paid GMAC $500. Thus, the GM group's total net expense was $10,000. Five hundred dollars ($500) more left the GM group when a below-market RISC/fleet loan was rate supported as compared with when there was no rate support.

As respondent pointed out on brief, the matching rule ensures clear reflection of income and prevents the creation of "paper" deductions when the group as a whole has not incurred a net expense. Here, the group had a net expense. Furthermore, the GM group's additional $500 expense was a real loss of $500 to the GM group. In both the example of a non-rate-supported RISC and a rate-supported RISC bearing a below-market rate of interest, the RISC's had face values of $10,000 and stated interest of $2,000. See supra pp. 290–292. Thus, if GMAC held the below-market non-rate-supported RISC to maturity, the GM group made a $2,500 profit ($12,000 minus the $9,500 paid to the independent GM dealer), or if the customer paid off the RISC immediately, the GM group made a $500 profit (the $10,000 of stated principal minus the $9,500 paid to the independent GM dealer). Whereas, if GMAC held the rate-supported RISC to maturity, the GM group made a $2,000 profit ($12,000 minus the $10,000 paid to the independent GM dealer), or if the customer paid off the RISC immediately, the GM group made no profit (the $10,000 of stated principal minus the $10,000 paid to the independent GM dealer).

The purpose of the consolidated return regulations is to provide rules so that the tax liability of a consolidated group will be clearly reflected and to prevent the avoidance of such tax liability. See sec. 1502. GM and GMAC have not fabricated a transaction where numbers merely are being shuffled on paper without any real loss to the GM group. The GM group's treatment of the rate support deductions and the discount income clearly reflected its tax liability.

Based on the foregoing, we conclude that the discount income was not the corresponding item of income to the rate support deductions.

Even if, however, the discount income was the corresponding item of income, the discount income would have to be part of an intercompany transaction in order for the consolidated return regulations to apply. See sec. 1.1502-13(b)(2), Income Tax Regs. Section 1.1502–13(a)(1), Income Tax Regs., defined the term "intercompany transaction" as "a trans

action during a consolidated return year between corporations which are members of the same group immediately after such transaction".

GMAC received the discount income from either a retail customer or a fleet customer. GMAC acquired the right to receive the discount income from an independent GM dealer when the independent GM dealer assigned the RISC/fleet loan to GMAC. Neither the retail/fleet customer nor the independent GM dealer was part of the GM group; therefore the transactions between GMAC and retail/fleet customers and GMAC and independent GM dealers were not intercompany transactions.

The intercompany transaction rules of the consolidated return regulations and the examples therein contemplated a transaction solely within the consolidated group between members of the group and not a situation where income comes from outside the group in a transaction involving third parties. See section 1.1502-13(a)(1), (b)(2), (h) Examples (3), (13), (16), Income Tax Regs., and the discussion of these examples supra.

Based on the foregoing, we conclude that the discount income was not earned in an intercompany transaction.

C. Conclusion

We conclude that under the 1966 regulations, the discount income GMAC earned over the term of RISC's/fleet loans from retail/fleet customers was not the corresponding item of income in an intercompany transaction to the rate support deductions. Therefore, the GM group was not required to defer the rate support deductions on its consolidated income tax return.

To reflect the foregoing,

An appropriate order will be issued.

ALDRICH H. AMES, PETITIONER v. COMMISSIONER OF
INTERNAL REVENUE, RESPONDENT

Docket No. 14031-96.

Filed May 28, 1999.

In 1985, P, an employee of the Central Intelligence Agency, began selling classified information to the Soviet Union. Dur

ing 1985, P received a communication from a Soviet agent
that $2 million had been set aside for P to draw upon. On
Apr. 28, 1994, P pleaded guilty to conspiracy to commit espio-
nage and tax conspiracy to defraud the U.S. Government. P
was sentenced to life imprisonment on the espionage charge
and to 27 months' imprisonment on the tax charge. R deter-
mined that P failed to report as income amounts received and
deposited in his bank accounts during 1989 through 1992. P
contends that he constructively received the majority of the
illicit espionage income in 1985, the year he was informed
that $2 million had been set aside for him. P also contends
that he is protected by the Double Jeopardy Clause of the
Fifth Amendment to the U.S. Constitution from the assess-
ment of any tax or civil penalties based upon his illegal espio-
nage income. P sought to discover R's criminal reference let-
ter. Generally, criminal reference letters contain detailed rec-
ommendations by R's attorneys that a taxpayer be prosecuted
for criminal tax violations. R refused to turn over the letter,
claiming the work product privilege applied. P contends that
the privilege does not apply to this civil proceeding. If we
decide it does apply, P argues that we should apply a bal-
ancing test and decide that his substantial need overcomes
the need for assertion of the privilege. Held, the work product
privilege applies to the criminal reference letter, and P has
not shown substantial need that would vitiate R's claim of
work product privilege. Held, further, P did not constructively
receive income before specific amounts were made available to
him. Held, further, the imposition of a tax liability on P's
espionage income and/or the imposition of an accuracy-related
penalty does not constitute punishment within the meaning of
the Double Jeopardy Clause.

Aldrich H. Ames, pro se.

Richard F. Stein and John C. McDougal, for respondent.

GERBER, Judge: Respondent determined deficiencies in petitioner's Federal income tax and section 6662(a)1 penalties as follows:

1 Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years under consideration, and all Rule references are to this Court's Rules of Practice and Procedure.

The issues for our consideration are: (1) Whether petitioner constructively received income from illegal espionage activities during 1985, when it was allegedly promised and/or set aside for him, or when it was received and/or deposited in his bank accounts during the taxable years 1989, 1990, 1991, and 1992 in the amounts of $745,000, $65,000, $91,000,2 and $187,000, respectively; (2) whether petitioner is liable for the accuracy-related penalty for taxable years 1989 through 1992; (3) whether petitioner is constitutionally protected by the Double Jeopardy Clause of the Fifth Amendment to the U.S. Constitution from the assessment and/or collection of any tax or civil penalties arising from espionage activity for which he was convicted and incarcerated; (4) whether the work product doctrine may be interposed by respondent in this case to prevent the turnover of respondent's counsel's criminal reference letter; and (5) if the work product privilege applies, whether petitioner has shown substantial need so as to vitiate respondent's assertion of the privilege.

FINDINGS OF FACT 3

Petitioner is incarcerated in a Federal penitentiary for turning over state secrets to a foreign government at a time when he held a position with the Central Intelligence Agency (CIA) of the United States. He had his legal residence in Allenwood, Pennsylvania, at the time the petition in this case was filed. Petitioner's employment with the CIA spanned the years 1962 to 1994, during which he was assigned to progressively more responsible positions involving the Union of Soviet Socialist Republics (Soviet Union) and Soviet Bloc Eastern European countries. Throughout that time, petitioner held a Top Secret security clearance, and he had access to information and documents classified Secret and Top Secret.

Petitioner timely filed joint Federal income tax returns with his wife, Rosario C. Ames, for the taxable years 1989, 1990, 1991, and 1992. Petitioner's returns were filed on the cash basis for reporting income and deductions. The returns primarily reflected income from petitioner's CIA employment

2 Although there was a discrepancy in the notice of deficiency over the amount of income that petitioner allegedly failed to report in 1991, respondent used $91,000 for purposes of calculating the amount of the deficiency. Therefore, we will use that number for purposes of this opinion. 3 The stipulation of facts and the attached exhibits are incorporated by this reference.

in the amounts of $70,337, $60,340, $62,514, and $67,578 for 1989, 1990, 1991, and 1992, respectively.

In 1984, as part of his duties as a CIA Operations officer, petitioner began meeting with officials of the Soviet Union's Embassy in Washington, D.C. These meetings were authorized by the CIA and the Federal Bureau of Investigation (FBI) and were designed to allow petitioner access to Soviet officials as possible sources for intelligence information and recruitment.

Sometime during April 1985, petitioner entered into a relationship with Soviet officials under which he betrayed his country and sold classified CIA information and information sourced in other branches of the U.S. Government to the KGB (the Soviet intelligence directorate) in return for large amounts of remuneration. Petitioner provided the KGB with classified Top Secret information relating to the penetration of the Soviet military and intelligence services by the CIA, including the identities of Soviet military and intelligence officers who were cooperating with the CIA and foreign intelligence services of governments friendly to the United States. Because of petitioner's disclosures, a number of these individuals were arrested and executed by the KGB.

In the fall of 1985, petitioner received a communication from a Soviet agent that $2 million had been set aside for him in an account that he would be able to draw upon. Petitioner was told that the money was being held by the Soviet Union, rather than in an independent or third-party bank or institution, on petitioner's behalf. Petitioner received $50,000 in cash for his initial disclosure to the KGB and additional cash payments, the specific dates of which have not been detailed in the record of this case.

Petitioner met with Soviet officials in Washington, D.C., and in 1989 he met with them in Rome. In the spring of 1989, as petitioner was preparing to return to CIA headquarters in Langley, Virginia, the KGB provided him with two written documents. The first was a financial accounting that indicated that as of May 1, 1989, approximately $1.8 million had been set aside for petitioner and that some $900,000 more had been designated for him. The second document was a nine-page letter containing a list of the types of classified U.S. Government information sought by the KGB. The second document also contained a discussion of arrangements for