Taxpayer in trade or business of being a 'private attorney general'.

• Author: Beavers, James A.

A district court held that a taxpayer who prosecuted an action against his former employer for false claims under the False Claims Act (FCA), 31 U.S.C. Sections 3729-3733, was in the business of prosecuting the FCA lawsuit and providing services to the government in prosecuting the lawsuit (or as the taxpayer described it, performing services as a "private attorney general"). Therefore, he was entitled to deduct his legal fees from the suit as ordinary and necessary business expenses.

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Background

Richard Bagley worked for TRW in a variety of positions from 1967 until 1993. From 1987 to 1992, he was the chief financial manager for TRW's space and technology group. He was responsible for, among other things, contract proposal pricing, indirect expense budgeting and control, and accounting. When he was chief financial manager of TRW's space and technology group, he was responsible for ensuring the integrity of the accounting records and sending bills to the government.

Starting about 1989 and continuing through 1991, Bagley became aware of false indirect expense claims TRW was making to the government. Though he knew the claims were wrong, in 1990 and 1991, Bagley signed indirect expense certifications to the government so he would not lose his job. While he stated that he discussed the false claims issue with two of his superiors who he believed were responsible for the false claims, he took no actions to prevent TRW from submitting false claims during his employment there.

Bagley was laid off from TRW in 1993. After looking for employment for about a year, he filed a wrongful termination suit against TRW in mid-1994, which he lost. In November 1994, he filed an FCA lawsuit (commonly called a qui tarn suit) on behalf of himself as relator and on behalf of the United States. He later filed a second qui tam suit. The government intervened on two of the eight claims Bagley made in the first suit, but it declined to intervene in the second suit, although he diligently attempted to convince the government that it should do so.

Because the government refused to intervene, Bagley continued to prosecute the second suit on his own. He was not an attorney and had no prior experience with FCA suits, so he hired two law firms that specialized in this area to assist him in prosecuting the suits. Over the suits' nine-year life, the firms allegedly spent more than 20,000 hours on the litigation.

Though the law firms did the bulk of the...