Trials & Litigation

9th Circuit Says $27M Whistle-Blower Award Is Taxed as Ordinary Income

A former chief financial officer for a Montana hospital eventually reaped a $27 million benefit by blowing the whistle on his former employer’s accounting fraud.

But James Alderson’s reward from filing qui tam suit under the federal False Claims Act is taxed as ordinary income, not under the lower capital gains tax rate, a federal appeals court ruled in a Wednesday opinion (PDF).

Affirming a federal district court’s summary judgment for the government in the tax case, the San Francisco-based 9th U.S. Circuit Court of Appeals held that the bounty Alderson received after he persuaded the feds to intervene in his case against HCA Healthcare and a $631 million settlement resulted wasn’t a payment for the sale of property, to which capital gains tax typically does apply.

“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,” the appeals court pointed out in its opinion, explaining that Alderson had gone to considerable effort to establish the merits of the case before the feds got interested in it.

Reuters reported court was similarly unpersuaded by Alderson’s alternative argument that the information he provided the government was a capital asset that increased in value as the case went on, and that his $27 million payout was a capital gain.

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