Campbell v. Commissioner

ALBERT D. CAMPBELL, PETITIONER v. COMMISSIONER OF
INTERNAL REVENUE, RESPONDENT
Docket No. 21209–07. Filed January 21, 2010.

P included on his return as ‘‘Other income’’ $5.25 million of
an $8.75 million ‘‘qui tam’’ payment P was awarded pursuant
to a Federal False Claims Act action. He did not report the
remaining $3.5 million, which was subtracted from the
recovery by P’s attorneys as attorney’s fees. P then omitted
the $5.25 million net proceeds of the qui tam payment from
the taxable income of $793 he reported on his return. P dis-
closed the $3.5 million attorney’s fee payment on Form 8275,
Disclosure Statement, attached to his return. P contends that
none of the $8.75 million qui tam payment is includable in his
gross income because it was a nontaxable share of the U.S.
Government’s recovery. R contends that the entire qui tam
payment, including the portion paid to P’s attorneys as their
fee, is includable in P’s gross income. Held: The entire $8.75
million qui tam payment awarded to P is includable in P’s
gross income. Roco v. Commissioner, 121 T.C. 160 (2003), fol-
lowed. Held, further, P substantiated the payment of the
attorney’s fees in issue. Held, further, P is entitled to deduct
the attorney’s fees as a miscellaneous itemized deduction.
Held, further, P is subject to an accuracy-related penalty
pursuant to sec. 6662, I.R.C., because P’s exclusion of the
$8.75 million qui tam payment from his gross income resulted
in a substantial understatement of income tax. Held, further,
so much of P’s understatement as relates to his failure to
include in gross income the $3.5 million attorney’s fee pay-
ment is reduced for purposes of the accuracy-related penalty,
pursuant to sec. 6662(d)(2)(B), I.R.C., since P adequately dis-
closed his position on Form 8275 and had a reasonable basis
for that position. Held, further, P is not entitled to further
reduction of the accuracy-related penalty, as relates to the
$5.25 million net proceeds of the qui tam payment, since,
pursuant to sec. 6662(d)(2)(B), I.R.C., P did not have substan-
tial authority or make an adequate disclosure or have a
reasonable basis for his position, and pursuant to sec. 6664(c),

20

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 (20) CAMPBELL v. COMMISSIONER 21

I.R.C., P did not have reasonable cause for his position or act
in good faith.

Bradley J. Davis and Loan B. Kennedy, for petitioner.
Miriam C. Dillard, for respondent.
WELLS, Judge: Respondent determined a deficiency in peti-
tioner’s Federal income tax for taxable year 2003 of
$3,044,000, an accuracy-related penalty pursuant to section
6662(a) of $608,800, and a delinquency addition to tax pursu-
ant to section 6651(a)(1) of $151,955.50. 1 We must decide the
following issues: (1) Whether a ‘‘qui tam’’ settlement payment
is taxable income to petitioner; (2) whether petitioner has
substantiated that he paid contingent attorney’s fees from
the qui tam settlement; (3) if so, whether the attorney’s fee
payment is includable in petitioner’s gross income and
deductible by him as a miscellaneous itemized deduction; and
(4) whether petitioner is liable for a section 6662(a) accuracy-
related penalty. 2

FINDINGS OF FACT

Some of the facts and certain exhibits have been stipu-
lated. The stipulations of fact are incorporated in this
Opinion by reference and are so found.
At the time he filed the petition, petitioner resided in
Florida.
Petitioner earned a bachelor’s degree in business adminis-
tration and accounting. From 1981 through July 1995, peti-
tioner worked for Lockheed Martin. He was employed as a
financial analyst until 1989, when he was promoted to chief
of cost control for a $3.5 billion contract Lockheed Martin
held with the U.S. Government. Petitioner remained in that
position until July 1995.
During May and December 1995, petitioner filed two law-
suits against Lockheed Martin under the False Claims Act
(FCA), 31 U.S.C. secs. 3729–3733 (2006), alleging that Lock-
heed Martin had defrauded the United States. The United
States intervened in the first suit, but not the second.
1 Unless otherwise indicated, all Rule references are to the Tax Court Rules of Practice and

Procedure, and all section references are to the Internal Revenue Code (Code), as amended.
2 Respondent has conceded that petitioner is not liable for the sec. 6651(a) delinquency addi-

tion to tax.

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 22 134 UNITED STATES TAX COURT REPORTS (20)

During September 2003, the United States, Lockheed Mar-
tin, and petitioner settled both suits. Lockheed Martin
agreed to pay the United States $37.9 million. As part of the
settlement, petitioner received a qui tam payment 3 of $8.75
million ($8.75 million qui tam payment) for his role as
‘‘relator’’. The U.S. Department of Justice filed and sent peti-
tioner a Form 1099–MISC, Miscellaneous Income, reporting
the $8.75 million qui tam payment in 2003. The $8.75 million
qui tam payment was wired to petitioner’s attorneys. Peti-
tioner’s attorneys subtracted from the $8.75 million qui tam
payment a fee of 40 percent of the proceeds, or $3.5 million
($3.5 million attorney’s fee payment) and then sent petitioner
a check for the remaining $5.25 million ($5.25 million net
proceeds of the qui tam payment).
On October 26, 2004, petitioner filed a Form 1040, U.S.
Individual Income Tax Return, for his 2003 taxable year
(return). Petitioner prepared the return without consulting a
tax professional. Petitioner included the $5.25 million net
proceeds of the qui tam payment on line 21 of his return as
other income. However, the return omitted the $5.25 million
net proceeds of the qui tam payment from the calculation of
taxable income on line 40. The return showed a resulting
taxable income of $793. Petitioner attached to the return
Form 8275, Disclosure Statement, in which he argued that
the $3.5 million attorney’s fee payment had been held not to
be taxable income by the U.S. Court of Appeals for the Elev-
enth Circuit. On the Form 8275, petitioner failed to include
a citation of an opinion of the Eleventh Circuit, or of any
Court of Appeals, standing for that proposition. Additionally,
petitioner failed to identify on the Form 8275 any authority
for excluding from his taxable income the $5.25 million net
proceeds of the qui tam payment. At the time petitioner sub-
mitted the return, he was aware of the case of Roco v.
Commissioner, 121 T.C. 160 (2003), which holds that qui tam
payments are includable in gross income of the recipient.
3 ‘‘Qui tam’’ is an abbreviation of the Latin phrase ‘‘qui tam pro domino rege quam pro se ipso

in hac parte sequitur’’, which means ‘‘who pursues this action on our Lord the King’s behalf
as well as his own.’’ Vt. Agency of Natural Res. v. United States ex rel. Stevens, 529 U.S. 765,
768 n.1 (2000). The individual who brings the qui tam suit on behalf of the Government is
known as the relator. 31 U.S.C. sec. 3730(b) (2006); Vt. Agency of Natural Res. v. United States
ex rel. Stevens, supra at 769. For a discussion of the history of qui tam actions, see Vt. Agency
of Natural Res. v. United States ex rel. Stevens, supra at 774–777.

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 (20) CAMPBELL v. COMMISSIONER 23

On October 24, 2004, petitioner sent respondent a letter
detailing why he believed the $8.75 million qui tam payment
was not taxable. Included as attachments to his letter were
a copy of his return, a copy of the settlement agreement, a
copy of Vt. Agency of Natural Res. v. United States ex rel. Ste-
vens, 529 U.S. 765 (2000), and a two-page letter from Andrew
Grosso, one of petitioner’s attorneys in the FCA case, stating
that, in his opinion, the $8.75 million qui tam payment was
from Lockheed Martin and not the United States.
On December 6, 2004, respondent determined that a math
error was made on petitioner’s return and sent him a notice
of assessment of a tax deficiency of $1,846,108.63.
On April 4, 2005, respondent sent petitioner a letter
stating that the $8.75 million qui tam payment was taxable
income and that any further consideration would require the
filing of a Form 1040X, Amended U.S. Individual Income Tax
Return.
On April 27, 2005, petitioner submitted a Form 1040X
(amended return) that he prepared. The amended return
excluded from gross income the entire $8.75 million qui tam
payment, resulting in taxable income of $793.
On June 14, 2007, respondent sent petitioner a notice of
deficiency. 4 Respondent included the entire $8.75 million qui
tam payment as gross income and determined an income tax
deficiency of $3,044,000, an accuracy-related penalty pursu-
ant to section 6662 of $608,800, and a delinquency addition
to tax pursuant to section 6651(a)(1) of $151,955.50.
OPINION

Generally, the Commissioner’s determination of a defi-
ciency is presumed correct, and the taxpayer bears the bur-
den of proving otherwise. Rule 142(a). 5 Pursuant to section
7491(c), the Commissioner generally bears the burden of
production for any penalty, but the taxpayer bears the ulti-
mate burden of proof. Higbee v. Commissioner, 116 T.C. 438,
446 (2001).
The FCA, enacted during the U.S. Civil War, allows a pri-
vate citizen (the relator) to bring a qui tam action on behalf
4 The record is unclear whether the Dec. 6, 2004, assessment was abated before the notice

of deficiency was sent on June 14, 2007.
5 Petitioner does not contend that sec. 7491(a) should apply to shift the burden of proof to re-

spondent, nor did he establish that it should apply to the instant case.

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of the United States. 31 U.S.C. secs. 3729–3733. The FCA
imposes civil liability upon any person who, among other
things, ‘‘knowingly presents, or causes to be presented, a
false or fraudulent claim for payment or approval’’ to the
United States. 31 U.S.C. sec. 3729(a). The relator may bring
the claim on his own; however, the Government has the right
to intervene in the case. 31 U.S.C. sec. 3730. The relator
receives a share of the proceeds ranging from 15 to 25 per-
cent if the Government intervenes, and 25 to 30 percent if
the Government declines to intervene. 31 U.S.C. sec.
3730(d)(1) and (2). The relator may also be awarded attor-
ney’s fees. Id.
We must first decide whether the qui tam payment is
includable in petitioner’s gross income. Petitioner contends
that the qui tam payment is a portion of a nontaxable
reimbursement Lockheed Martin paid to the United States.
Petitioner relies on Roco v. Commissioner, supra at 165 n.2,
a case decided by this Court that held that qui tam payments
were taxable as the equivalent of a reward but expressly
reserved deciding whether a qui tam payment was a non-
taxable share in the recovery of a reimbursement. Petitioner
also relies on Vt. Agency of Natural Res. v. United States ex
rel. Stevens, supra, for the proposition that a qui tam claim
is the assignment of the United States’ reimbursement claim
to the relator 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 stands in the shoes of the U.S.
Government in pursuing the claim. Finally, petitioner con-
tends that the qui tam payment is not taxable income
because it is not proceeds from labor or capital.
Respondent contends that the qui tam payment is a tax-
able reward and should be included in petitioner’s gross
income.
Gross income is ‘‘all income from whatever source derived’’.
Sec. 61(a). Courts have given a broad construction to the
definition of gross income. Commissioner v. Glenshaw Glass
Co., 348 U.S. 426, 430 (1955). The effect of such a broad view
of gross income is that exclusions from gross income are nar-
rowly construed. Commissioner v. Schleier, 515 U.S. 323, 328
(1995).

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 (20) CAMPBELL v. COMMISSIONER 25

As noted above, this Court has considered the issue of
whether a qui tam payment is taxable income. In Roco v.
Commissioner, 121 T.C. 160 (2003), the taxpayer received a
qui tam payment from the United States for his role as
relator in an action pursuant to the FCA. The Court ruled
that rewards are included in gross income pursuant to sec-
tion 1.61–2(a), Income Tax Regs., and that the qui tam pay-
ment was the equivalent of a reward and, therefore, includ-
able in the taxpayer’s gross income. Roco v. Commissioner,
supra at 164.
Petitioner’s reliance on note 2 of Roco is misplaced. In Roco
v. Commissioner, supra at 165 n.2, the Court stated that it
was not deciding whether a qui tam payment is a nontaxable
share in the recovery of a reimbursement. Contrary to peti-
tioner’s argument, the footnote does not suggest that the
Court would have held that a qui tam payment is a non-
taxable share in the recovery of a reimbursement had the
issue been properly before it. As the issue is before us now,
we will address it.
In support of his position that a qui tam payment is a non-
taxable share of the recovery, petitioner relies on Vt. Agency
of Natural Res. v. United States ex rel. Stevens, 529 U.S. 765
(2000). Petitioner contends that he is the assignee of the
United States’ claim against Lockheed and, therefore, stands
in the shoes of the Government in receipt of a nontaxable
recovery. In Vt. Agency of Natural Res., the Supreme Court
considered whether a private individual has standing to
bring a qui tam suit in Federal court against a State agency.
On that issue, the Court held that the relator had standing
because the FCA effected a partial assignment of the Govern-
ment’s claim to the relator and, as the assignee of such a
claim, a relator has standing to assert the injury in fact suf-
fered by the Government. Id. at 773. Petitioner’s reliance on
Vt. Agency of Natural Res. is misplaced. Although the FCA
effects a partial assignment of the claim for the purposes of
standing, the assignment of the claim does not change the
character of the proceeds to petitioner. The qui tam payment
is the equivalent of a reward as we held in Roco v. Commis-
sioner, supra at 164. In Vt. Agency of Natural Res., the
Supreme Court made no ruling regarding the taxability of
the qui tam payment to the relator or the character of the
payment for Federal income tax purposes.

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Petitioner also relies on Lucas v. Earl, 281 U.S. 111 (1930),
contending that the qui tam payment was nontaxable income
as an assignment to him by the Government of a portion of
a nontaxable recovery. In Lucas v. Earl, supra, the taxpayer
assigned a portion of his earned income to his wife. The
Supreme Court held that a taxpayer cannot exclude his
earnings from his gross income by an anticipatory assign-
ment of them to another party. Id. Lucas v. Earl, supra, is
inapposite. The payment from Lockheed Martin to the
United States was not earned income; it was a reimburse-
ment to the Government for fraudulent billing practices.
Additionally, the $8.75 million qui tam payment was a
reward to petitioner for bringing Lockheed’s wrongdoing to
light; it was not an assignment of a right to income. See Roco
v. Commissioner, supra. Accordingly, Lucas v. Earl, supra,
does not stand for the proposition that the claim assigned to
the relator in an action pursuant to the FCA is a transfer of
a portion of a nontaxable recovery that is nontaxable to the
relator.
Petitioner also cites Eisner v. Macomber, 252 U.S. 189
(1920), for the definition of income. Macomber held that
income was the ‘‘ ‘gain derived from capital, from labor, or
from both combined’ ’’. Id. at 207 (quoting Stratton’s
Independence, Ltd. v. Howbert, 231 U.S. 399, 415 (1913), and
Doyle v. Mitchell Bros. Co., 247 U.S. 179, 185 (1918)). How-
ever, the Supreme Court later observed that the Macomber
definition of income did not take precedence over the inclu-
sive statutory definition of gross income. Commissioner v.
Glenshaw Glass Co., supra at 431.
On the basis of the foregoing, we conclude that the qui tam
payment is includable in petitioner’s gross income for 2003
because it is the equivalent of a reward. None of petitioner’s
arguments persuade us that our holding in Roco v. Commis-
sioner, supra, does not apply. Because the qui tam payment
is includable in petitioner’s gross income, we next decide
whether petitioner must include the entire $8.75 million qui
tam payment in gross income or is entitled to exclude the
$3.5 million attorney’s fee payment and thus include only the
$5.25 million qui tam payment in gross income.
Petitioner contends that only $5.25 million of the qui tam
payment must be included in gross income because he never
received the $3.5 million attorney’s fee payment. The $8.75

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 (20) CAMPBELL v. COMMISSIONER 27

million qui tam payment was wired from the United States
to petitioner’s attorneys, who subtracted a 40-percent contin-
gency fee and paid the $5.25 million net proceeds of the qui
tam payment to petitioner by check.
Respondent contends that the $3.5 million attorney’s fee
payment is includable in petitioner’s gross income and thus
petitioner must include the entire $8.75 million qui tam pay-
ment in gross income.
Petitioner relies on Cotnam v. Commissioner, 263 F.2d 119,
(5th Cir. 1959), affg. in part and revg. in part 28 T.C. 947
(1957), 6 Davis v. Commissioner, 210 F.3d 1346 (11th Cir.
2000), affg. T.C. Memo. 1998–248, and Foster v. United
States, 249 F.3d 1275 (11th Cir. 2001), contending that they
control the treatment of contingent attorney’s fees. However,
after those cases were decided, the Supreme Court held, in
Commissioner v. Banks, 543 U.S. 426 (2005), that, when a
litigant’s recovery constitutes taxable income, that income
includes the portion paid to attorneys as a contingent fee.
Accordingly, we hold that the $3.5 million attorney’s fee pay-
ment is includable in petitioner’s gross income and, therefore,
petitioner must include the entire $8.75 million qui tam pay-
ment in gross income.
We next address whether petitioner may deduct the $3.5
million attorney’s fee payment as a miscellaneous itemized
deduction. Both parties concede that, if petitioner has
substantiated the attorney’s fees, he may deduct them as a
miscellaneous itemized deduction. 7 Accordingly, we address
the issue of whether petitioner has properly substantiated
his deduction.
Petitioner contends that his testimony and the attorney’s
fee agreement provide sufficient evidence to substantiate the
deduction of attorney’s fees. Respondent contends that the
offered proof and testimony are insufficient and that peti-
6 The Court of Appeals for the Eleventh Circuit has adopted as binding precedent the caselaw

of the former Court of Appeals for the Fifth Circuit, as of Sept. 30, 1981. Bonner v. City of
Pritchard, 661 F.2d 1206 (11th Cir. 1981). Absent stipulation to the contrary, any appeal of the
instant case would be to the Court of Appeals for the Eleventh Circuit. The Tax Court follows
the law of the circuit in which an appeal would lie if that law is on point. Golsen v. Commis-
sioner, 54 T.C. 742, 757 (1970), affd. 445 F.2d 985 (10th Cir. 1971).
7 The American Jobs Creation Act of 2004, Pub. L. 108–357, sec. 703, 118 Stat. 1546, amended

sec. 62(a) to allow an adjustment from gross income for attorney’s fees paid by, or on behalf
of a taxpayer in connection with a claim under the FCA. However, the adjustment is applicable
only to fees and costs paid after Oct. 22, 2004, with respect to any judgment or settlement occur-
ring after that date. Id. The settlement in the instant case was entered into during September
2003. Accordingly, the adjustment is not applicable to the instant case.

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 28 134 UNITED STATES TAX COURT REPORTS (20)

tioner should have called his attorneys to testify to the
receipt of the funds.
Deductions are a matter of legislative grace, and a tax-
payer bears the burden of proving that he is entitled to the
deductions claimed. INDOPCO, Inc. v. Commissioner, 503
U.S. 79, 84 (1992); Hradesky v. Commissioner, 65 T.C. 87,
89–90 (1975), affd. 540 F.2d 821 (5th Cir. 1976). The tax-
payer is required to maintain records that will enable the
Commissioner to determine the correct liability. Sec. 6001.
Petitioner offered as proof of payment his testimony and a
corroborating document that contained his contingency fee
arrangement with his attorneys. On the basis of that evi-
dence, we are persuaded that petitioner paid the attorney’s
fees and, therefore, hold that petitioner has substantiated
the payment of the fees.
Finally, we consider whether petitioner is liable for the
accuracy-related penalty pursuant to section 6662(a). Tax-
payers are subject to a 20-percent penalty for any under-
payment which is attributable to, among other things, (1)
negligence or disregard of rules or regulations or (2) any
substantial understatement of income tax. Sec. 6662(a) and
(b); New Phoenix Sunrise Corp. v. Commissioner, 132 T.C.
161, 189, 191 (2009). Negligence includes any failure to make
a reasonable attempt to comply with the Code. Sec. 6662(c);
see Neely v. Commissioner, 85 T.C. 934, 947 (1985) (neg-
ligence is lack of due care or failure to do what a reasonably
prudent person would do under the circumstances). Dis-
regard of rules or regulations includes any careless, reckless,
or intentional disregard. Sec. 6662(c). A substantial under-
statement of income tax occurs in any year where the
amount of the understatement exceeds the greater of 10 per-
cent of the amount required to be shown on the return or
$5,000. Sec. 6662(d)(1)(A). An understatement is the excess
of the amount of tax required to be shown on the return over
the amount of tax actually shown on the return less any
rebates. Sec. 6662(d)(2)(A). The potential understatement
will be reduced by the portion attributable to the tax treat-
ment of an item if there was substantial authority for such
treatment or if the relevant facts affecting the item’s tax
treatment are adequately disclosed in the return or in an
attached statement and there is a reasonable basis for such
treatment. Sec. 6662(d)(2)(B). An exception to the accuracy-

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 (20) CAMPBELL v. COMMISSIONER 29

related penalty exists if the taxpayer can show there was
reasonable cause for such portion and the taxpayer acted in
good faith in regard to such portion. Sec. 6664(c).
Respondent contends that petitioner is liable for the
accuracy-related penalty because he substantially under-
stated his income tax as a result of failing to include the
$8.75 million qui tam payment in his gross income. See sec.
6662(b)(2). Alternatively, respondent contends that the
underpayment is attributable to negligence or disregard of
rules and regulations. See sec. 6662(b)(1).
Petitioner contends that, pursuant to sections 6662(d)(2)(B)
and 6664(c), he should not be liable for the accuracy-related
penalty because he disclosed the full settlement payment on
his return, there was reasonable cause for the omission from
income, and he acted in good faith with respect to the omis-
sion of the settlement payment. Specifically, petitioner con-
tends that, because he disclosed the $5.25 million net pro-
ceeds of the qui tam payment on the face of his return,
excluded it from his calculation of taxable income, and filed
Form 8275 disclosing the $3.5 million attorney’s fee payment,
he should not be liable for the accuracy-related penalty.
Generally, the Commissioner bears the burden of produc-
tion with respect to any penalty, including the accuracy-
related penalty. Sec. 7491(c); Higbee v. Commissioner, 116
T.C. at 446. To meet that burden, the Commissioner must
come forward with sufficient evidence indicating that it is
appropriate to impose the relevant penalty. Higbee v.
Commissioner, supra at 446. The Commissioner has the bur-
den of production only; the ultimate burden of proving that
the penalty is not applicable remains on the taxpayer. Id.
Respondent offers petitioner’s original return as evidence
that petitioner understated his income tax and that the
imposition of the accuracy-related penalty is appropriate. The
original return does exclude the $8.75 million qui tam pay-
ment from the calculation of taxable income. We have held
above that the $8.75 million qui tam payment is includable
in petitioner’s gross income. Accordingly, we conclude that
respondent has met his burden of production to show that his

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determination of the accuracy-related penalty is appro-
priate. 8
Petitioner is liable for the accuracy-related penalty if his
underpayment is a result of negligence or disregard of rules
or regulations or if there is a substantial understatement of
income tax. Sec. 6662(b); New Phoenix Sunrise Corp. v.
Commissioner, supra at 189, 191. As discussed above, peti-
tioner should have included the $8.75 million qui tam settle-
ment payment in his gross income for his 2003 taxable year.
Had he done so, a total tax liability of $3,044,110 would have
resulted. Petitioner’s deficiency of $3,044,000 exceeds the
greater of $5,000 or 10 percent of the amount of tax required
to be shown on the return (10 percent of $3,044,110 is
$304,411). See sec. 6662(d)(1)(A). Consequently, petitioner
will be liable for the accuracy-related penalty unless the pen-
alty can be reduced pursuant to section 6662(d)(2)(B) or
avoided pursuant to section 6664(c). 9
An underpayment may be reduced where the taxpayer has
substantial authority for the tax treatment or, alternatively,
the position is adequately disclosed and the taxpayer has a
reasonable basis for such treatment. Sec. 6662(d)(2)(B); W.
Covina Motors, Inc. v. Commissioner, T.C. Memo. 2008–237.
Substantial authority is an objective standard based on an
analysis of the law and its application to the relevant facts.
Myers v. Commissioner, T.C. Memo. 1994–529; sec. 1.6662–
4(d)(2), Income Tax Regs. Taking into account all authorities,
substantial authority exists only if the weight of the authori-
ties supporting the treatment is substantial in relation to the
weight of authorities supporting contrary treatment. Sec.
1.6662–4(d)(3), Income Tax Regs. Substantial authority is not
so stringent that a tax treatment must be upheld in litiga-
tion or have a greater-than-50-percent likelihood of being
sustained. O’Malley v. Commissioner, T.C. Memo. 2007–79;
sec. 1.6662–4(d)(2), Income Tax Regs.
Petitioner argues that substantial authority to exclude the
qui tam payment from his gross income exists because of
Roco v. Commissioner, 121 T.C. at 165 n.2. However, Roco’s
8 Respondent has met his burden of production for both the negligence grounds of the accu-

racy-related penalty pursuant to sec. 6662(b)(1) and the substantial understatement grounds of
the accuracy-related penalty pursuant to sec. 6662(b)(2).
9 We note that the accuracy-related penalty was imposed on the taxpayer in Roco v. Commis-

sioner, 121 T.C. 160 (2003).

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 (20) CAMPBELL v. COMMISSIONER 31

holding is directly adverse to his position. As explained
above, Roco is not substantial authority for his position, nor
is any case petitioner cites. Petitioner has failed to show that
the authorities in support of his treatment are substantial in
relation to those supporting contrary treatment.
Petitioner further argues that the underpayment should be
reduced because of adequate disclosure and a showing of
reasonable basis. Sec. 6662(d)(2)(B)(ii). Adequate disclosure
may be made either in a statement attached to the return or
on the return. Sec. 1.6662–4(f), Income Tax Regs. Disclosure
generally must be made on Form 8275 unless otherwise per-
mitted by applicable revenue procedure—in this case, Rev.
Proc. 2003–77, 2003–2 C.B. 964. Sec. 1.6662–4(f)(2), Income
Tax Regs.
Petitioner included the $5.25 million net proceeds of the
qui tam payment as other income on page 1 of his return.
Qui tam payments are not addressed in Rev. Proc. 2003–77,
supra. Consequently, the method for adequately disclosing
the taxability of a qui tam payment was by the filing of a
Form 8275. Petitioner’s Form 8275 did not disclose the $5.25
million net proceeds of the qui tam payment. Instead, the
Form 8275 disclosed the $3.5 million attorney’s fee payment.
Accordingly, we conclude that petitioner did not adequately
disclose the $5.25 million net proceeds of the qui tam pay-
ment.
Additionally, we conclude that petitioner did not have a
reasonable basis for his position with regard to the exclusion
of the $5.25 million net proceeds of the qui tam payment
from his gross income. Reasonable basis is a relatively high
standard of reporting. Sec. 1.6662–3(b)(3), Income Tax Regs.
Taxpayers must have a position that is more than merely
arguable. Halby v. Commissioner, T.C. Memo. 2009–204; sec.
1.6662–3(b)(3), Income Tax Regs. As noted above, petitioner’s
position is based on a footnote from a case that holds in
direct opposition to his position. See Roco v. Commissioner,
121 T.C. 160 (2003). Petitioner’s arguments in support of his
contention that Roco is distinguishable were at best merely
colorable. Consequently, we hold that petitioner has not
shown that he had a reasonable basis for his return position
regarding the $5.25 million net proceeds of the qui tam pay-
ment.

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 32 134 UNITED STATES TAX COURT REPORTS (20)

We next consider whether the accuracy-related penalty
should be reduced because petitioner adequately disclosed
the exclusion of the $3.5 million attorney’s fee payment from
gross income and had a reasonable basis for that exclusion.
Disclosure of petitioner’s position regarding the $3.5 million
attorney’s fee payment on the Form 8275 attached to his
return constitutes adequate disclosure. See sec. 1.6662–
4(f)(1), Income Tax Regs. Petitioner relies on Cotnam v.
Commissioner, 263 F.2d 119 (5th Cir. 1959), Davis
v. Commissioner, 210 F.3d 1346 (11th Cir. 2000), and Foster
v. United States, 249 F.3d 1275 (11th Cir. 2001), for the
proposition that, at the time he filed his original return, 10
contingency fee payments made directly to attorneys were
not includable in gross income. At that time, Foster v. United
States, supra, had held that attorney’s fees covered by a
contingency fee arrangement should be excluded from gross
income because of the Alabama attorney’s lien law governing
the recovery of such fees. Because petitioner was a resident
of Florida, a State with similar lien laws, his reliance on
Foster was a reasonable basis for the exclusion of the attor-
ney’s fee payment from his income. 11 At the time petitioner
filed his original return, the Supreme Court had not yet
decided Commissioner v. Banks, 543 U.S. 426 (2005), which
overruled Foster. 12 Consequently, we hold that petitioner’s
underpayment for the purpose of the section 6662(b) penalty
must be reduced by the portion of the penalty attributable to
the $3.5 million attorney’s fee payment.
Finally, we consider petitioner’s contention that the
accuracy-related penalty should not apply to the $5.25 mil-
lion net proceeds of the qui tam payment he failed to include
in his income because there was reasonable cause for his
position and he acted in good faith. See sec. 6664(c); New
Phoenix Sunrise Corp. v. Commissioner, supra at 192. Tax-
10 Petitioner filed an amended return on Apr. 26, 2005. Respondent has not raised any issue

regarding when liability for the penalty must be determined; i.e., as of the time of the original
return or the amended return. We therefore need not address the issue. In another context, how-
ever, the Supreme Court has held that liability for the penalty is determined as of the time of
the original return and not an amended return. See Badaracco v. Commissioner, 464 U.S. 386
(1984).
11 The attorney’s lien laws of Florida and Alabama are not exactly the same but are not suffi-

ciently dissimilar to persuade us that Foster v. United States, 249 F.3d 1275 (11th Cir. 2001),
is not a reasonable basis for the exclusion. Foster was decided by the Court of Appeals for the
Eleventh Circuit, the same Court of Appeals serving as the venue, absent stipulation to the con-
trary, of appeals by Florida residents.
12 Commissioner v. Banks, 543 U.S. 426 (2005), was decided on Jan. 24, 2005.

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 (20) CAMPBELL v. COMMISSIONER 33

payers demonstrate reasonable cause when they exercise
ordinary business care and prudence. Richardson v. Commis-
sioner, 125 F.3d 551, 558 (7th Cir. 1997), affg. T.C. Memo.
1995–554. The most important factor in determining reason-
able cause and good faith is the taxpayer’s efforts to assess
the proper tax liability. Sec. 1.6664–4(b)(1), Income Tax Regs.
A taxpayer’s experience, knowledge, and education may also
be taken into account. Bachmann v. Commissioner, T.C.
Memo. 2009–51; sec. 1.6664–4(b)(1), Income Tax Regs.
Petitioner did not have reasonable cause for his position or
act in good faith. Petitioner is a sophisticated taxpayer,
having earned a bachelor’s degree in accounting and business
administration and served as chief of cost control for Lock-
heed Martin for a $3.5 billion project. Petitioner failed to
seek professional advice when preparing his 2003 tax return.
See also Bachmann v. Commissioner, supra (taxpayer was a
sophisticated banker who should have sought advice on tax
treatment of receipt of large arbitration award). Moreover,
petitioner’s claimed authority for his position was a footnote
from a case that reached a holding directly adverse to his
position. See Roco v. Commissioner, supra. Petitioner’s posi-
tion was neither persuasive nor reasonable. Given his experi-
ence, knowledge, and education, petitioner has failed to meet
his burden of proving the reasonable cause exception to the
accuracy-related penalty. Consequently, we hold that peti-
tioner is liable for the accuracy-related penalty with respect
to the $5.25 million net proceeds of the qui tam payment.
The Court has considered all other arguments made by the
parties and, to the extent we have not addressed them
herein, we consider them moot, irrelevant, or without merit.
On the basis of the foregoing,
Decision will be entered under Rule 155.

f

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