## Facts

- Sara Burns received a federal whistleblower reward paid by the United States government in installments.
- At the time the final installment was due, Burns was a debtor in an ongoing bankruptcy case.
- The bankruptcy court directed that the final installment be paid into Burns’s attorney’s client trust account while a creditor’s claim against Burns was being resolved in the bankruptcy proceeding.
- Burns did not include the final installment on her federal income tax return for the year in which the government paid the installment into the trust account.
- Burns argued that she did not actually receive the money and also did not constructively receive it because the funds were held in the attorney trust account under the bankruptcy court’s order and were not freely available to her.
- The Commissioner of Internal Revenue determined the installment was includible in Burns’s gross income for that year.
- The United States Tax Court agreed with the Commissioner and sustained the resulting deficiency.
- Burns appealed from the Tax Court’s decision to the United States Court of Appeals for the Ninth Circuit.

## Issues

1. Whether a whistleblower award installment paid by the government into the taxpayer’s attorney’s client trust account under a bankruptcy court order is includible in the taxpayer’s gross income in the year of payment.
2. Whether the bankruptcy court’s direction to hold the funds pending resolution of a creditor claim prevents taxation on the theory that the taxpayer lacked actual or constructive receipt.

## Decision

- The Ninth Circuit affirmed the Tax Court’s judgment.
- The court upheld the determination that the final installment was includible in Burns’s taxable income for the year it was paid into the attorney’s client trust account.
- The court rejected Burns’s argument that the deposit into the attorney trust account, as directed during the bankruptcy, meant she neither actually nor constructively received the funds for federal income tax purposes.

## Legal Principles

- Federal income tax generally requires inclusion in gross income of payments received as rewards or compensation unless an exclusion applies.
- Under the constructive receipt doctrine, income is treated as received when it is credited to the taxpayer’s account, set apart, or otherwise made available for the taxpayer’s benefit, unless the taxpayer’s control is subject to substantial limitations or restrictions.
- Payment to a taxpayer’s agent (including an attorney holding funds for the client) can be treated as payment to the taxpayer for income-recognition purposes.
- A restriction arising from bankruptcy administration or competing creditor claims may affect the taxpayer’s ability to use the money, but it does not necessarily change the character of the payment as income to the taxpayer in the year it is paid for the taxpayer’s benefit.

## Conclusion

In *Burns v. Commissioner*, the Ninth Circuit affirmed the Tax Court and held that Burns had taxable income in the year the government paid the final whistleblower installment into her attorney’s client trust account pursuant to a bankruptcy court order, notwithstanding the funds being held while a creditor’s claim was resolved.


Burns v. Commissioner, 325 F. App’x 596 (2009)