Why This Cold War Tale of Tax Fraud Was Never Solved

Recent revelations that the FBI and CIA used at least 1,000 ex-Nazis as spies after World War II, in Europe and the United States, made me think about U.S. Army activity that might well have been part of that effort, which I found out about in a very unusual way.

Back in 1960, I was a special agent in the Criminal Investigation Division of the Internal Revenue Service, assigned to the Chicago office.

While I was there. I was assigned to investigate returns filed by-¬-Victor will do for a name-- a former U.S. Army officer stationed in Germany. His ability to speak several languages resulted in his being assigned to intelligence work in West Germany at the end of World War II. At that time, Army personnel were typically given two-year assignments. But for whatever reason, Victor worked for about eight years at the same location in the Munich area. Perhaps his assignment lasted as long as it did because the Army considered him to be irreplaceable.

During those eight years, Victor's duties included serving as a paymaster responsible for disbursing funds to spies sent by the Army from West Germany into East Germany and, perhaps, beyond. The Army eventually decided that some of the funds got no further than his pocket. But it failed to come up with sufficient evidence to charge him and decided to discharge him. Had the Army not become aware of what was going on, Victor's assignment might have continued until he reached retirement age.

With the Army out of the picture, enter the IRS, which decided to conduct an investigation into whether Victor could be charged with tax evasion for not reporting the funds he supposedly did not pass on as income.

Because Victor was being processed for discharge through Fort Sheridan, near Chicago, the tax fraud investigation wound up being assigned to me. Of course, there was no way I could build a case without the Army disclosing the amounts turned over to Victor and the lesser amounts he turned over to the spies, and it wasn't about to do that. And even if it did, and the case went to trial, the Army wasn't going to acknowledge in open court that it engaged in espionage during the Cold War.

Still, I had to figure out a way to close the investigation, rather than leave it hanging. The best way was with Victor's help. I told him that while I could make no promises, I thought it would be helpful for him to give me a statement that accounted for an apparent increase in his wealth, which would be part of my investigative report. He readily agreed.

Victor came up with an explanation involving, among other things, sizable assets that somehow fell into the hands of an anti-Nazi German-- Ludwig will do for his name--during World War II and then wound up with Ludwig's niece--Ilsa will do for her name. She worked for Victor at the place where funds were ladled out and later shared lavish quarters with him in Munich. (This wasn't a bodice ripper; Ilsa was old enough to be the mother of Victor, who later married Ilsa's niece.) The statement was a story unto itself. But that's another matter for a different time. Victor's assertion that Ludwig opposed Hitler reminded me of the scene in Billy Wilder's "One, Two Three," when James Cagney asked a German what he did doing the war and was told "I was in the underground; I worked for the subway."

While I can no longer recall the specifics of my report, I did allude to the difficulties of obtaining information and tactfully mentioned the improbability of the Army's helping out. So Victor's statement and my report, as far as I know, have been collecting dust over the ensuing five decades.

Some things, though, never change. Fast forward to Iraq and Afghanistan. There have been numerous media accounts of G.I.s disbursing vast sums of money to the locals. Surely some of those dinars will never get to the locals. Eventually, as it did with Victor, the Army will dump these cases on the IRS. Will a budget-strapped IRS send special agents to Iraq and Afghanistan to interview the local recipients of baksheesh? Will the Army provide names and amounts? On the basis of my experience, no and no.

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Julian Block writes and practices law in Larchmont, N.Y. He is frequently quoted in the New York Times, the Wall Street Journal, and the Washington Post, and has been cited as: "a leading tax professional" (New York Times); "an accomplished writer on taxes" (Wall Street Journal); and "an authority on tax planning" (Financial Planning Magazine).

His tax guides include "Tax Deductible Travel and Moving Expenses," "Tax Tips for Marriage and Divorce," "Easy Tax Guide for Writers, Photographers, and Other Freelancers," and "Home Seller's Guide to Tax Savings." For information about his books, go to julianblocktaxexpert.com.