Roco v. Comm'r
121 T.C. 160, 121 T.C. No. 10, 2003 U.S. Tax Ct. LEXIS 32 (2003)
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Rule of Law:
Payments received by a private individual (a "relator") under the False Claims Act for bringing a successful qui tam action on behalf of the government constitute gross income and are subject to federal income tax.
Facts:
- Aldo Roco was an accountant employed by New York University Medical Center (NYUMC) from 1974 to 1992.
- Roco was terminated in 1992 after informing his superiors that he believed NYUMC had substantially overcharged the U.S. government.
- In 1993, Roco, acting as a relator, filed a qui tam action against NYUMC under the False Claims Act, alleging the submission of false claims for federal funds.
- The lawsuit was settled in 1997, with NYUMC agreeing to pay the United States $15.5 million.
- Pursuant to the False Claims Act, the United States paid Roco $1,568,087 in 1997 as his statutory share of the settlement proceeds.
- Roco received a Form 1099-MISC from the Department of Justice for the payment.
- Roco and his wife, a state tax auditor, researched the taxability of the payment but found no specific authority addressing qui tam awards.
- Roco did not report the $1,568,087 payment as income on his 1997 federal income tax return.
Procedural Posture:
- Aldo Roco (petitioner) filed a qui tam action against New York University Medical Center in the U.S. District Court for the Southern District of New York.
- The case was settled, resulting in a payment from the United States to Roco.
- Roco did not report the payment on his 1997 federal income tax return.
- The Internal Revenue Service (respondent) determined a tax deficiency of $610,446 and an accuracy-related penalty of $122,093 against Roco.
- Roco filed a petition with the United States Tax Court to contest the deficiency and penalty determinations.
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Issue:
Is a payment received by a relator from the United States as a share of the proceeds from a settled qui tam action under the False Claims Act includable in the relator's gross income?
Opinions:
Majority - Judge Colvin
Yes, the payment is includable in gross income. The court reasoned that gross income is defined broadly under Internal Revenue Code § 61 to include all income from whatever source derived, unless specifically excluded by law. Citing Commissioner v. Glenshaw Glass Co., the court affirmed that this includes all 'accessions to wealth.' The court analogized the qui tam payment to a reward, which is generally taxable, and rejected Roco's reliance on the narrower definition of income from Eisner v. Macomber, noting the Supreme Court has limited that case's application. The payment is not compensation for damages but a financial incentive for a private person to prosecute fraud, similar to punitive damages, which are also considered gross income.
Analysis:
This case establishes a clear precedent for the tax treatment of whistleblower awards under the False Claims Act. By classifying qui tam payments as taxable gross income, the court reinforced the expansive 'accession to wealth' doctrine from Glenshaw Glass Co. and explicitly rejected attempts to use the older, narrower definition of income from Eisner v. Macomber. This decision solidifies the principle that statutory awards and financial incentives, unless specifically exempted by Congress, are subject to taxation. It provides certainty for both the government and future whistleblowers regarding the tax consequences of such awards.
