The Eleventh Circuit held that qui tam payments that a whistleblower received were includible in income. It further held that the whistleblower, who had included the payments on his return as other income but had not included them in the calculation of his tax due, had not acted in good faith and was liable for a 20% accuracy-related penalty.
Background
Until 1995, Albert Campbell was the chief of cost control for a $3.5 billion contract his employer had with the U.S. government. In 1995, Campbell became a whistleblower against his former employer (Lockheed). On behalf of the government, he filed two lawsuits under the Federal Claims Act, asserting that Lockheed had defrauded the United States. 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. The government wired the money to Campbell’s attorneys, who subtracted their 40% fee of $3.5 million and sent Campbell a check for the balance of $5.25 million.
The Justice Department issued Campbell a Form 1099-MISC, Miscellaneous Income, for $8.75 million. On his self-prepared return for 2003, Campbell entered the $5.25 million net qui tam payment on line 21 as “other income” but omitted the amount from the calculation of taxable income on line 40. He 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 attorneys’ fees was not taxable income and that the $5.25 million net qui tam payment was excludible from his taxable income.
In 2007, the IRS sent Campbell a notice of deficiency (1) for failing to include the $5.25 million qui tam payment in his gross income and (2) for an accuracy-related penalty because his exclusion of the qui tam payment resulted in a substantial understatement of income tax. Campbell contested the IRS’s determination in Tax Court, which held in favor of the IRS.
Campbell appealed the decision to the Eleventh Circuit. Campbell argued, relying on Vermont Agency of Natural Res. v. United States ex rel. Stevens, 529 U.S. 765 (2000), that the qui tam claim was an assignment of the United States’ reimbursement claim to him 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 stood in the shoes of the U.S. government in pursuing the claim. Campbell argued that he was not liable for an accuracy-related penalty because he had disclosed the payment on the face of his return and on Form 8275, there was reasonable cause for omitting the payment from income, and he had acted in good faith.
Eleventh Circuit’s Decision
The Eleventh Circuit held that the qui tam payment was includible in Campbell’s income. The court rejected Campbell’s assignment argument on the grounds that in Vermont Agency the Supreme Court, while finding that a relator in a qui tam claim has standing to assert the injury-in-fact suffered by the government, did not rule on whether a qui tam payment was taxable. Consistent with the decisions of the Tax Court and other circuit courts that have addressed the issue, the Eleventh Circuit found that a qui tam payment is in the nature of a reward and as such is includible in gross income.
Regarding the accuracy-related penalty, the court gave Campbell no credit for disclosing the payment on line 21 of his return and on Form 8275. It stated that Campbell had not disclosed the payment in good faith and with reasonable cause by mentioning it in two places while omitting the payment from income in the calculation of his tax due, calling his efforts “an overt and intentional act to underpay.” The court also found that besides his inadequate disclosure of the payment, he did not qualify for either of the exceptions to the imposition of the accuracy-related penalty because he had not cited any authorities actually supporting his claim that the qui tam payment was not includible in income and that he had not consulted a tax professional when preparing his return to determine if his treatment of the payment was correct.
Reflections
Taxpayers cannot use a Form 8275 disclosure as an all-purpose talisman to ward off the imposition of an accuracy-related penalty, as this case demonstrates. Tax practitioners should be aware of the limited utility of a disclosure and make sure that clients who are making a disclosure understand the extent of the protection that it provides.
Campbell, No. 10-13677 (11th Cir. 9/28/11)
