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Sixth Circuit Holds Whistleblower Not Entitled To Income Tax Exclusion For Personal Injury Compensation On Qui Tam Award


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 against him.

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

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