[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT FILED
U.S. COURT OF APPEALS
_____________ ELEVENTH CIRCUIT
SEP 28, 2011
No. 10-13677 JOHN LEY
CLERK
_____________
Tax Court No. 21209-07
ALBERT D. CAMPBELL,
Petitioner - Appellant,
versus
COMMISSIONER OF INTERNAL REVENUE,
Respondent - Appellee.
____________
Appeal from a Decision of the
United States Tax Court
____________
(September 28, 2011)
Before DUBINA, Chief Judge, HILL, Circuit Judge, and GOLDBERG,* Judge.
PER CURIAM:
*
Honorable Richard W. Goldberg, United States Court of International Trade Judge,
sitting by designation.
Taxpayer Albert D. Campbell was awarded and received a net $5.25 million
qui tam payment from the government as a “relator” in two lawsuits settled against
government contractor Lockheed Martin (Lockheed) under the False Claims Act
(FCA), 31 U.S.C. §§ 3729-3733 (2006). Campbell asserted that the award was not
taxable.1
The Tax Court disagreed. It held that the entire amount was includable in
Campbell’s gross income as the equivalent of a reward, Roco v. Comm’r, 121 T.C.
160, 164 (2003), pursuant to I.R.C. § 61(a); and (2) that he was liable for an
accuracy-related penalty pursuant to I.R.C. § 6662(a), based on the omission of the
award from his reported taxable income. Finding no clear error, we affirm the
judgment of the Tax Court.
I.
Campbell is a sophisticated taxpayer. See Seven W. Enter., Inc. & Subs. v.
Comm’r, 136 T.C. No. 26, 2011 WL 2260389, at *4 (T.C. June 7, 2011). He had
a business degree in accounting. He began working for Lockheed in 1981. For
eight years he was a financial analyst. After that, Lockheed promoted him to chief
1
“Qui tam” is short for a Latin phrase which means he or she “who pursues this action on
our Lord the King’s behalf as well as his own.” Vt. Agency of Natural Res. v. U. S. ex rel.
Stevens, 120 S.Ct. 1858, 1860 n.1 (2000). The individual who brings the qui tam suit on behalf
of the government is referred to as a relator. Id. at 1860. The history of qui tam actions is
discussed at length. Id. at 1863-65.
2
of cost control for a $3.5 billion contract held with the government. Campbell
held that position until 1995.
In 1995, Campbell became a whistleblower against his former employer.
He filed two lawsuits under the FCA, claiming that Lockheed had defrauded the
United States.2 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. A
Form 1099-MISC, Miscellaneous Income, was issued to him from the United
States Department of Justice for $8.75 million.
The money was wired to Campbell’s attorneys. They subtracted their 40%
fee of $3.5 million, and sent Campbell a check for the remaining balance of $5.25
million.
Campbell prepared his 2003 tax return without consulting outside counsel.
He displayed the $5.25 million sum on line 21 as “other income” but omitted the
amount from the calculation of taxable income on line 40. His resulting taxable
income was $793.
Campbell 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 attorney’s fees was not taxable income, and that the
2
The United States intervened in the first lawsuit, but not the second.
3
$5.25 million net qui tam payment was excludable from his taxable income.
In 2007, the Commissioner of Internal Revenue sent Campbell a notice of
deficiency: (1) for failing to include the $5.25 million qui tam payment in his
gross income under I.R.C. § 61(a); and (2) for an accuracy-related penalty under
I.R.C. § 6662, as his exclusion of the qui tam payment resulted in a substantial
understatement of income tax. Campbell filed a petition in the Tax Court. The
Tax Court held in favor of the Commissioner on both issues. This appeal
followed.
II.
In 2000, the Supreme Court held that a relator has standing to bring a qui
tam action in federal court against a state agency because the FCA affected a
partial assignment of the government’s claim to the relator. See Vt. Agency of
Natural Res. v. U.S. ex rel. Stevens, 120 S.Ct. 1858, 1863 (2000).3 As the assignee
of such a claim, a relator has standing to assert the injury-in-fact suffered by the
government. Id. In Vermont Agency, the Supreme Court made no ruling on the
taxability or non-taxability of a qui tam payment.
3
Campbell’s argument that, as the assignee of the United States’ claim against Lockheed,
he stands in the shoes of the government in receipt of a nontaxable recovery, is misplaced. See
Vt. Agency, 120 S.Ct. at 1863. Also meritless is Campbell’s reliance upon the 1930 Supreme
Court case of Lucas v. Earl, 50 S.Ct. 241 (1930), for the same proposition.
4
In Campbell’s case, the Tax Court found that although the FCA affects a
partial assignment of the claim for purposes of standing, the assignment of the
claim does not change the taxability of the proceeds to him. See Roco, 121 T.C. at
164. Therefore, the qui tam payment is the equivalent of a reward, and taxable.
Id.4
III.
We review the Tax Court’s application of the tax code de novo and its
findings of fact for clear error. See Estate of Jelke v. Comm’r, 507 F.3d 1317,
1321 (11th Cir. 2007). Whether a taxpayer acted with reasonable cause and in
good faith is a question of fact. See Green v. Comm’r, 507 F.3d 857, 866 (5th Cir.
2007).
IV.
Section 61(a) of the Internal Revenue Code defines gross income as “all
income from whatever source derived.” I.R.C. § 61(a). There is no exclusion
enumerated in the Code for qui tam awards. See Treas. Reg. § 1.61-1(a). “The
taxpayer’s qui tam relator’s award, therefore, must constitute gross income unless
4
Campbell’s reliance upon footnote 2 in Roco, which stated that the Tax Court was not
deciding whether a qui tam payment is a nontaxable share in the recovery of a reimbursement, is
meritless. Roco v. Comm’r, 121 T.C. 160, 165 n.2 (2003). Here the Tax Court correctly found
that, contrary to Campbell’s argument, the footnote cannot be interpreted to mean that the qui
tam payments are nontaxable shares in the recovery of a reimbursement. Roco held that qui tam
payments are the equivalent of a reward, and therefore taxable. Id. at 164.
5
the taxpayer is able to show that it is ‘expressly excepted by another provision in
the Tax Code.’” Brooks v. United States, 383 F.3d 521, 523 (6th Cir. 2004). The
payment to a relator in a qui tam action is a financial incentive for a private person
to provide information and prosecute claims relating to fraudulent activity. See
United States ex rel. Semtner v. Med. Consultants, Inc., 170 F.R.D. 490, 495
(W.D.Okla. 1997). It is not a penalty imposed on the wrongdoer. Id.
Although the question of whether or not qui tam payments are includable in
gross income is an issue of first impression in this circuit, other courts that have
addressed this issue have uniformly concluded that they are. See Brooks, 383 F.3d
at 525 (qui tam payments are not excludable from gross income as personal
injuries inflicted upon the relator in tort); Roco, 121 T.C. at 164-65 (qui tam
payments are the equivalent of a reward, and rewards are generally includable in
gross income); Trantina v. United States, 512 F.3d 567, 570 n.2 (9th Cir. 2008)
(the legal question is whether qui tam payments should be taxed as ordinary
income or as a capital gain); Alderson v. United States, 718 F.Supp.2d 1186, 1191
(C.D.Cal. 2010) (the parties do not dispute that a qui tam award is taxable income,
the dispute is whether or not the award is ordinary income or capital gain). We
6
agree with our sister courts that qui tam payments are includable in gross income.5
The taxpayer in Brooks was a physician who filed an FCA claim against a
hospital and two of its doctors for submitting fraudulent Medicare and Medicaid
bills to the government for payment. Brooks, 383 F.3d at 522. Dr. Brooks
received a qui tam payment of $210,067. He included the relator’s reward in gross
income, and timely paid $78,607 in income taxes on that amount. Id.
Dr. Brooks also received a second settlement of $300,000, releasing the
defendants from any personal injury claims, including claims for retaliation and
defamation, as “damages received on account of personal injuries within the
meaning of [I.R.C. §] 104(a)(2).” Brooks, 383 F.3d at 522. He excluded the
$300,000 from his gross income as compensatory damages for personal injuries,
under I.R.C. § 104(a)(2). Id.
Dr. Brooks then filed a claim for refund for the $78,607 in income tax that
he had paid on the relator’s award. Brooks, 383 F.3d at 522. The Commissioner
disallowed his claim for refund and the district court agreed with the government.
The Sixth Circuit affirmed finding “1) that the underlying cause of action (the
FCA claim) is based upon contract fraud inflicted upon the government, not a tort
5
We are also not persuaded by Campbell’s argument that the legislative history of the
FCA determines that we must hold otherwise.
7
inflicted upon the relator, and 2) that the relator received his award on account of
initiating the prosecution of the FCA claim on behalf of the government, not on
account of personal injuries inflicted upon himself, we therefore [affirm] the
district court’s holding that a qui tam relator’s award is not excludable from gross
income under [I.R.C.] § 104(a)(2).” Id. at 525.
Although no part of Campbell’s case involved a tort action, we agree with
the Sixth Circuit. Campbell initiated the prosecution of an FCA claim on behalf of
the government. His relator award is not excludable from gross income. It is in
the nature of a reward, and is includable in gross income. See Roco, 121 T.C. at
164.
V.
We now turn to the issue of whether or not Campbell is liable for a 20%
accuracy-related penalty for underpayment under the Internal Revenue Code. A
penalty is imposed when there is: (1) negligence or disregard of rules or
regulations; or (2) substantial understatement of income tax. I.R.C. §§ 6662(a),
(b). Negligence includes any failure to make a reasonable attempt to comply with
the tax code. I.R.C. § 6662(c). Disregard of rules or regulations includes any
8
careless, reckless, or intentional disregard. Id.6
Campbell contends that he is not liable for the accuracy-related penalty
because: (1) he disclosed the qui tam payment on his tax return, both on line 21
and on Form 8275; (2) there was reasonable cause for the omission; and (3) that he
acted in good faith. The Commissioner contends that while the qui tam payments
were “reflected” on Campbell’s return, they were “dropped” in calculating his
ultimate tax liability and that such underpayment resulted in a “substantial
understatement of income” under I.R.C. § 6662(b). We agree. Campbell did not
disclose the amount in good faith and with reasonable cause merely by mentioning
them in two places on his return. He incredulously and conveniently ignored or
overlooked the amount when it was time to do the math. He showed no
reasonable cause for that omission. It was an overt and intentional act to
underpay.
VI.
We now turn to whether Campbell satisfies either exception to the
6
A substantial understatement of income tax occurs in any year where the amount of the
understatement exceeds the greater of ten percent (10%) of the amount required to be shown on
the return or $5,000. I.R.C. § 6662(d)(1)(A). The understatement will be reduced if there was
substantial authority for such treatment, or if the relevant facts are adequately disclosed in the
return or attached statement, or if there was reasonable basis for such treatment. I.R.C. §
6662(d)(2)(B). An exception exists if the taxpayer can show reasonable cause for the
understatement and that he or she acted in good faith. I.R.C. § 6664(c).
9
imposition of the 20% penalty. Did he provide: (a) substantial authority for the
omission, (b) did he adequately disclose the omission, or (c) did he have a
reasonable basis for the omission? I.R.C. § 6662(d)(2)(B). Did he have: (a) a
reasonable cause for his position, or (b) did he prove that he acted in good faith:
I.R.C. § 6664(c).
The Tax Court determined in its findings of fact that Campbell did not meet
either exception. Campbell asserted that he relied upon substantial case law
authority. He contends he made adequate disclosure and showed reasonable basis.
The Tax Court found to the contrary. Campbell’s citations to authority were no
authority for his position. Certainly they are neither reasonable or persuasive.
They are meritless. The Tax Court did not clearly err in finding that Campbell did
not qualify for the first exception to the accuracy-related penalty under Section
6662(d)(2)(B).
Next Campbell claims he has provided reasonable cause for his position.
The Tax Court found no such reasonable cause. Campbell claims he acted in good
faith. Campbell is a sophisticated taxpayer who chose not to consult a
professional tax consultant in preparing his return. The Tax Court did not clearly
err in finding that Campbell did not qualify for the second exception to the
accuracy-related penalty under Section 6664(c).
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VII.
The Tax Court correctly concluded that the entire $5.25 million qui tam
payment awarded to Campbell under the FCA was includable in gross income and
that Campbell was liable for the Section 6662(a) accuracy-related penalty.
The judgment of the Tax Court is
AFFIRMED.
11