Barnes v. United States
| Decision Date | 14 January 2019 |
| Docket Number | Civil Action No. 4:17-cv-00902-O |
| Parties | Sharon BARNES and Duncan Barnes, Plaintiffs, v. UNITED STATES of America, Defendant. |
| Court | U.S. District Court — Northern District of Texas |
Carolyn Jean Dove, Jeffrey David Lerner, The Dove Firm PLLC, Arlington, TX, for Plaintiffs.
Michelle C. Johns, US Department of Justice, Dallas, TX, for Defendant.
Before the Court are Plaintiffs Sharon and Duncan Barnes' Motion for Summary Judgment (ECF No. 16) and Defendant United States of America's Motion for Summary Judgment (ECF No. 19). The motions are fully briefed and ripe for review. Having considered the motions, briefing, and applicable law, the Court finds that Defendant's Motion for Summary Judgment (ECF No. 19) should be and is hereby GRANTED and Plaintiffs' Motion for Summary Judgment (ECF No. 16) should be and is hereby DENIED .
The following facts are undisputed. See Joint Stipulation, ECF No. 15. On April 4, 2012, Sharon Shadic (whose married name is now Sharon Barnes) filed a qui tam action in the United States District Court for the Southern District of New York, captioned United States of America ex rel. Sharon Shadic v. UFC Aerospace, United Fastener Company, Inc. and Douglas B. Davis, on behalf of the United States of America , pursuant to the qui tam provisions of the False Claims Act, 31 U.S.C. § 3730(b). In that case, the United States sought to recover damages and penalties from defendants under Section 3729, et seq. of the False Claims Act ("FCA"), arising from Defendant UFC misrepresenting itself as a woman-owned small business to obtain government contracts.
The United States intervened in the qui tam action filed by Sharon Shadic on or about October 5, 2015. Shortly thereafter, a Stipulation and Order of Settlement and Dismissal was entered into by the United States, Sharon Shadic (as Relator), and the Defendants in the qui tam action, which called for a settlement payment from Defendants to the United States in the total amount of $ 20,015,956.92. The United States and Sharon Shadic simultaneously entered into a Stipulation and Order of Settlement and Release in which it was agreed that Sharon Shadic was entitled to receive $ 3,602,872.25, or 18%, of the total settlement payment. The Release provides that it "does not resolve or in any manner affect any claims the United States has or may have against the Relator arising under Title 26, U.S. Code (Internal Revenue Code), or any claims arising under this U.S. Relator Release Stipulation."
Plaintiffs Sharon and Duncan Barnes timely filed a joint Form 1040 for the 2015 tax year, reporting the $ 3.6 million relator award on Schedule C, Profit or Loss from Business. The Barnes paid income tax in the amount of $ 914,922.00. Plaintiffs then timely filed an amended Form 1040X for the 2015 tax year, seeking a refund of federal income tax of $ 875,005.00 plus statutory interest, on the basis that settlement proceeds from a qui tam action are not taxable income. The Commissioner of Internal Revenue Service disallowed all but $ 67,912.00 of the amount claimed as a refund. The IRS proposed to re-characterize the relator share award from net business income/profits on Schedule C to Form 1040, line 21, "Other Income," resulting in a refund of $ 67,921.00 of self-employment taxes reported and paid. Plaintiffs Sharon and Duncan Barnes subsequently timely filed this suit for a refund. Before the Court are the parties' cross-motions for summary judgment. ECF No. 16; ECF No. 20.
Summary judgment is proper when the pleadings and evidence on file show "that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." FED. R. CIV. P. 56(a). "[T]he substantive law will identify which facts are material." Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A genuine dispute as to a material fact exists "if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Id. The movant makes a showing that there is no genuine dispute as to any material fact by informing the court of the basis of its motion and by identifying the portions of the record which reveal there are no genuine material fact issues. Celotex Corp. v. Catrett , 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) ; FED. R. CIV. P. 56(c).
When reviewing the evidence on a motion for summary judgment, the court must resolve all reasonable doubts and inferences in the light most favorable to the non-movant. See Walker v. Sears, Roebuck & Co. , 853 F.2d 355, 358 (5th Cir. 1988). The court cannot make a credibility determination in light of conflicting evidence or competing inferences. Anderson , 477 U.S. at 255, 106 S.Ct. 2505. If "reasonable minds could differ as to the import of the evidence" regarding the disputed allegations, the motion for summary judgment must be denied. Id. at 250, 106 S.Ct. 2505.
Plaintiffs move for summary judgment, arguing that a qui tam recovery is not subject to taxation. Br. Supp. Pls.' Mot. Summ. J. 1, ECF No. 17. In the alternative, Plaintiffs argue that qui tam settlement proceeds are taxable as capital gains rather than as ordinary income. Id. Defendant's Motion for Summary Judgment contends that qui tam awards are taxable income. Br. Supp. Def.'s Mot. Summ. J. 5, ECF No. 20. Defendant also argues that qui tam awards are taxed as ordinary income, not capital gains. Def.'s Resp. Pls.' Mot. Summ. J. 4, ECF No. 21. These cross-motions present the Court with two legal issues. First, whether a relator's qui tam award is subject to federal income tax. And if so, whether the award is subject to ordinary income or capital gains treatment.
Plaintiffs argue that proper application of the "origin of the claim" doctrine would show that a qui tam award is not subject to taxation. Br. Supp. Pls.' Mot. Summ. J. 3, ECF No. 17. Plaintiffs' argument rests on four premises: (1) under the origin of the claim doctrine, taxability is determined by the origin and nature of the claim to which the recovery relates; (2) assignment does not change the character of proceeds for tax purposes; (3) pursuant to the Supreme Court's holding in Vermont Agency of Nat. Resources v. U.S. ex rel. Stevens , 529 U.S. 765, 120 S.Ct. 1858, 146 L.Ed.2d 836 (2000), by filing an action under the FCA, the relator effects a partial assignment of the Government's claim for damages; and (4) the United States does not pay taxes. Br. Supp. Pls.' Mot. Summ. J. 3-4, ECF No. 17. Therefore, Plaintiffs contend that "the partial assignment of the Government's claim to the relator does not alter the non-taxable character of the original claim." Id. For Plaintiffs, any "recovery retains its nontaxable character, whether or not the recipient of the damages is the injured party." Id. Finally, Plaintiffs argue that taxing the relator's award violates the terms of the FCA by effectively increasing the Government's share of the recovery beyond the FCA's 85% statutory cap. Id. at 13.
Defendant responds that, even under the origin of the claim doctrine, qui tam payments are subject to taxes. Def.'s Resp. Pls.'s Mot. Summ. J 2, ECF No. 21. Because qui tam awards compensate for personal services, and are really a bounty or a fee, Defendant argues they constitute ordinary income. Br. Supp. Def.'s Mot. Summ. J. 6, ECF No. 20. Moreover, Defendant contends that in Vermont Agency , the Supreme Court "merely held that the FCA effects a partial assignment of the claim for purposes of standing." Def.'s Resp. Pls.'s Mot. Summ. J 3, ECF No. 21. Finally, Defendant rejects the argument that Plaintiffs should be treated as co-equals with the Government and therefore not be taxed on their award. Id. Defendant argues that the relator acts as an instrumentality of the Government and that the claim belongs to the Government as the injured party. Id.
The Internal Revenue Code ("IRC") broadly defines gross income as "all income from whatever source derived." 26 U.S.C. § 61(a). The Supreme Court has emphasized the "sweeping scope" of the section and notes "that exclusions from income must be narrowly construed." Commissioner v. Schleier , 515 U.S. 323, 327, 115 S.Ct. 2159, 132 L.Ed.2d 294 (1995) (quoting United States v. Burke , 504 U.S. 229, 248, 112 S.Ct. 1867, 119 L.Ed.2d 34 (1992) (Souter, J., concurring in judgment) ). The IRC does not exclude qui tam awards from gross income and the Fifth Circuit has never addressed whether qui tam payments are includable in gross income. However, at least four circuit courts have held that qui tam payments are includable in gross income. See Patrick v. Commissioner , 799 F.3d 885, 888 (7th Cir. 2015) (); Alderson v. United States , 686 F.3d 791, 798 (9th Cir. 2012) (); Campbell v. Commissioner , 658 F.3d 1255, 1258 (11th Cir. 2011) (); Brooks v. United States , 383 F.3d 521, 525 (6th Cir. 2004) ().
Here, the Court finds that qui tam awards are gross income under 26 U.S.C. § 61(a). A qui tam award is a bounty or a reward that the relator receives for uncovering a fraud and bringing the suit, making it subject to taxation. See 26 U.S.C. § 61(a). Text and precedent confirm this. The qui tam provisions of the FCA were "enacted in 1863 to combat fraud by Civil War defense contractors," and authorized "private citizens (called relators) to sue on behalf of the government and, as a bounty, share in any recovery." U.S. ex rel. Newell v. City of St. Paul, Minn. , 728 F.3d 791, 794 (8th Cir. 2013). "Many of the early qui tam statutes allowed citizens to keep part of the recovery gotten by the government as a reward for...
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