange for such information.

For his troubles, Ames received life imprisonment for espionage and 27 months imprisonment for tax fraud. Among the numerous sources of this story, Ames’ travails are neatly described in Ames v. Commissioner, 112 T.C. 304 (1999) (“Ames”). We shall return to Ames momentarily.


The tools of intelligence (and counterintelligence) gathering, e.g., espionage, spying and the like, have been utilized since time immemorial by states, sovereign and otherwise, for both legitimate and nefarious reasons. For example, use by democratic regimes to protect their form of government, and their citizens and borders, is a seemingly legitimate endeavor, as compared with the perhaps nefarious use by some states to undermine the governments of other sovereign states, harm their citizens or encroach upon their borders.

It is important to consider whether intelligence gathering activity is occurring during peacetime or during wartime (or somewhere in between). In exploiting these tools, bad things can happen, people, whether innocent or not, can be hurt or perhaps worse. For an exhaustive analysis of the legalities involved in espionage See, Asaf Lubin, The International Law of Intelligence: The World of Spycraft and the Law of Nations (Oxford University Press, 2024).

Successful intelligence gathering requires, among other things, electronic eavesdropping, high resolution satellite images, and most importantly, human sources. “Only with a human source can intelligence officers make proper sense on intercepts and understand the context of an overheard conversation,” says the C.I.A.’s espionage chief, Tom Sylvester. See, Julian E. Barnes, In Age of Intercepts, C.I.A. Makes the Case for Spies, The New York Times, March 3, 2024.

So, who are these folks? “What do you think spies are: priests, saints, and martyrs? They’re a squalid profession of vain fools, traitors too, yes; pansies, sadists, and drunkards, people who play cowboys and Indians to brighten their rotten lives. Do you think they sit like monks in London balancing the rights and wrongs?” See, John Le Carré, The Spy Who Came in from the Cold (1963). Perhaps Le Carre was being a little harsh, I would guess that they are people with varied motives, some good, some not so good. I harken back to John Huston’s metaphorical admonition in the noir thriller, The Asphalt Jungle, where lawyer Emmerich exclaims, “After all, crime is only a left-handed form of human endeavor.”

Historically, British intelligence agencies (e.g., MI5 and MI6) were dominated by so-called elites, upper class folks, graduates of Eton and Oxford or Cambridge. Similarly, elites (prestigious prep schools and Ivy League or equivalent graduates) inhabited the various U.S. intelligence agencies. (Seee.g., Matt Damon portraying a CIA officer in The Good Shepard, responding that his class “has the United States of America,” and that the everyone else is just visiting.

Closer Look at ‘Ames’

The taxable years before the court were 1989 through 1992. Interestingly, Ames argued that he constructively received $2 million, presumably set aside for him by the Soviets, in 1985, a year that was not before the court. Although perplexed by the argument, since the statute of limitations regarding1985 was still open due to Ames’ having committed tax fraud, the court analyzed whether there was constructive receipt in 1985.

The court found that in 1985, the Soviet government still had control of the funds presumably set aside for Ames, and that Ames would not realize the income until it was made “physically and/or practically available to him.”

In effect, the court used the convoluted and time-consuming techniques of spy craft against Ames’ contention of constructive receipt. Basically, constructive receipt requires that the taxpayer have unfettered control over the amount claimed. Corliss v. Bowers, 281 U.S. 376 (1930); Treasury Regulation 1.451-2.

It was a lengthy, risky, and uncertain process for Ames to obtain the funds. He apparently would first have had to contact the Soviets to determine whether funds could be withdrawn, and, if so, he would then have to initiate the procedure of getting the Soviets to transfer the cash to a secret prearranged location in the U.S. so that Ames could gain access.

The court determined that the lack of certainty that the foregoing could be accomplished was sufficient to avoid constructive receipt. “ … [C]ertain conditions had to be met or had to occur before [Ames] could gain physical access to any funds. *** So long as the Soviets retained control over any funds or promised set-asides, there was no practical or legal way in which petitioner could compel payment.” See Ames at 313.

Another noteworthy aspect of the case was whether Ames could avoid being taxed or suffering penalties under the Self-Incrimination or Double Jeopardy clauses of the 5th Amendment to the U.S. Constitution.

Regarding the former, there was no finding or even discussion of self‑incrimination in the opinion other than a reference in a footnote to Ames’ testimony at trial where he said that if he had reported the income on his income tax return, his illicit and secret relationship with the Soviet Union would have been revealed (See Ames at 312, footnote 7).

Not to belabor the point, but all income, whether legally realized or not, is clearly taxable, James v. U.S., 366 U.S. 213 (1961) (holding embezzled funds taxable). Further, the requirement to report so-called illicit income on an income tax return is not violative of a taxpayer’s right against self-incrimination. See United States v. Sullivan, 274 U.S. 259 (1927) (requiring a bootlegger to file an income tax return and to claim any privilege on the return itself).

The court dismissed the double jeopardy argument regarding the imposition of income tax and fraud and negligence penalties on Ames’ espionage earnings on the basis that the tax and penalties were civil in nature, and not punishment for crimes and therefore not subject to the prohibition against double jeopardy.

One curious and unexplained question is whether Ames was able to recover any taxes that he may have paid on his illicit income since his espionage related income and assets were subject to forfeiture (See Ames at 308, citing 18 U.S.C. section 794(d)). Since Ames had to give up the illicit income, he may have been entitled to relief under the Claim of Right provision, Internal Revenue Code section 1341.

The Home Stretch

If you have read this far, perhaps your interest lies less with tax law and more in the spy realm, and with the excitement and intrigue it may bring. Say an over-the-top James Bond-like character as an example. Or perhaps you are in the more realistic Graham Greene or John Le Carre camp? If the latter, I encourage you to sample some of Mick Herron’s writing and I recommend that you start with Herron’s The Secret Hours (Soho Press, Incorporated, 2023)

Apropos, and smoothly fitting the tradition of great story tellers such as Greene and Le Carre, Mick Herron’s The Secret Hours portrays folks engaged in intelligence gathering and spy craft. As in any other form of human endeavor, it has its good people and those who are not so good.

One most definitely becomes invested in Herron’s characters, some more so than others, which is a good sign.

Cutting to the chase, and avoiding spoilers, the plot broadly concerns MI5’s flushing out of a former Stasi officer, who, among various unsavory deeds, murdered the “joe” of a British Intelligence officer.

Enough said, take a look!

Reprinted with permission from the New York Law Journal, An ALM Publication

More to explorer