Patrick v. Commissioner
799 F.3d 885
7th Cir.2015Background
- Craig Patrick, a former Kyphon reimbursement manager, filed a qui tam False Claims Act suit alleging Kyphon marketed a kyphoplasty as an inpatient procedure to obtain larger Medicare reimbursements.
- The United States intervened and settled with Kyphon for over $75 million based largely on Patrick’s nonpublic information; Patrick received about $5.9 million as his relator’s share.
- Patrick also brought related qui tam suits against hospitals; those settlements yielded about $900,000 to Patrick.
- On 2008 and 2009 joint returns the Patricks reported these recoveries as capital gains; the IRS determined they were ordinary income and issued deficiency notices.
- The Tax Court agreed with the IRS; the appeals court affirmed, holding the relator’s share is a bounty/reward for services and not a capital-gain realization.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether a relator’s share of a qui tam recovery is a “gain from the sale or exchange of a capital asset” (capital gain) under 26 U.S.C. § 1222 | Patrick: the recovery is a capital gain — based on his property/interest in the information or his right to a share of recovery | IRS/United States: the recovery is a bounty/reward for services—compensation for investigative and prosecutorial work, therefore ordinary income | Held: Ordinary income. The relator’s share is compensation for services, not a capital asset sale/exchange. |
Key Cases Cited
- Vt. Agency of Natural Res. v. United States ex rel. Stevens, 529 U.S. 765 (2000) (describes relator’s share as a bounty/fee from the Government’s recovery)
- Alderson v. United States, 686 F.3d 791 (9th Cir. 2012) (holds relator’s share is ordinary income as a bounty for filing qui tam suits)
- Canal-Randolph Corp. v. United States, 568 F.2d 28 (7th Cir. 1977) (payments for services constitute ordinary income)
- Bouchard v. Comm’r, 229 F.2d 703 (7th Cir. 1956) (compensation for services taxed as ordinary income)
- Comm’r v. Gillette Motor Transp., Inc., 364 U.S. 130 (1960) (capital gain normally reflects appreciation of a capital investment over time)
- Kaiser Aetna v. United States, 444 U.S. 165 (1979) (property requires exclusionary rights to qualify as capital asset)