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Appeals Court Taxes Whistleblower Bounty as Ordinary Income
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On Wednesday, a federal appeals court ruled that whistleblower bounty for exposing fraud on behalf of the government should be taxed as ordinary income and not at the lower taxation rates meant for capital gains.

The U.S. Court of Appeals for the 9th Circuit considered the issue for the first time, and it found that a $27 million bounty received by whistleblower James Alderson from a government settlement with HCA Healthcare should be taxed as regular income and not as a profit from the sale of an asset.

The case dates back to 1990, when while working as chief financial officer for a Montana hospital, Alderson was asked to prepare two sets of books, one for auditors and one for Medicare reports. Alderson refused and his job was terminated.

  
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Alderson sued for wrongful termination and uncovered evidence of widespread accounting fraud. He later used the evidence to file a qui tam suit under the False Claims Act against HCA Healthcare and affiliated companies.

In 2003, the government settled with HCA for $631 million and Alderson received $27 million as reward. Alderson shared the reward with his family including his two children and his wife, all of whom reported the money as income on their tax returns. However, four years later Alderson and his relatives tried to amend the tax returns and claimed the money was capital gains and not ordinary income. The IRS denied their request and Alderson sued.

The unanimous three-judge panel held, “If Alderson had offered simply to sell or exchange the information to the government in return for a sum of money the government would almost certainly have refused the offer.”

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Alderson also claimed in alternative that the information he provided to the government was a capital asset that increased in value as the case progressed and the reward should be assessed as capital gain. The panel said that the information was not any exclusive property of Alderson, but was also known to other officials at the company.





 

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