Emmanuel L. Roco v. Commissioner , 121 T.C. No. 10 ( 2003 )

121 T.C. No. 10
UNITED STATES TAX COURT
EMMANUEL L. ROCO, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8470-01. Filed September 11, 2003.
Petitioner (P) sued the New York University
Medical Center (NYUMC) in a qui tam action under the
False Claims Act, 31 U.S.C. secs. 3729-3733 (2000).
NYUMC agreed to pay $15,500,000 to the United States to
settle the case. The United States paid $1,568,087 of
the settlement proceeds to P in 1997.
The parties dispute whether the $1,568,087 qui tam
payment is includable in P’s gross income for 1997.
Held: The $1,568,087 payment is includable in P’s
gross income for 1997.
Held, further, P is liable for the accuracy-
related penalty under sec. 6662(a), I.R.C., for 1997.
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Emmanuel L. Roco, pro se.
Patricia A. Riegger, for respondent.
COLVIN, Judge: Respondent determined a deficiency in
petitioner’s 1997 Federal income tax of $610,446 and an accuracy-
related penalty under section 6662(a) of $122,093.
Petitioner sued the New York University Medical Center
(NYUMC) in a qui tam1 action under the False Claims Act (FCA), 31
U.S.C. secs. 3729-3733 (2000). In the qui tam action, petitioner
claimed that NYUMC had submitted false information to the United
States which resulted in a substantial overpayment of Federal
funds to NYUMC. NYUMC agreed to pay $15,500,000 to the United
States in settlement of the case. The United States paid
petitioner $1,568,087 in 1997 as his share of the settlement
proceeds.
The issues for decision are:
1. Whether the $1,568,087 payment that petitioner received
from the United States in 1997 is includable in gross income. We
hold that it is.
2. Whether petitioner is liable for the accuracy-related
penalty under section 6662(a) for 1997. We hold that he is.
1
Qui tam is short for the Latin phrase “qui tam pro domino
rege quam pro se ipso in hac parte sequitur”, which means "who
pursues this action on our Lord the King's behalf as well as his
own.” Vt. Agency of Natural Resources v. United States, 529 U.S.
765, 768 n.1 (2000).
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Unless otherwise specified, section references are to the
Internal Revenue Code as amended.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
A. Petitioner and His Spouse
Petitioner resided in Merrick, New York, when he filed the
petition in this case.
Petitioner and his wife, Milagros Roco (Mrs. Roco), have
been married since January 24, 1971. Both petitioner and Mrs.
Roco are accountants and have accounting degrees from the
University of the East, Manila, the Philippines. Petitioner was
employed as an accountant by NYUMC in New York, New York, from
1974 to 1992. Mrs. Roco has worked as an income tax auditor for
the State of New York Department of Taxation and Finance since
1977. She began training others to do tax audits in 1988.
B. Qui Tam Actions
Congress enacted the FCA in 1863. Act of Mar. 2, 1863, ch.
67, 12 Stat. 696. Under the FCA, either the United States or a
private person (the relator) may bring an action, known as a qui
tam action, against any person who knowingly presents to the
Government a false or fraudulent claim for payment. 31 U.S.C.
secs. 3729(a) and 3730(b)(1). The relator in a qui tam action is
the agent of the United States, in whose name the suit is
brought. 31 U.S.C. sec. 3730(b); Vt. Agency of Natural Resources
v. United States, 529 U.S. 765, 772 (2000). The relator may
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recover attorney’s fees and a share of the Government’s recovery
if the claim is successful. 31 U.S.C. sec. 3730(d)(1) and (2).
C. Petitioner’s Lawsuit Against NYUMC
Petitioner was fired by NYUMC in 1992 after he told his
superiors that he believed NYUMC had substantially overcharged
the United States. In 1993, petitioner, acting as the relator,
filed a qui tam action against NYUMC in the U.S. District Court
for the Southern District of New York. In that case, petitioner
alleged that, from 1984 to 1993, NYUMC submitted false
information and overcharged the United States for costs
associated with federally sponsored research grants and Medicaid,
Medicare, and Blue Cross/Blue Shield reimbursements. Petitioner
researched the law concerning qui tam actions, drafted the
complaint, and appeared pro se in the qui tam proceeding.
The U.S. Attorney for the Southern District of New York
intervened in the case. The case was settled in April 1997.
Under the settlement, NYUMC agreed to pay the United States
$15,500,000, and the United States paid petitioner $1,568,087 on
May 13, 1997. Petitioner, NYUMC, and the United States
stipulated:
The United States agrees to pay the Relator pursuant to
31 U.S.C. section 3730(d)(1), $1,568,087 within a
reasonable time following receipt of the full
settlement amount from defendant as described in
paragraph 2. * * * This Stipulation does not in any
manner affect any Claims the United States has or may
have against the Relator arising under title 26 of the
United States Code (“Internal Revenue Code”) and the
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regulations promulgated thereunder, or from any
obligations created by this Stipulation.
Petitioner asked Deborah Pugh (Pugh), the Department of
Justice attorney who handled the qui tam case, whether the qui
tam payment was includable in gross income for Federal income tax
purposes. She told him she did not know and recommended that he
consult an attorney. Petitioner asked Pugh to omit the paragraph
quoted above, but she declined to do so. The Department of
Justice issued to petitioner a Form 1099-MISC, Miscellaneous
Income, showing that it had paid him $1,568,087 in 1997.
D. Petitioner’s Efforts To Determine the Tax Treatment of the
Qui Tam Payment
Petitioner and Mrs. Roco believed that their accounting and
tax backgrounds were sufficient to enable them to correctly
determine whether the qui tam payment was includable in gross
income for Federal income tax purposes. Petitioner and Mrs. Roco
researched tax cases, the Internal Revenue Code, Internal Revenue
Service (IRS) regulations, tax publications, and tax treatises.
Petitioner and Mrs. Roco correctly concluded that none of those
authorities discuss whether payments to a relator in a qui tam
case are includable in the relator’s gross income. Mrs. Roco
told petitioner that she thought the qui tam payment was probably
not includable in gross income.
After he received the Form 1099-MISC, petitioner requested a
private letter ruling from the IRS on July 23, 1997, as to the
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income tax consequences of the qui tam payment he received.
Petitioner’s request was assigned to Sheldon Iskow (Iskow). In
August 1997, Iskow told petitioner that there were no court cases
holding that qui tam payments are includable in gross income.
Iskow also told petitioner that he believed a qui tam payment is
taxable because it is analogous to a reward, and that the IRS
would rule that the qui tam payment was taxable unless petitioner
provided legal authorities for his position or withdrew his
request for a ruling. Petitioner withdrew the letter ruling
request.
E. Petitioner’s 1997 Tax Returns
Petitioner made no estimated tax payments to the United
States in 1997 relating to the qui tam payment, but he did make
an estimated tax payment of $80,500 to the State of New York.
Mrs. Roco helped petitioner prepare and file his Form 1040,
Individual Income Tax Return, for 1997. Petitioner did not
report the qui tam payment on his State and Federal returns for
1997.
Petitioner and Mrs. Roco filed joint Federal returns for
1995, 1996, 1998, 2000, and 2001, but they filed separate returns
for 1997. They expected respondent to discover that petitioner
had not reported the $1,568,087 payment by matching the Form
1099-MISC with his 1997 return, and that respondent would decide
to audit petitioner’s 1997 return. Mrs. Roco believed she might
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lose her job if she owed substantial tax for failing to report
the qui tam payment.
The IRS began the examination of petitioner’s 1997 income
tax return in 1999.
OPINION
A. Whether the $1,568,087 Qui Tam Payment Is Includable in
Income
We first decide whether the $1,568,087 payment made by the
United States to petitioner in the qui tam action is includable
in petitioner’s gross income.
The qui tam payment to petitioner was the equivalent of a
reward for petitioner’s efforts to obtain repayment to the United
States of overcharges by NYUMC. Rewards are generally includable
in gross income. Sec. 1.61-2(a), Income Tax Regs.
Petitioner contends that, if qui tam payments are includable
in gross income, taxpayers will be discouraged from bringing
actions under the FCA. We disagree that this possibility
justifies holding for petitioner. Petitioner’s point could also
be made with respect to taxing any reward, but rewards are
clearly includable in gross income under section 1.61-2(a)(1),
Income Tax Regs.
Petitioner contends that the $1,568,087 qui tam payment is
not includable in gross income because it is not gain derived
from capital or labor. See Eisner v. Macomber, 252 U.S. 189, 207
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(1920).2 We disagree. Gross income includes all income from
whatever source derived unless excluded by law. Sec. 61;
Commissioner v. Kowalski, 434 U.S. 77, 82-83 (1977); Commissioner
v. Glenshaw Glass Co., 348 U.S. 426, 430 (1955). The Internal
Revenue Code provides no exclusion from gross income for proceeds
received by a relator in a qui tam proceeding. In Eisner v.
Macomber, supra, the Supreme Court decided that a shareholder-
taxpayer did not realize gain on the receipt of a stock dividend.
The Supreme Court said that income is “‘gain derived from
capital, from labor, or from both combined,’” id. at 207 (quoting
Doyle v. Mitchell Bros. Co., 247 U.S. 179, 185 (1918)), but it
does not include “enrichment through increase in value of capital
investment”, id. at 214-215.
Neither qui tam payments nor punitive damages are intended
to compensate the recipient for actual damages. Punitive damages
are includable in gross income. O'Gilvie v. United States, 519
U.S. 79, 90 (1996); Commissioner v. Glenshaw Glass Co., supra.
In Commissioner v. Glenshaw Glass Co., supra at 430-431, the
Supreme Court said that gross income includes all accessions to
wealth and that the definition of income in Eisner v. Macomber,
supra, “was not meant to provide a touchstone to all future gross
2
At trial petitioner suggested that a qui tam payment is a
nontaxable share in the recovery of a reimbursement. However, we
do not consider this theory because petitioner did not explain or
argue it on brief.
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income questions.” Commissioner v. Glenshaw Glass Co., supra at
431. The payment to a relator in a qui tam action is not a
penalty imposed on the wrongdoer; instead, it is a financial
incentive for a private person to provide information and
prosecute claims relating to fraudulent activity. United States
ex rel. Semtner v. Medical Consultants, Inc., 170 F.R.D. 490, 495
(W.D. Okla. 1997); Biddle & Matricciani, “Whistleblower Lawsuits-
-Health Care Billing Fraud Cases,” 36 Md. B.J. 3 (Jan/Feb. 2003);
Cavanaugh, “False Claims Act: Failure To Seek Legal Advice Not a
Violation of the FCA,” 30 J.L. Med. & Ethics 318 (Summer 2002).
We conclude that the $1,568,087 qui tam payment that
petitioner received in 1997 is includable in gross income.
B. Whether Petitioner Is Liable for the Accuracy-Related
Penalty Under Section 6662(a)
1. Burden of Production
Taxpayers are liable for a penalty equal to 20 percent of
the part of the underpayment attributable to any substantial
understatement of income tax. Sec. 6662(a) and (b)(2). An
understatement is reduced to the extent that it is (1) based on
substantial authority or (2) adequately disclosed on the return
or in a statement attached to the return and there is a
reasonable basis for the tax treatment of that item. Sec.
6662(d)(2)(B)(ii); sec. 1.6662-3(c), Income Tax Regs. A taxpayer
may be relieved of liability for the accuracy-related penalty if
the taxpayer shows that he or she had reasonable cause for the
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understatement and acted in good faith. Sec. 6664(c)(1); sec.
1.6664-4(a), Income Tax Regs.
Respondent bears the burden of production with respect to
petitioner’s liability for the accuracy-related penalty under
section 6662(c) because the examination in this case commenced
after July 22, 1998, the effective date of section 7491.
Internal Revenue Service Restructuring and Reform Act of 1998,
Pub. L. 105-206, sec. 3001(c), 112 Stat. 727. Petitioner
erroneously failed to include in his gross income the $1,568,087
qui tam payment. Thus, respondent has met the burden of
production. H. Conf. Rept. 105-599, at 241 (1998), 1998-3 C.B.
747, 995.
2. Petitioner’s Contentions
Petitioner contends that he made a good faith and reasonable
effort to assess his proper tax liability by discussing it with
Mrs. Roco and researching tax cases, the Internal Revenue Code,
IRS regulations, tax publications, and tax treatises to determine
whether the qui tam payment was includable in gross income for
Federal income tax purposes. He also contends that his failure
to report the qui tam payment on his 1997 return was reasonable
because he expected respondent to audit his 1997 return after
respondent matched the Form 1099-MISC with his return and
discovered that he had not reported the $1,568,087 payment. We
disagree.
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Petitioner received a Form 1099-MISC for the qui tam payment
and expected respondent to audit his return. Triggering an audit
by omitting income reported on a Form 1099 is not a good faith
attempt to comply with the tax laws. Petitioner’s claim that he
was merely seeking to test the income tax laws is not credible
because he failed to disclose the payment on his return.
Petitioner contends that the language in Eisner v. Macomber,
supra, to the effect that income includes only proceeds from
labor or capital, provides substantial authority for his position
that the qui tam payment was not includable in gross income. We
disagree. A taxpayer has substantial authority for his or her
position if the weight of authority in support of the taxpayer’s
position is substantial in relation to the weight of authorities
supporting contrary positions. Antonides v. Commissioner, 91
T.C. 686, 702 (1988), affd. 893 F.2d 656 (4th Cir. 1990). The
description of income in Eisner v. Macomber, 252 U.S. 189 (1920),
clearly is inapplicable here. See, e.g., Commissioner v.
Glenshaw Glass Co., 348 U.S. at 431; Helvering v. Bruun, 309 U.S.
461 (1940); United States v. Kirby Lumber Co., 284 U.S. 1 (1931).
The Supreme Court has limited Eisner v. Macomber, supra, chiefly
to the taxability of stock dividends. See Helvering v.
Griffiths, 318 U.S. 371, 373, 375, 394 (1943). We conclude that
Eisner v. Macomber, supra, is not substantial authority for
petitioner’s position here.
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Petitioner’s withdrawal of his request for a letter ruling
upon learning that it would be adverse does not suggest he
exercised good faith. The bona fides of his claim of reliance on
Mrs. Roco, who held (and holds) a responsible tax law enforcement
position with New York State, is undermined by the fact that she
did not act consistently with what she told him; i.e., she filed
separately for 1997, unlike their practice for prior years.
We conclude that petitioner did not act in good faith in
claiming that the 1997 qui tam payment was nontaxable, and that
he is liable for the accuracy-related penalty under section
6662(a).
To reflect the foregoing,
Decision will be entered for
respondent.