James Alderson v. United States
686 F.3d 791
9th Cir.2012Background
- In 1993, James Alderson filed a qui tam FCA action against Quorum Health Group, Inc. and related entities; the United States intervened in 1998 and settled against HCA for $631 million in 2003 with Alderson receiving 16% as relator’s share.
- Alderson and family reported the relator’s share as ordinary income on their 2003 tax returns; they amended to claim capital gain and sought refunds of about $5 million.
- Alderson transferred 40% of his relator’s share to a family partnership in 1999, retaining 60%; wife and children received interests in the partnership.
- Valuation for gift transfer to children occurred in 1999 with an appraised value of about $3,047,356 used to file gift tax returns.
- In 2003, the three related couples reported partnership income and treated it as ordinary income; in 2007 they amended to treat it as capital gain; the IRS denied refunds and the district court granted summary judgment for the government.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Relator’s share: ordinary income or capital gain? | Alderson | United States | Relator's share is ordinary income. |
| Was there a sale or exchange of a capital asset to receive the share? | Alderson | United States | No sale or exchange; not a capital asset. |
| Is the relator’s right itself a capital asset under §1221(a)? | Alderson | United States | Relator’s right is not a capital asset. |
Key Cases Cited
- Vermont Agency of Natural Resources v. United States ex rel. Stevens, 529 U.S. 765 (U.S. 2000) (relator’s bounty described as a fee from recovery)
- United States v. Maginnis, 356 F.3d 1179 (9th Cir. 2004) (two factors to identify a capital asset; factors not satisfied here)
- Comm'r v. Gillette Motor Transp., Inc., 364 U.S. 130 (U.S. 1960) (capital asset definition narrowly construed)