FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
JAMES F. ALDERSON; CONNIE B.
ALDERSON; JENNIFER A. PAGE;
No. 10-56007
WALTER PAGE; JUSTIN W.
ALDERSON; KRISTEN N. ALDERSON, D.C. No.
Plaintiffs-Appellants, 2:09-cv-06155-
SVW-MLG
v.
OPINION
UNITED STATES OF AMERICA,
Defendant-Appellee.
Appeal from the United States District Court
for the Central District of California
Stephen V. Wilson, District Judge, Presiding
Argued and Submitted
January 12, 2012—Pasadena, California
Filed July 18, 2012
Before: Stephen Reinhardt and William A. Fletcher,
Circuit Judges, and Jack Zouhary, District Judge.*
Opinion by Judge William A. Fletcher
*The Honorable Jack Zouhary, United States District Judge for the
Northern District of Ohio, sitting by designation.
8311
ALDERSON v. UNITED STATES 8313
COUNSEL
Robert W. Wood, David B. Porter, Steven E. Hollingworth,
WOOD & PORTER, P.C., San Francisco, California, for the
appellants.
Thomas D. Coker, OFFICE OF THE UNITED STATES
ATTORNEY, Los Angeles, California, Damon W. Taaffe,
Kenneth L. Greene, UNITED STATES DEPARTMENT OF
JUSTICE, Washington, D.C., for the appellee.
8314 ALDERSON v. UNITED STATES
OPINION
W. FLETCHER, Circuit Judge:
In 1993, James Alderson filed a qui tam action under the
False Claims Act (“FCA”) alleging Medicare fraud by Quo-
rum Health Group, Inc. (“Quorum”), a hospital management
company, and several related entities including the Hospital
Corporation of America, Inc. (“HCA”). The United States
intervened in 1998. The United States settled its FCA claims
against HCA for $631 million in 2003. Alderson received six-
teen percent of the settlement as his relator’s share.
Alderson and related taxpayers, Appellants, filed income
tax returns for tax year 2003 reporting the relator’s share as
ordinary income. They later filed amended returns character-
izing it as capital gain, seeking refunds of about $5 million.
The Internal Revenue Service (“IRS”) denied the refund
claims. Appellants then filed suit in federal district court. The
court granted summary judgment to the United States, holding
that the relator’s share was ordinary income. Alderson v.
United States, 718 F. Supp. 2d 1186, 1200-01 (C.D. Cal.
2010).
We affirm.
I. Background
Alderson was the Chief Financial Officer for North Valley
Hospital in Whitefish, Montana, in 1990. That year, Quorum,
an affiliate of HCA, began managing the hospital. Quorum
asked Alderson to prepare two sets of books, one for the hos-
pital’s financial auditors and one to serve as the basis for the
hospital’s Medicare cost reports. Alderson refused to prepare
separate books. Quorum fired him in September 1990.
In May 1991, Alderson filed a wrongful termination suit.
During discovery, Alderson deposed several Quorum officials
ALDERSON v. UNITED STATES 8315
and obtained sample Medicare cost reports. The depositions
and documents suggested widespread accounting fraud. See
United States ex rel. Alderson v. Quorum Health Grp. Inc.
(Quorum), 171 F. Supp. 2d 1323, 1325 (M.D. Fla. 2001).
Alderson settled his wrongful termination suit in 1993.
Using information obtained during discovery in his wrong-
ful termination suit, Alderson filed a pro se qui tam suit in
January 1993 against Quorum, HCA and affiliated companies
under the False Claims Act. See 31 U.S.C. §§ 3729 et seq. At
that time, Alderson made available to the United States the
documents he had received during discovery. In a subsequent
conversation between Alderson and the Department of Jus-
tice, Alderson “identified for . . . government personnel the
categories of documents that the government should subpoena
from Quorum to advance most effectively the government’s
investigation.” Quorum, 171 F. Supp. 2d. at 1326. The United
States issued subpoenas that resulted in the production of cost
reports from 197 hospitals covering a seven-year period. Id.
At the government’s request, Alderson analyzed the reports
and prepared a spreadsheet for the government based on 2,500
documents. Alderson presented his analysis to the government
in early 1995. Id.
Alderson spent five years trying to persuade the United
States to intervene in his FCA suit. At his own expense, he
retained counsel in 1993, and different counsel in 1995, to
represent him. Id. The United States finally intervened in
1998. Id. at 1329. After intervening, the United States severed
the suits against HCA and Quorum. Id. The district court
opinion in the severed Quorum suit describes in detail Alder-
son’s extensive efforts on behalf of the United States. Id. at
1326-31.
In 2001, the United States settled the suit against Quorum
for $85.7 million. Alderson received a twenty-four percent
relator’s share, one percent below the maximum percentage
allowed under the qui tam statute. 31 U.S.C. § 3730(d)(1). In
8316 ALDERSON v. UNITED STATES
explaining its decision to award Alderson a significant share
of the recovery, the district court referred to the “heroic effort
by many, including prominently Alderson and the team he
assembled, [that] contributed to the development of the fac-
tual information, documentary evidence, and legal arguments
necessary to prevail.” Quorum, 171 F. Supp 2d. at 1332. The
appropriate tax treatment of Alderson’s relator’s award in the
Quorum suit is not before us.
In 2003, the United States settled the suit against HCA for
$631 million. Alderson received a sixteen percent relator’s
share. After accounting for attorney’s fees and expenses,
Alderson received $27,105,035. We are asked to determine
the appropriate tax treatment of this award.
Prior to the settlement of the HCA suit, Alderson gave por-
tions of his potential relator’s share to members of his family,
using a family partnership he established for this purpose.
Alderson transferred to the Alderson Family Limited Partner-
ship (“the partnership”) forty percent of his interest in the
relator’s share. Alderson retained ownership of the remaining
sixty percent of his relator’s share. Alderson gave each of his
two children, Justin and Jennifer, a forty-nine percent interest
in the partnership. He gave his wife Connie a one percent
interest in the partnership and retained a one percent interest
in the partnership in his own name. In 1999, an appraiser esti-
mated the present value of the entire relator’s share as
$3,047,356. The appraiser used that estimate to value the part-
nership shares. Alderson and his wife relied on this valuation
to pay a gift tax on the partnership shares transferred to their
children.
In 2003, the Alderson parties received their relator’s share
income and filed tax returns for tax year 2003 reporting their
share of the settlement. James and Connie Alderson filed a
joint return reporting income from the sixty percent owner-
ship interest that Alderson had retained and from their two
percent interest in the partnership. Justin Alderson and his
ALDERSON v. UNITED STATES 8317
wife Kristen, and Jennifer Alderson Page and her husband
Walter Page, reported on their joint returns the partnership
income they received based on Justin’s and Jennifer’s forty-
nine percent interests in the partnership. All three couples
characterized the income as ordinary income.
In 2007, all three couples filed amended returns for tax year
2003, in which they re-characterized their portions of the rela-
tor’s share as capital gain. This re-characterization, if upheld,
would significantly reduce their tax liability for 2003. Alder-
son and his wife sought a refund of $3,263,431. His two chil-
dren and their spouses each sought just over one million
dollars per couple.
The IRS denied the refund requests in 2008. All three cou-
ples then filed suit in district court for refunds. The district
court held that the relator’s share was ordinary income and
granted summary judgment to the United States. Alderson,
718 F. Supp. 2d at 1200-01. The three couples timely
appealed.
II. Jurisdiction and Standard of Review
We have jurisdiction under 28 U.S.C. § 1291. We review
a grant of summary judgment de novo. Red Lion Hotels
Franchising, Inc. v. MAK, LLC, 663 F.3d 1080, 1086 (9th Cir.
2011). “The taxpayer bears the burden of establishing that
proceeds of a settlement are what the taxpayer contends them
to be.” Milenbach v. Comm’r, 318 F.3d 924, 933 (9th Cir.
2003).
III. Discussion
A. False Claims Act
[1] The False Claims Act imposes civil liability on any
person who presents to the federal government “a false or
fraudulent claim for payment or approval.” 31 U.S.C.
8318 ALDERSON v. UNITED STATES
§ 3729(a). The government may itself bring a suit, or a private
person may bring a suit in the name of the government as a
“relator.” § 3730(a), (b)(1). If a private person wishes to bring
suit, the relator must first serve on the government a copy of
the complaint, together with supporting evidence.
§ 3730(b)(2). The government then has at least sixty days to
decide whether to intervene in the suit. Id. While the govern-
ment is deciding whether to intervene, the complaint must
remain under seal in the district court and may not be served
on the defendant until the court so orders. § 3730(b)(2). If the
government declines to intervene, the relator may pursue the
suit on his or her own. § 3730(b)(4)(B).
[2] If the government declines to intervene and the relator
succeeds in obtaining a judgment, the relator is entitled to
receive between twenty-five and thirty percent of the recov-
ery, plus fees and costs. § 3730(d)(2). If the government inter-
venes and if a judgment is not based primarily on information
that was already public, the relator is entitled to receive
between fifteen and twenty-five percent of the recovery, plus
fees and costs. § 3730(d)(1). If the government intervenes and
the judgment is “based primarily” on disclosures made in
government hearings or reports, or in news reports, the relator
is entitled to receive between zero and ten percent of the
recovery, plus fees and costs. Id. The percentage awarded to
the relator depends “upon the extent to which the [relator]
substantially contributed to the prosecution of the action.” Id.
In the suit against HCA, where the judgment was not based
primarily on public information, Alderson received a sixteen
percent relator’s share.
[3] The Supreme Court has characterized a relator’s share
under the FCA as a “bounty” and as a “fee.” The Court
observed in Vermont Agency of Natural Resources v. United
States ex rel. Stevens, 529 U.S. 765, 772, that “the relator’s
bounty is simply the fee he receives out of the United States’
recovery for filing and/or prosecuting a successful action on
behalf of the Government.” Id. at 772 (emphasis omitted).
ALDERSON v. UNITED STATES 8319
The Court further referred to the relator’s share as “the bounty
[the relator] will receive if the suit is successful,” id., and to
the qui tam suit as “the relator’s suit for his bounty.” Id. at
773.
B. Ordinary Income Versus Capital Gain
[4] Whether a relator’s share under the FCA is ordinary
income or capital gain is a question of first impression.
Appellants cite no case in which a relator’s share has been
given capital gains treatment. The government states that it is
“unaware of a single instance in which a relator’s award has
received capital gains treatment.” However, the government
provided no case supporting the proposition that such awards
have been consistently treated as ordinary income and has
cited no case addressing the question.
1. Section 1222
Section 1222 of the Internal Revenue Code defines “capital
gain” as “gain from the sale or exchange of a capital asset.”
26 U.S.C. § 1222(1), (3). We consider, in turn, the require-
ments of “sale or exchange” and “capital asset.”
a. Sale or Exchange
[5] Capital gains treatment applies only to a “gain from [a]
sale or exchange.” Id. Appellants contend that “Alderson
exchanged his documents, information and know-how[ ] and
. . . received cash, thus consummating a sale or exchange
. . . .” (For convenience, we will refer to the documents, infor-
mation, and know-how provided by Alderson as “informa-
tion.”) We disagree with Appellants’ contention.
[6] Alderson did not “sell” or “exchange” his information.
Alderson’s right to a relator’s share was a right conferred by
the FCA. He provided his information to the government as
a precondition for pursuing his qui tam suit, as required by the
8320 ALDERSON v. UNITED STATES
statute. If Alderson had offered simply to sell or exchange the
information to the government in return for a sum of money,
the government would almost certainly have refused the offer.
In the unlikely event the government had accepted the offer,
it would have done so based on some authority other than the
FCA.
Further, Alderson did far more than simply hand informa-
tion over to the government. As detailed by the district court
in Quorum, he performed numerous acts in connection with
that information. 171 F. Supp. 2d at 1326-31. He spent five
years after filing his pro se complaint trying to persuade the
government to intervene in his suit. Among other things, he
performed an extensive analysis of 2,500 documents the gov-
ernment had obtained through subpoenas, and he prepared a
spreadsheet based on that analysis. Id. at 1326. He also
retained his own counsel—indeed, two different counsel—
during these five years to help him in his effort to persuade
the government to intervene. Id.
Appellants contend that “Tax Court decisions and IRS rul-
ings alike make clear that a sale or exchange is not a prerequi-
site for capital treatment.” It is true that damage to a capital
asset may, in some circumstances, qualify for capital gains
treatment. See, e.g., Inco Electroenergy Corp. v. Comm’r,
T.C. Memo 1987-437 (“[A]mounts received for injury or
damage to capital assets are taxable as capital gain, whereas
amounts received for lost profits are taxable as ordinary
income.” (citing State Fish Corp. v. Comm’r, 48 T.C. 465,
472 (1967))). But Appellants point us to no case treating
actions such as those performed by Alderson in return for his
relator’s share under the FCA as a “sale or exchange.”
b. Capital Asset
[7] Section 1221(a) defines a capital asset as “property
held by the taxpayer,” subject to certain exceptions not rele-
vant here. 26 U.S.C. § 1221(a). In 1960, the Supreme Court
ALDERSON v. UNITED STATES 8321
wrote, “This Court has long held that the term ‘capital asset’
is to be construed narrowly,’ in accordance with the purpose
of Congress to afford capital-gains treatment only in situa-
tions typically involving the realization of appreciation in
value accrued over a substantial period of time . . . .” Comm’r
v. Gillette Motor Transp., Inc., 364 U.S. 130, 134 (1960).
Appellants have two theories. First, they argue that the infor-
mation supplied by Alderson to the government was a capital
asset. Second, they argue that the relator’s share itself was a
capital asset.
[8] Under their first theory, Appellants must show that the
information Alderson provided to the government was his
“property,” as required by § 1221(a). Information and papers
are often protected property rights. See, e.g., United States v.
Frazell, 335 F.2d 487, 490 (5th Cir. 1964) (holding a set of
unique and valuable maps to be a capital asset); E.I. du Pont
de Nemours & Co. v. United States, 288 F.2d 904, 912 (Ct.
Cl. 1961) (discussing trade secrets as capital assets). How-
ever, the information Alderson provided to the government
was not his property.
General principles of property law require that a property
owner have the legal right to exclude others from use and
enjoyment of that property. See G.S. Rasmussen & Assoc.,
Inc. v. Kalitta Flying Serv., Inc., 958 F.2d 896, 903 (9th Cir.
1992) (defining three characteristics of property: (1) “an inter-
est capable of precise definition”; (2) an interest “capable of
exclusive possession or control”; and (3) “the putative owner
must have established legitimate claim to exclusivity”).
[9] Alderson had no legal right to exclude others from use
of the information that he obtained through discovery and
subsequently provided to the government. The information
was known to other officials in the company, and Alderson
had no right to prevent those officials from providing it to
others. The FCA required Alderson to file his complaint and
accompanying evidence under seal to allow the government
8322 ALDERSON v. UNITED STATES
to examine it, see 31 U.S.C. § 3730(b)(2), but that require-
ment does not alter the fact that Alderson could not prevent
others who knew the information from revealing it to the gov-
ernment or to The New York Times.
Under their second theory, Appellants contend that Alder-
son’s relator’s share, rather than the information he provided
in order to obtain it, was a capital asset. Appellants contend
that the increase in value of the relator’s share between 1993,
when Alderson filed his suit, and 2003, when he actually
received his relator’s share of $27,105,035, was capital gain.
[10] We recognize that a relator’s share—even a potential
relator’s share—can be property for some purposes. For
example, a potential relator’s share can be assigned to others,
as Alderson did when he assigned part of his share to his wife
and children. But the fact that a relator’s share can be property
for some purposes does not make it a capital asset under
§ 1221(a).
Appellants rely on two community property cases in an
attempt to support their second theory. See D.B. v. K.B., 176
S.W.3d 343, 349 (Tex. Ct. App. 2004); In re Marriage of Bid-
dle, 52 Cal. App. 4th 396, 400 (1997). While a relator’s share
can be community property, the definition of community
property is much broader than the definition of a capital asset
under § 1221(a). Community property includes many types of
ordinary income, such as wages earned during marriage.
Indeed, the two cases cited by Appellants describe the rela-
tor’s share in terms applicable to ordinary income rather than
capital gain. See D.B., 176 S.W.3d at 349 (noting that relator
“earned the fee by discovering the fraud, filing the qui tam
lawsuit, and providing the United States Attorney’s Office
with information”); Biddle, 52 Cal. App. 4th at 400 (compar-
ing work of qui tam relator to “that of a married producer who
starts work on a movie and, after separating from her hus-
band, completes the movie which becomes a smash hit; the
ALDERSON v. UNITED STATES 8323
contingency of success results in a divisible community
asset”).
Appellants also rely on United States v. Maginnis, 356 F.3d
1179, 1183 (9th Cir. 2004), in support of their second theory.
In Maginnis, we set forth two factors that may, in some cir-
cumstances, be used to identify a capital asset. The two fac-
tors are (1) whether the taxpayer made an “underlying
investment of capital in return for the receipt of his . . . right,”
and (2) whether “the sale of his right . . . reflect[ed] an accre-
tion in value over cost to any underlying asset.” Id. Appellants
contend that the increase in value between 1993 and 2003 sat-
isfies both Maginnis factors. We conclude that they satisfy
neither.
[11] First, Alderson did not receive his right to a relator’s
share in return for an “underlying investment of capital.”
Appellants state in their brief, “Alderson acquired property
when he uncovered HCA’s secret accounting practices, when
he received documents stamped ‘Confidential—Do not dis-
cuss or release to Medicare auditors,’ and when he applied his
cost accounting expertise to interpret and explain them.”
Uncovering accounting fraud, receiving documents during
discovery, and interpreting those documents are not activities
that constitute an investment of capital. Appellants point out
that Alderson incurred expenses in acquiring the documents
and information that he provided to the government. How-
ever, the fact that Alderson incurred expenses is not determi-
native, for taxpayers routinely incur expenses in the
production of ordinary income.
[12] Second, the increase in value between 1993 and 2003
did not “reflect an accretion in value over cost to [the] under-
lying asset.” The increase in value of Alderson’s relator’s
share—of his “underlying asset”—was not the sort of “accre-
tion in value” that characterizes a capital gain. Alderson was
not an investor who bought and held an asset that increased
in value during the holding period. Rather, Alderson worked
8324 ALDERSON v. UNITED STATES
intensively after 1993 to increase the likelihood that his qui
tam suit would be successful, as the district court in Quorum
recounted in detail. 171 F. Supp. 2d at 1326-31.
2. Section 1234A
Finally, Appellants contend that the increase in value
between 1993 and 2003 is a capital gain under 26
U.S.C.§ 1234A. That section provides:
Gain or loss attributable to the cancellation, lapse,
expiration, or other termination of a right or obliga-
tion with respect to property . . . which is a capital
asset in the hands of the taxpayer . . . shall be treated
as gain or loss from the sale of a capital asset.
This provision does not help Appellants. It applies only to
such “[g]ain or loss . . . with respect to property which is a
capital asset in the hands of the taxpayer.” Id. As discussed
above, Alderson’s right to his relator’s share was not a capital
asset.
Conclusion
[13] We hold that Alderson’s qui tam award under the
FCA was ordinary income. We therefore affirm the district
court’s grant of summary judgment in favor of the govern-
ment.
AFFIRMED.