Tax trends: qui tam payment included in income tax return preparers win partial victory in fraudulent credit scheme case.

• Author: Beavers, James A.

Gross Income

Qui Tam Payment Included in Income

The Eleventh Circuit held that qui tam payments that a whistleblower received were includible in income. It further held that the whistleblower, who had included the payments on his return as other income but had not included them in the calculation of his tax due, had not acted in good faith and was liable for a 20% accuracy-related penalty.

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Background

Until 1995, Albert Campbell was the chief of cost control for a $3.5 billion contract his employer had with the U.S. government. In 1995, Campbell became a whistleblower against his former employer (Lockheed). On behalf of the government, he filed two lawsuits under the Federal Claims Act, asserting that Lockheed had defrauded the United States. In 2003, Lockheed settled with the government for $37.9 million. Campbell received a qui tam payment of $8.75 million for his role as relator. The government wired the money to Campbell's attorneys, who subtracted their 40% fee of $3.5 million and sent Campbell a check for the balance of $5.25 million.

The Justice Department issued Campbell a Form 1099-MISC, Miscellaneous Income, for $8.75 million. On his self-prepared return for 2003, Campbell entered the $5.25 million net qui tam payment on line 21 as "other income" but omitted the amount from the calculation of taxable income on line 40. He also attached Form 8275, Disclosure Statement, to his 2003 return. Without citing any authority in support of his assertions, he stated on the form that the $3.5 million in attorneys' fees was not taxable income and that the $5.25 million net qui tam payment was excludible from his taxable income.

In 2007, the IRS sent Campbell a notice of deficiency (1) for failing to include the $5.25 million qui tam payment in his gross income and (2) for an accuracy-related penalty because his exclusion of the qui tam payment resulted in a substantial understatement of income tax. Campbell contested the IRS's determination in Tax Court, which held in favor of the IRS.

Campbell appealed the decision to the Eleventh Circuit. Campbell argued, relying on Vermont Agency of Natural Res. v. United States ex rel. Stevens, 529 U.S. 765 (2000), that the qui tam claim was an assignment of the United States' reimbursement claim to him and that, because the payment would not be taxable to the U.S. government, it should not be taxable to him as an assignee of the nontaxable claim, since as an assignee of the claim he stood in the shoes of the U.S. government in pursuing the claim...