Austin Towers is a convicted former spy for the former Soviet Union. Austin received a communication from a Soviet agent that $2 million had been set aside for him in account upon which he would be able to draw. Austin was told that the money was being held by the Soviet Union, rather than in an independent or third-party bank or institution, on the petitioner’s behalf. Over the next few years, Austin drew approximately $1 million from the account. During that period, Austin filed annual tax returns with his wife showing taxable income of approximately $65,000 per year.
Mr. Towers Liable for failing to pay tax for $1,000,000 in espionage fees?
Analysis
“Section 61 internal Revenue code (IRC) defines gross income as all income from whatever the source” (Aldrich & Ames, 1999). The income includes compensation for espionage services such as in the current case where Mr. Towers is compensated for his services as a spy agent to the Soviet Union. In a period of few years Mr. Towers has withdrawn approximately $1,000,000 from the 2,000,000 paid to him for espionage services for the Soviet Union. The amount has not been taxed as Mr. Towers and his wife have a joint filing status for approximately $65,000 per year which does not include the amount he is rewarded by the Soviet Union. According to the IRC, an amount ranging from “$750,000 to $1,000,000 is taxed $ 248,300 plus 39% of the excess over $750,000” (§ 6662 Imposition of accuracy-related penalty on underpayments., 2010). The understatement of pension liabilities by Mr. Towers exceeds $ 1000 and thus under section 6662 (f) (2), a penalty should be imposed on him (§ 6662 Imposition of accuracy-related penalty on underpayments., 2010).
Mr. Towers has not reported the income received from the illegal espionage activities. Thus his failure to pay taxes on the received amount can be regarded as negligence or disregard of rules and regulations (§ 6662 Imposition of accuracy-related penalty on underpayments., 2010). In IRC’s section 6662(a) and (b) (1) there is a provision for a penalty relating to “accuracy amounting to 20 percent of the part of the underpayment that is attributable to negligence or disregard of rules and regulations” (Aldrich & Ames, 1999). According to Rule 142 (1) below, Mr. Towers negligence conduct is unlawful. The term negligence is statutorily refers to “any failure to make a reasonable attempt to comply with provisions of the internal revenues laws. Section 6662 [D] is defined as any careless, reckless or intentional disregard of rules or regulations” (Aldrich & Ames, 1999). There are two mutually exclusive factors that may have led to the concealment of the espionage income.
The first reason is due to fraud, whereby the payments made were illegal and thus Mr. Towers was could not declare the source of the income. Secondly, the failure can be due to negligence of the IRC laws. Mr. Towers may be found liable for “both fraud and negligence penalties” (Aldrich & Ames, 1999). According to section 6662 (b), the two penalties are mutually exclusive, however, they can be asserted in the alternative. In this case the court may decide that fraud is not applicable leading to the consideration of the fraud case (Aldrich & Ames, 1999). It is established that “fraudulent concealment goes far beyond and is inclusive of negligence or disregard of rules and regulations” (Aldrich & Ames, 1999). Mr. Towers may be found guilty for swindling the Government under 18 U.S.C sec. 371 (§ 6662 Imposition of accuracy-related penalty on underpayments., 2010). Mr. Towers is required to make an argument to explain why he failed to pay tax for the $1,000,000 he withdrew and spent from Soviet Union held account. This analysis holds that Mr. Towers “is liable for the section 6662 (a) negligence penalty” (Aldrich & Ames, 1999).
Conclusion
Income from illegal espionage activities is illegitimate it has be concluded that should have paid tax for it. Therefore Mr. Towers is liable for failing to pay tax for the one million he withdrew from the account provided by the Soviet Union. He should therefore be tried for negligence or disregard of rules and regulations and or fraud.
References
§ 6662 Imposition of accuracy-related penalty on underpayments. (2010). Web.
Aldrich, H., & Ames, V. (1999). Tax Court & Board of Tax Appeals Reported Decisions: 112 TC 304, Code Sec (s) 451;6662. TCR.