Blow the Whistle, Pay The Piper: Ninth Circuit Rules Whistleblowers Must Pay Full Tax on Awards As Income

There is a fascinating case out of the United States Court of Appeals for the Ninth Circuit that asks what a whistleblower claim is: a type of capital gain, sale of property, capital asset or just income? James Alderson, a former chief financial officer for a Montana hospital, wanted to pay a lower level of taxes on the $27 million payment that he received by blowing the whistle on his former employer’s accounting fraud. The IRS, however, insisted that such recovery should be treated as simple income and that 9th Circuit agreed.

The Court described the underlying facts:

Alderson was the Chief Financial Officer for North Valley Hospital in Whitefish, Montana, in 1990. That year, Quorum, an affiliate of HCA, began managing the hospital. Quorum asked Alderson to prepare two sets of books, one for the hos- pital’s financial auditors and one to serve as the basis for the hospital’s Medicare cost reports. Alderson refused to prepare separate books. Quorum fired him in September 1990.

In May 1991, Alderson filed a wrongful termination suit. During discovery, Alderson deposed several Quorum officials and obtained sample Medicare cost reports. The depositions and documents suggested widespread accounting fraud. See United States ex rel. Alderson v. Quorum Health Grp. Inc. (Quorum), 171 F. Supp. 2d 1323, 1325 (M.D. Fla. 2001). Alderson settled his wrongful termination suit in 1993.

It took Anderson five years (including his hiring of counsel) to convince the U.S. government to finally act in the case.

Anderson argued that the money from the qui tam suit should be treated as an asset under the lower capital gains tax rate. However, the court ruled that such a claim cannot be treated as a sale of property to the government when he convinced the feds to take the case: “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.” It also rejected the claim that such a case is a capital asset that increased in value as the government proved greater and greater fraud — increasing his share of recovery. In 2003, the government settled the suit against HCA for $631 million. Alderson received a sixteen percent relator’s share or $27,105,035.

The court held:

First, Alderson did not receive his right to a relator’s share in return for an “underlying investment of capital.” . . . Uncovering accounting fraud, receiving documents during discovery, and interpreting those documents are not activities that constitute an investment of capital. Appellants point out that Alderson incurred expenses in acquiring the documents and information that he provided to the government. However, the fact that Alderson incurred expenses is not determinative, for taxpayers routinely incur expenses in the production of ordinary income.

Second, the increase in value between 1993 and 2003 did not “reflect an accretion in value over cost to [the] underlying asset.” The increase in value of Alderson’s relator’s share—of his “underlying asset”—was not the sort of “accre- tion in value” that characterizes a capital gain. Alderson was not an investor who bought and held an asset that increased in value during the holding period. Rather, Alderson worked intensively after 1993 to increase the likelihood that his qui tam suit would be successful, as the district court in Quorum recounted in detail. 171 F. Supp. 2d at 1326-31.

The ruling would seem faithful to the strict meaning of the Latin phrase qui tam pro domino rege quam pro se ipso in hac parte sequitur, “[he] who sues in this matter for the king as for himself.” It turns out the King can ask not only for his share but for a cut of that part that goes to yourself.

Here is the opinion: 10-56007

13 thoughts on “Blow the Whistle, Pay The Piper: Ninth Circuit Rules Whistleblowers Must Pay Full Tax on Awards As Income”

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  2. Malisha,dude,

    my car’s still where I left it – where’s my trillion Any fool who knows even a little bit about the 9/11 official fairy tale, can understand it was an inside job.

    You believe in the miracles that are necessary for the official conspiracy to be true?

  3. bill mcwilliams, dude, you better forget that trillion and go look for your car instead. It might have been booted while you blogged.

  4. The 9/11 events and subsequent corporate/military/intelligence services
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  5. If the award is considered income, I would hope they could use a schedule C and deduct all expenses in their pursuit of the income.

    Just finished Sibel Edmond’s book, “Classified Woman”. She used all available internal avenues to report espionage in the FBI and Congress.

    Her case was the test case for blocking law suits by using the “National Security” ploy – the case must be thrown out if the government is the defendant because “national security” won’t allow them to participate in discovery nor present a defense. or the government’s case must be accepted without the defendant being allowed to see the evidence against them and therefore, unable to defend themselves.

    See also “Extreme Prejudice – The Terrifying Story of the PATRIOT Act and the Coverup of 911” by Susan Lindauer.

  6. I agree with Dr. Padmanabhan,

    Whistle blowers face daunting obstacles in their attempts to do the right thing and there is no reason not to define their efforts as investment activity as a matter of public good. As Dredd aptly contributes the immense wealth of the Walton’s gets taxed less. As in Animal Farm, some animals are more equal than others.

  7. How about the whistle blowing case in Vance v. Rumsfeld ….their reporting on the gun running and other misdeads of the Bush-Rumsfeld administration in Iraq and the torture of these individuals endured at the hands of the Bush administration…Mr. Turley…do you think Mr. Bush should
    have been added as a Defendant in this case in a Bivens suit???????

  8. People who have never blown the whistle simply have no idea what people who stand up and say ‘wrong is wrong’ actually go through. This man was retaliated against in 1990. This is now 2012. How do commenters think he has lived all these years? Whistleblowers are blacklisted in their profession immediately and no one hires them in their field ever again.

    People commenting here should read Alford’s definitive book on whistleblowers and their lives ( as well as Eyal Press’ book on what leads them to do the right thing knowing their careers, incomes and credit rating will be trashed by the evil. (

    So, the case was not an absurd question. I think a Qui Tam award is not a case of simple income; it is more akin to punitive damages. But the court has spoken.

  9. He was well paid for his work, but paid taxes at a higher rate than some others do.

    The six Walton kids have more wealth than half of the U.S. added up together.

    Those six kids have more than ~160,000,000 other Americans.

    Ain’t plutocracy grand?

    The Walton Six increased from having more wealth than 33% of the rest of the country added together, to just under 50% in just a few years.

    And they pay taxes at the lower rate.

  10. And to complain about taxes on a 27 million dollar payment…. Boo…. Hoodies…. I see you can’t use the b¥÷¤» word now…..

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