Walter Page v. USA

Citation718 F.Supp.2d 1186
Decision Date27 May 2010
Docket NumberNo. CV09-6155 SVW (MLGx).,CV09-6155 SVW (MLGx).
PartiesJames F. and Connie B. ALDERSON; Justin W. and Kristen N. Alderson; and Jennifer A. and Walter Page, Plaintiffs, v. UNITED STATES of America, Defendant.
CourtU.S. District Court — Central District of California

OPINION TEXT STARTS HERE

COPYRIGHT MATERIAL OMITTED.

David B. Porter, Robert Warren Wood, Wood & Porter, San Francisco, CA, for Plaintiffs.

Thomas Derrick Coker, AUSA-Office of U.S. Attorney, Los Angeles, CA, for Defendant.

ORDER GRANTING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT [11]; DENYING PLAINTIFFS' MOTION FOR SUMMARY JUDGMENT [17]

STEPHEN V. WILSON, District Judge.

I. INTRODUCTION

Plaintiffs seek to obtain a tax refund by characterizing their False Claims Act qui tam award as capital gains rather than ordinary income. Plaintiffs' Complaint presents a question of first impression

II. FACTS

Plaintiff Jim Alderson was the Chief Financial Officer for the North Valley Hospital in Whitefish, Montana. Beginning in 1990, Quorum Health Group, Inc. (“Quorum”) took over management of the hospital. Quorum instructed Alderson to retain two sets of cost reports: one to submit to the federal government's Medicare program when seeking reimbursements and another to submit to the hospital's auditors. Quorum requested that the Medicare books contain more aggressive cost reporting in order to increase the amount of proceeds received from Medicare.

When Alderson refused to maintain the separate sets of books, he was fired. He then brought a wrongful termination action, which settled in late 1993. In the course of discovery during the wrongful termination proceedings, certain Quorum officials' testimony suggested that Quorum was engaged in Medicare fraud.

In January 1993, Alderson filed a qui tam False Claims Act action against Quorum and related entities. The Department of Justice interviewed Alderson about the lawsuit in 1993, and ultimately decided to intervene in the action five years later. The United States then severed the actions against Quorum and its affiliate Hospital Corporation of America (“Hospital Corporation”). 1 The present lawsuit only relates to the qui tam action against Hospital Corporation.

In 1999, Alderson formed the Alderson Family Limited Partnership and transferred to the partnership 40% of his interest in the qui tam claim against Hospital Corporation. Alderson then transferred 49% shares in the Alderson Family Limited Partnership to each of his children and retained 1% shares in the Alderson Family Limited Partnership for himself and his wife. 2 In order to calculate the gift taxes owed on the transfer to the children, Alderson hired an appraiser to estimate the value of the qui tam claim. Plaintiffs submit evidence showing that the appraiser valued the claim at slightly more than $3,000,000.

In June 2003, the United States and Hospital Corporation settled the False Claims Act suit involving Medicare fraud. The district court awarded Plaintiff 16% of the settlement proceeds. Plaintiffs received a total of $27,105,035 as a result of the settlement.

After receiving these funds, all of the Plaintiffs initially reported their qui tam recovery as ordinary income. They now seek to recharacterize the income as capital gains. They have satisfied the procedural prerequisites for bringing the present action seeking a refund.

III. LEGAL STANDARD

The parties have filed cross-motions for summary judgment. If there were factual disputes, the taxpayer would bear the initial burden of showing that its legal contentions were supported by the evidence; following that initial showing, the burden would shift to the Government. Fed.R.Civ.P. 56(c); 26 U.S.C. § 7491; Celotex Corp. v. Catrett, 477 U.S. 317, 322-24, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). However, [i]n this case, there are no disputes about the material facts; the only question is the legal question of whether ... the [ qui tam recovery] should be taxed as ordinary income [or] as a [ ] capital gain.” See Trantina v. United States, 512 F.3d 567, 570 n. 2 (9th Cir.2008).

Based on the undisputed facts stated above, the Court reaches the following legal conclusions.

A. False Claims Act

In order to fully understand the nature of Plaintiffs' recovery under the False Claims Act, it is necessary to briefly summarize the False Claims Act's structure and purpose.

The False Claims Act establishes liability for [a]ny person” who “knowingly presents, or causes to be presented, to an officer or employee of the United States Government ... a false or fraudulent claim for payment or approval.” Vermont Agency of Natural Resources v. United States ex rel. Stevens, 529 U.S. 765, 769, 120 S.Ct. 1858, 146 L.Ed.2d 836 (2000) (quoting 31 U.S.C. § 3729(a)). Liability is established either by way of a direct suit brought by the Government or a qui tam suit brought by a private plaintiff. Id. (citing 31 U.S.C. § 3730(a)-(b)(1)).

In a qui tam suit, the private plaintiff (known as a “relator”) must file the suit under seal and provide the Government a copy of the pleadings and supporting evidence. Id. (citing 31 U.S.C. § 3730(b)(2)). The Government must decide whether to intervene in the action within sixty days; if the Government initially declines to intervene, it may intervene at a later time upon a showing of good cause. Id. (citing 31 U.S.C. § 3730(b)-(c)).

If the Government fails to intervene and the relator successful proceeds to judgment, the relator is entitled to receive 25 to 30 percent of the recovery (plus fees and costs) and the Government receives the remainder. Id. at 770, 120 S.Ct. 1858 (citing 31 U.S.C. § 3730(d)(2)). If the Government intervenes and the action is “based primarily on disclosures” contained in government reports or news accounts, the relator may recover zero to ten percent of the final judgment, but only if the relator possessed “direct and independent knowledge of the information” upon which the suit was based. See 31 U.S.C. § 3730(d)(1), (e)(4); Graham County Soil and Water Conservation Dist. v. United States ex rel. Wilson, --- U.S. ----, 130 S.Ct. 1396, 1402-04, 176 L.Ed.2d 225 (2010); Rockwell Intern. Corp. v. United States, 549 U.S. 457, 127 S.Ct. 1397, 167 L.Ed.2d 190 (2007). If the Government intervenes and the relevant information was not publicly disclosed prior to the lawsuit, the relator may recover fifteen to twenty-five percent of the of the final judgment. Vermont Agency of Natural Resources, 529 U.S. at 769-70, 120 S.Ct. 1858 (citing 31 U.S.C. § 3730(d)(1)).

The Supreme Court has explained that the relator obtains Article III standing because “the assignee of a claim has standing to assert the injury in fact suffered by the assignor.” Id. at 773, 120 S.Ct. 1858. Under this framework, [t]he [False Claims Act] can reasonably be regarded as effecting a partial assignment of the Government's damages claim.” Id. Therefore, “the relator's bounty” is not merely “the fee he receives out of the United States' recovery for” his services of “filing and/or prosecuting a successful action on behalf of the Government.” See id. at 772, 120 S.Ct. 1858. Rather, as the Court explained, in addition to the relator's recovery based on his services, the False Claims act-like all qui tam actions-“allow [s] informers to obtain a portion of the penalty as a bounty for their information.” Id. at 775, 120 S.Ct. 1858 (emphasis added); see also id. at 776 & nn. 5-7, 120 S.Ct. 1858 (noting history in United States of “several informer statutes expressly authorizing qui tam suits”).

Numerous other courts have characterized the False Claims Act's qui tam provision in various ways, but the common core of their characterizations is that the relator receives a portion of the Government cause of action in exchange for the relator's information and (in some cases) services. The Ninth Circuit has stated that the law “operate[s] as an enforceable unilateral contract” which is “accepted by the relator upon filing suit.” United States ex rel. Kelly v. Boeing Co., 9 F.3d 743, 748 (9th Cir.1993). The Fifth Circuit has explained that, through the Act, “the government seeks to purchase information it might not otherwise acquire.” United States ex rel. Russell v. Epic Healthcare Management Group, 193 F.3d 304, 309 (5th Cir.1999); see also United States ex rel. Hebert v. Dizney, 295 Fed.Appx. 717, 723 (5th Cir.2008) (same) (citable pursuant to Fed. R.App. P. 32.1(a)). The Federal Circuit and the Tax Court have described the qui tam payment as a “reward” provided in exchange for the relator's “efforts,” Roco v. Comm'r, 121 T.C. 160, 165 (2003), and for “successfully bringing suit on behalf of the government.” SKF USA, Inc. v. United States Trade Comm'n, 556 F.3d 1337, 1355-56 (Fed.Cir.2009). The payment “is a financial incentive for a private person to provide information and prosecute claims relating to fraudulent activity.” Id. (citations omitted) (emphasis added).

In short, the overwhelming weight of the caselaw holds that a False Claims Act qui tam award is given in exchange for information and services.

To the extent that there is any doubt about the nature of the qui tam award, it is helpful to focus on the language of the statute, which plainly establishes that the award is a payment in exchange for the relator's information and services. The statute provides three levels of recovery to the relator. If the qui tam suit is “based primarily on disclosures of specific information” disclosed in a government report or the news media, the relator is entitled to up to ten percent of the recovery based on “the significance of the information [provided by the relator] and the role of the [relator] in advancing the case to litigation.” 31 U.S.C. § 3730(d)(1). If the suit is based on nonpublic information and the Government intervenes, then the relator is entitled to 15 to 25 percent “depending upon the extent to which the person substantially contributed to the prosecution of the action.” Id. If the Government does not...

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