                       T.C. Memo. 2007-271



                     UNITED STATES TAX COURT



                  SARA J. BURNS, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 11924-04.                Filed September 12, 2007.



     John W. Sunnen, for petitioner.

     Erin K. Huss, for respondent.



                       MEMORANDUM OPINION


     CARLUZZO, Special Trial Judge:    In a notice of deficiency

dated April 13, 2004, respondent determined a $41,723 deficiency

in petitioner’s 1999 Federal income tax.    The issue for decision

is whether a reward payment (the reward) petitioner was entitled

to receive in 1999 is includable in her income for that year even
                               - 2 -

though in a bankruptcy proceeding initiated by petitioner the

reward was determined to be subject to the claim of a creditor.

                            Background

     Some of the facts have been stipulated and are so found.

At the time the petition was filed petitioner resided in

California.

     On September 24, 1991, petitioner sued her former employer,

Family Practice Associates of San Diego (FPASD), for Medicare

fraud in what is commonly referred to as a qui tam action, filed

under the False Claims Act, 31 U.S.C. sec. 3729 (2000), in the

U.S. District Court for the Southern District of California (the

whistle-blower case).   The whistle-blower case was settled

pursuant to an agreement between the United States and FPASD in

which FPASD agreed to pay $2 million to the United States in four

annual installments, beginning in 1996.   Under the statutory

scheme, petitioner was entitled to a reward of 29 percent of the

$2 million settlement, or $580,000, also payable over a 4-year

period beginning in 1996.

     Petitioner received the first three installment payments in

due course.   In 1998, petitioner was sued in a California court

(the lawsuit) by Bradley Proulx (Proulx), a private investigator

who petitioner had hired to assist her in connection with the
                                - 3 -

initiation, investigation, and prosecution of the whistle-blower

case.    According to Proulx, petitioner had failed to pay him what

he was due pursuant to the contract between them.1   As a result

of the lawsuit, in October 1998 Proulx was awarded a $231,463

judgment against petitioner.    In accordance with California law,

following the judgment Proulx initiated proceedings that gave

rise to a lien on petitioner’s nonexempt personal property,

including, as it turned out, the proceeds from the reward.

     Aware that the fourth installment of the reward was soon

due and potentially subject to the above-referenced lien, on

January 25, 1999, petitioner initiated a voluntary chapter 13

bankruptcy proceeding in the U.S. Bankruptcy Court for the

Southern District of California (the first bankruptcy

proceeding).   On February 2, 1999, Proulx filed an Ex Parte

Application for Order to Pay Trustee (the ex parte application)

in the first bankruptcy proceeding seeking an order from the

bankruptcy court authorizing the U.S. Government to pay the

chapter 13 trustee the final reward installment due petitioner

from the whistle-blower case.




     1
       The terms of the contract are unclear but apparently
involved a contingency fee based upon petitioner’s recovery.
If the contract was reduced to writing, the document was not
made part of the record in either the lawsuit or this proceeding.
                                 - 4 -

     On February 4, 1999, petitioner filed an opposition to

Proulx’s ex parte application.    Petitioner argued that the relief

sought by Proulx in the ex parte application was improper for

various reasons but offered to place the final reward installment

then due to her from the U.S. Government into a segregated,

interest-bearing special attorney-client trust account with her

bankruptcy counsel’s firm, Robbins & Keehn (the trust account),

under the conditions that there would be no withdrawals from the

trust account without:   (1) An order from the bankruptcy court;

or (2) the consent of Proulx.

     On February 22, 1999, the bankruptcy court directed the U.S.

Government to make the final installment of petitioner’s reward

and further

     ordered that * * * [petitioner’s bankruptcy attorney
     and his firm] are hereby instructed to place the funds
     from * * * [the reward] into * * * [the trust account].
     These funds may not be disbursed without further order
     of this court. Further, in the event that * * *
     [petitioner] dismisses her Chapter 13 action, the funds
     shall remain in * * * [the trust account] pending
     further order of this court.


     The reward was paid to petitioner by U.S. Treasury check

dated February 26, 1999.   The check represented the fourth

installment of the reward due petitioner as a result of the

settlement from the whistle-blower case.   The check was issued to

petitioner “c/o Charles F. Robbins Esq., Robbins & Keehn, 530 B

Street, Ste. 2400, San Diego, CA 92101”.   Petitioner endorsed the
                               - 5 -

check and wrote “for deposit only * * * [trust account]” on the

back.   During 1999, the $148,680 in settlement proceeds earned

$1,299 in interest while on deposit in the trust account.

     Throughout the pendency of the first bankruptcy proceeding,

Proulx, through actions taken in that proceeding as well as

actions taken in California courts, attempted to collect on his

judgment against petitioner.   Petitioner, at all times, resisted

his efforts.

     On August 13, 1999, petitioner filed for chapter 7

bankruptcy (the second bankruptcy proceeding).     Had petitioner

not filed the second bankruptcy petition, petitioner might have

been required to pay over the reward proceeds to Proulx pursuant

to a State court order.   Pursuant to the second bankruptcy

proceeding, the reward proceeds were transferred from the trust

account to Richard Kipperman (Kipperman), the chapter 7 trustee.

On September 4, 2001, Kipperman initiated an adversary action

against Proulx in order to determine whether Proulx’s lien

attached to the reward proceeds.   A series of proceedings

ultimately determined that it did.     As it turned out, the

conflict between Proulx and petitioner would not be resolved

until the middle of 2003.

     Taking into account an extension, petitioner’s 1999 Federal

income tax return was timely filed.     Receipt of the $148,680

reward is disclosed on line 21 of that return.     The amount of the
                                 - 6 -

reward is offset by $151,489 because, according to an explanation

contained on the return, petitioner “did not constructively

received [sic] these amounts”.    The amount reported on line 21 of

petitioner’s 1999 return is a net loss of $2,809.

     In the notice of deficiency that forms the basis for this

case, respondent proceeded as though the reward ($148,680) and

the interest earned on that amount while it was on deposit in the

trust fund ($1,299) were omitted from the income reported on

petitioner’s return.2   Other adjustments made in the notice of

deficiency have been agreed to by the parties and need not be

addressed.   Furthermore, respondent now concedes that to the

extent that the reward is includable in petitioner’s 1999 income,

she is entitled to a deduction in the same amount.   See secs.

212, 461(f).3

                            Discussion

     Absent the complications that followed from Proulx’s

contractual claim against petitioner, the reward would be

includable in petitioner’s 1999 income, and neither party



     2
       Presumably, this case could be resolved by addressing
petitioner’s entitlement to what is, in effect, a $151,489
deduction, as the $148,680 reward is, in effect, included in the
income reported on petitioner’s return. In fairness to the
parties, however, the Court will address the issues as framed by
the pleadings and briefs.
     3
       Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for 1999, and Rule references are
to the Tax Court Rules of Practice and Procedure.
                                - 7 -

suggests otherwise.    Secs. 61, 451(a); Commissioner v. Glenshaw

Glass Co., 348 U.S. 426 (1955); Roco v. Commissioner, 121 T.C.

160, 164-165 (2003) (payment made by the U.S. Government to the

taxpayer in a qui tam action is a reward and, as such, is

includable in gross income); sec. 1.61-2(a)(1), Income Tax Regs.

According to petitioner, however, the reward is not includable in

her 1999 income because she did not “constructively receive” the

reward during that year.    In support of her position, petitioner

argues that because the distribution of the proceeds of the

reward was subject to an order of the bankruptcy court during

1999, she could not exercise the necessary dominion and control

over the reward to render it includable in her income for that

year.    See sec. 1.451-2(a), Income Tax Regs.4

     At the outset we should note that, as a general explanation

of the topic, we agree with petitioner’s discussion of the

doctrine of constructive receipt contained in her briefs.    We




     4
       The term “constructive receipt” is defined in sec. 1.451-
2(a), Income Tax Regs., as follows:

     (a) General rule. Income although not actually reduced
     to a taxpayer’s possession is constructively received
     by him in the taxable year during which it is credited
     to his account, set apart for him, or otherwise made
     available so that he may draw upon it at any time, or
     so that he could have drawn upon it during the taxable
     year if notice of intention to withdraw had been given.
     However, income is not constructively received if the
     taxpayer’s control of its receipt is subject to
     substantial limitations or restrictions.
                               - 8 -

further agree that petitioner did not “constructively” receive

the reward in 1999.   Instead, as we view the situation, she

actually received the reward during that year.5    Petitioner’s

reliance upon the doctrine of constructive receipt ignores the

simple fact that it was petitioner who volunteered6 to place the

reward in the custody of the bankruptcy court.    The “dominion and

control” over the reward implicit in her decision to do so

completely undermines petitioner’s claim that she lacked any

such dominion or control over the reward.    See Sullivan v.

Commissioner, T.C. Memo. 1999-341.     For what it’s worth, we think

it also important to note that the doctrine of constructive

receipt, in general, addresses questions regarding when, not

whether, income is realized by a cash basis taxpayer.    Taken to

its extremes, petitioner’s argument would suggest that because

Proulx ultimately prevailed, the reward would never be includable

in her income.   Such a conclusion is wholly inconsistent with the




     5
       Although not expressly addressed by the parties, it is
clear from their respective positions that petitioner computed
her 1999 Federal income tax liability in accordance with the cash
receipts and disbursements method of accounting (cash basis).
Sec. 1.446-1(c)(1)(i), Income Tax Regs., provides, in part, as
follows: “Generally, under the cash receipts and disbursements
method in the computation of taxable income, all items which
constitute gross income * * * are to be included for the taxable
year in which actually or constructively received.”
     6
       We appreciate petitioner’s point that it was a hard
choice. Nevertheless, it was her choice.
                                - 9 -

principle that a taxpayer does not escape taxation on what is

otherwise the taxpayer’s income merely because the income was

paid directly to the taxpayer’s creditor.    Helvering v. Horst,

311 U.S. 112 (1940); Parkford v. Commissioner, 133 F.2d 249, 251

(9th Cir. 1943).7

       Furthermore, we think it appropriate to note that, contrary

to petitioner’s arguments, the above-described bankruptcy

proceedings are, for the most part, irrelevant.   The bankruptcy

court did not focus on the nature of the reward as an item of

income but rather as an asset available as a source of payment to

petitioner’s creditors.    See Parkford v. Commissioner, supra at

251.

       Similarly, petitioner’s reliance on Cold Metal Process Co.

v. Commissioner, 17 T.C. 916 (1951), affd. per order 53-1 USTC

par. 9135 (6th Cir. 1952), Barnette v. Commissioner, T.C. Memo.

1992-371, affd. without published opinion 41 F.3d 667 (11th Cir.

1994), Stone v. Commissioner, T.C. Memo. 1984-187, Collins v.

Commissioner, T.C. Memo. 1972-170, and Hannaford v. Commissioner,




       7
       Curiously, and if only by implication, petitioner
recognizes this principle as she argues in the alternative that
to the extent that the reward is includable in her income, it
should be includable in her 1998 income because that was the year
Proulx’s lien arose. A creditor’s collection rights against a
taxpayer’s property, however, say little about when a cash basis
taxpayer realizes income.
                               - 10 -

T.C. Memo. 1960-78, is misplaced.8      The taxpayer in Cold Metal

Process Co. was on the accrual method of accounting, and any

precedents established by that case simply have no application to

the issue in dispute here.    In each of the other cases there was

a question regarding whether the taxpayer was entitled to receive

the disputed income.    Unlike the taxpayers in those cases,

petitioner was clearly entitled to the reward in 1999; the only

question at the time was how much of the reward she would be

entitled to retain.

       The reward is includable in petitioner’s 1999 income, and

respondent’s adjustment to that end is sustained.      We need not

discuss the treatment of the $1,299 interest earned on the reward

proceeds while they were on deposit in the trust fund because the

parties have agreed on that treatment.      Finally, as noted above,

respondent now agrees that petitioner is entitled to a

miscellaneous itemized deduction in an amount equal to the amount

includable in her income, and petitioner agrees that the

imposition of the section 55 alternative minimum tax that results

is computational.




       8
         Stone v. Commissioner, T.C. Memo. 1984-187, might very
well   apply to the interest earned on the reward proceeds while
they   were on deposit in the trust account. However, the parties
have   by their agreement removed the treatment of the interest
from   the Court’s consideration.
                        - 11 -

To reflect the foregoing,


                                 Decision will be entered

                            under Rule 155.
