HLD, v. 32, n. 10 (October 2004)
Sixth Circuit Holds Whistleblower Not Entitled To Income Tax Exclusion
For Personal Injury Compensation On Qui Tam Award
Dr. Hilton Brooks was a physician on the medical staff at Pineville
Community Hospital (Hospital) where he served on the Hospital's quality assurance
committee. According to Brooks, he discovered various billing improprieties
by the Hospital and two physicians. Brooks claimed the Hospital refused to correct
the billing improprieties and instead engaged in a variety of retaliatory actions
Brooks brought a qui tam action under the False Claims Act (FCA)
against the Hospital and the two physicians (collectively defendants), claiming
they defrauded Medicare and Medicaid. The federal government initially declined
to intervene but eventually did so after discovery had been completed. Before
trial, defendants settled the FCA action, agreeing to pay the federal government
$2.5 million and admitting they had violated numerous regulations. The district
court approved the settlement and granted Brooks a qui tam award of $210,000,
which resulted in income tax of $78,607. Defendants also paid Brooks a separate
settlement of $300,000 for "damages received on account of personal injuries
within the meaning of [Internal Revenue Code] Section 104(a)(2)."
Brooks paid the $78,607 in income taxes on his qui tam award, but
excluded from income the $300,000 in compensatory damages for "personal injuries."
The Internal Revenue Service (IRS) approved the exclusion. Brooks then claimed
a refund of the $78,607 tax on the relator's award, arguing that the award was
at least partly excludable under � 104(a)(2) as personal injury damages. The
IRS disallowed his claim for a refund. Brooks sued the government in federal
district court, arguing he was entitled to the refund. The district court granted
the government's motion for summary judgment, holding that the no part of a
qui tam relator's award under � 3730(d) of the FCA is excludable from gross
income under � 104(a)(2). Brooks appealed.
The Sixth Circuit affirmed. To establish that income should be
excluded under � 104(a)(2), a taxpayer must show (1) that the underlying cause
of action is based on tort or tort-type rights and (2) that "the damages were
received on account of personal injuries or sickness." As to the first requirement,
the appeals court noted the "fact that a qui tam plaintiff may suffer personal
injuries while prosecuting an FCA claim does not transform the FCA claim into
one based upon tort or tort type rights." An FCA action is based on contract
fraud, not tort, the appeals court said. Moreover, a qui tam action is not intended
to compensate the taxpayer for injuries, but rather is intended to compensate
the government for injuries it suffered as a result of contract fraud. Further
support for this conclusion is found in the statute itself, said the appeals
court. The FCA provides a separate provision for compensating a whistleblower
for retaliation. See 31 U.S.C. � 3730(h).
The appeals court also rejected the taxpayer's argument that his
award was based at least in part on account of personal injuries or sickness.
According to the taxpayer, the percentage to award a qui tam relator (between
15% and 25%) is influenced by whether the relator suffered personal injuries
or sickness. But even if that were true, the appeals court said, the fact remains
that the underlying nature of the claim is the determining factor under � 104(a)(2).
"Regardless of whether a qui tam plaintiff received fifteen percent or twenty-five
percent of the proceeds recovered by the government, the fact that he receives
anything at all is on account of his decision to bring the lawsuit on behalf
of the government, and not on account of any personal injuries inflicted upon
him," the appeals court held. Thus, the appeals court affirmed the lower court's
judgment in favor of the government.
Brooks v. United States, No. 03-5610 (6th Cir. Sept. 10,
2004). To read the case, go to http://pacer.ca6.uscourts.gov/opinions.pdf/04a0307p-06.pdf