Wright v. Commissioner, 931 F.2d 61 (9th Cir. 1983)

MEMORANDUM^** 

Michael and Mary Ann Wright appeal the decision of the tax court upholding the Commissioner of Internal Revenue's ("Commissioner") assessment of a deficiency in their 1983 tax return. The Commissioner assessed income tax on $9,406.28 of accrued interest earned by the Wrights from an investment which they later discovered was a Ponzi scheme. The tax court found that the Wrights had constructively received the income in 1983. The Wrights contend that, for tax purposes, they did not "receive" the interest income until 1984 because the income was derived from an illegal Ponzi scheme and because they did not actually receive the disputed income until 1984. We have jurisdiction pursuant to 26 U.S.C. § 7482, and affirm.

A finding of constructive receipt is a finding of fact. Baxter v. Commissioner, 816 F.2d 493, 494 (9th Cir. 1987) (citing Bennett v. United States, 293 F.2d 323, 326 (9th Cir. 1961)). "As such, it can be set aside only if clearly erroneous." Id. at 494 (citing Anderson v. City of Bessemer, 470 U.S. 564, 575 (1985)).

The Internal Revenue Code provides that " [T]he amount of any item of gross income shall be included in the gross income for the taxable year in which received by the taxpayer...." 26 U.S.C. § 451(a). Under the doctrine of constructive receipt, income, although not actually reduced to possession, is constructively received by a taxpayer " '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.' " Baxter, 816 F.2d at 494 (quoting Treas.Reg. Sec. 1.451-2(a) (as amended in 1979)); see also Minor v. United States, 772 F.2d 1472, 1473 (9th Cir. 1985).

In 1983, the Wrights invested $25,100 in Innovative Investments, which was to use the funds for arbitrage trading. The Wrights received a statement dated December 31, 1983 showing that their investment had accrued interest of $9,406.28.¹  The Wrights conceded in their stipulation of facts that they could have withdrawn the capital or accrued interest on their investment at any time during 1983, without restriction. Thus, under the doctrine of constructive receipt, the accrued interest was available to the Wrights as income in 1983. See Baxter, 816 F.2d at 494.

The Wrights contend that the income was not constructively received in 1983 because the investment was a Ponzi scheme, in which the interest on their investment was actually paid out of the capital of later investors. They argue that because the embezzlement did not actually take place until 1984, when they liquidated their investment, the accrued interest was not actually received until 1984. This contention lacks merit.

The Wrights rely on the proposition that illegally obtained income is taxable in the year it is actually received. See James v. United States, 366 U.S. 213, 219 (1961); Rutkin v. United States, 343 U.S. 130, 137 (1952). They argue that because the income was obtained from an illegal activity, it was not taxable until the year of the embezzlement. Here, however, the Wrights are not the embezzlers, and only learned of the existence of the Ponzi scheme after they had withdrawn their entire investment. Thus, the action of the embezzler is not attributable to them to determine when the illegal activity took place. Rather, the determinative factor is that, under the terms of the investment agreement, they had an unrestricted right to withdraw the accrued interest on their investment at any time during 1983. See Baxter, 816 F.2d at 494.

Accordingly, the tax court correctly determined that the Wrights constructively received $9,406.28 in gross income from their investment in 1983.

AFFIRMED.