Campbell v. Commissioner
2011 U.S. App. LEXIS 19745
| 11th Cir. | 2011Background
- Campbell received a net $5.25 million qui tam reward for two FCA suits against Lockheed Martin.
- The FCA award was issued as a Form 1099-MISC and the attorney fees of $3.5 million were deducted before Campbell received the net amount.
- Campbell reported the $5.25 million as “other income” but did not include it in taxable income on line 40 of the tax return.
- The IRS issued a deficiency notice in 2007 for failure to include the $5.25 million in gross income and for an accuracy-related penalty.
- The Tax Court ruled for the Commissioner on both taxability and penalty issues, and the Eleventh Circuit affirmed, holding the entire amount includable as gross income and the penalty applicable.
- Campbell is a sophisticated taxpayer with a background in accounting and experience at Lockheed Martin, including a role as chief of cost control.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Taxability of qui tam reward as gross income | Campbell: reward is excludable under FCA/legislation | Commissioner: there is no exclusion; reward taxable as gross income | Qui tam reward includable in gross income |
| Penalty for underpayment under I.R.C. § 6662 | Disclosures and good faith/reasonable cause negate penalty | No reasonable basis or adequate disclosure; substantial understatement | 20% accuracy-related penalty upheld |
| Exceptions to the 6662 penalty | Relies on substantial authority, adequate disclosure, or reasonable basis | No substantial authority, disclosure, or reasonable basis exists | No exception applied; penalty affirmed |
| Reasonable cause and good faith under 6664(c) | Sophisticated taxpayer could rely on law; good faith | Lacked reasonable cause and good faith | No reasonable cause or good faith; penalty sustained |
Key Cases Cited
- Vermont Agency of Natural Resources v. U.S. ex rel. Stevens, 529 U.S. 765 (2000) (standing to sue under FCA; assignment, no tax implications moonlighting)
- Roco v. Comm'r, 121 T.C. 160 (2003) (qui tam rewards are taxable as gross income; rewards ≠ penalties)
- Brooks v. United States, 383 F.3d 521 (6th Cir. 2004) (qui tam awards includable in gross income; §104(a)(2) not applicable)
- Trantina v. United States, 512 F.3d 567 (9th Cir. 2008) (tax treatment of qui tam awards; ordinary income vs capital gain)