Alderson v. United States

686 F.3d 791

110 A.F.T.R.2d 2012-5123

12 Cal. Daily Op. Serv. 8121

James F. ALDERSON; Connie B. Alderson; Jennifer A. Page; Walter Page; Justin W. Alderson; Kristen N. Alderson, Plaintiffs–Appellants,

v.UNITED STATES of America, Defendant–Appellee.

No. 10–56007.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Jan. 12, 2012.

Filed July 18, 2012.

Robert W. Wood, David B. Porter, Steven E. Hollingworth, Wood & Porter, P.C., San Francisco, CA, for the appellants.

Thomas D. Coker, Office of the United States Attorney, Los Angeles, CA, Damon W. Taaffe, Kenneth L. Greene, United States Department of Justice, Washington, D.C., for the appellee.

Appeal from the United States District Court for the Central District of California, Stephen V. Wilson, District Judge, Presiding. D.C. No. 2:09–cv–06155–SVW–MLG.

Before: STEPHEN REINHARDT and WILLIAM A. FLETCHER, Circuit Judges, and JACK ZOUHARY, District Judge.^*

OPINION

W. FLETCHER, Circuit Judge:

In 1993, James Alderson filed a qui tam action under the False Claims Act (“FCA”) alleging Medicare fraud by Quorum Health Group, Inc. (“Quorum”), a hospital management company, and several related entities including the Hospital Corporation of America, Inc. (“HCA”). The United States intervened in 1998. The United States settled its FCA claims against HCA for $631 million in 2003. Alderson received sixteen percent of the settlement as his relator's share.

Alderson and related taxpayers, Appellants, filed income tax returns for tax year 2003 reporting the relator's share as ordinary income. They later filed amended returns characterizing it as capital gain, seeking refunds of about $5 million. The Internal Revenue Service (“IRS”) denied the refund claims. Appellants then filed suit in federal district court. The court granted summary judgment to the United States, holding that the relator's share was ordinary income. Alderson v. United States, 718 F.Supp.2d 1186, 1200–01 (C.D.Cal.2010).

We affirm.

I. Background

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 hospital'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.

Using information obtained during discovery in his wrongful termination suit, Alderson filed a pro se qui tam suit in January 1993 against Quorum, HCA and affiliated companies under the False Claims Act. See31 U.S.C. §§ 3729 et seq. At that time, Alderson made available to the United States the documents he had received during discovery. In a subsequent conversation between Alderson and the Department of Justice, Alderson “identified for ... government personnel the categories of documents that the government should subpoena from Quorum to advance most effectively the government's investigation.” Quorum, 171 F.Supp.2d. at 1326. The United States issued subpoenas that resulted in the production of cost reports from 197 hospitals covering a seven-year period. Id. At the government's request, Alderson analyzed the reports and prepared a spreadsheet for the government based on 2,500 documents. Alderson presented his analysis to the government in early 1995. Id.

Alderson spent five years trying to persuade the United States to intervene in his FCA suit. At his own expense, he retained counsel in 1993, and different counsel in 1995, to represent him. Id. The United States finally intervened in 1998. Id. at 1329. After intervening, the United States severed the suits against HCA and Quorum. Id. The district court opinion in the severed Quorum suit describes in detail Alderson's extensive efforts on behalf of the United States. Id. at 1326–31.

In 2001, the United States settled the suit against Quorum for $85.7 million. Alderson received a twenty-four percent relator's share, one percent below the maximum percentage allowed under the qui tam statute. 31 U.S.C. § 3730(d)(1). In explaining its decision to award Alderson a significant share of the recovery, the district court referred to the “heroic effort by many, including prominently Alderson and the team he assembled, [that] contributed to the development of the factual information, documentary evidence, and legal arguments necessary to prevail.” Quorum, 171 F.Supp.2d at 1332. The appropriate tax treatment of Alderson's relator's award in the Quorum suit is not before us.

In 2003, the United States settled the suit against HCA for $631 million. Alderson received a sixteen percent relator's share. After accounting for attorney's fees and expenses, Alderson received $27,105,035. We are asked to determine the appropriate tax treatment of this award.

Prior to the settlement of the HCA suit, Alderson gave portions of his potential relator's share to members of his family, using a family partnership he established for this purpose. Alderson transferred to the Alderson Family Limited Partnership (“the partnership”) forty percent of his interest in the relator's share. Alderson retained ownership of the remaining sixty percent of his relator's share. Alderson gave each of his two children, Justin and Jennifer, a forty-nine percent interest in the partnership. He gave his wife Connie a one percent interest in the partnership and retained a one percent interest in the partnership in his own name. In 1999, an appraiser estimated the present value of the entire relator's share as $3,047,356. The appraiser used that estimate to value the partnership shares. Alderson and his wife relied on this valuation to pay a gift tax on the partnership shares transferred to their children.

In 2003, the Alderson parties received their relator's share income and filed tax returns for tax year 2003 reporting their share of the settlement. James and Connie Alderson filed a joint return reporting income from the sixty percent ownership interest that Alderson had retained and from their two percent interest in the partnership. Justin Alderson and his wife Kristen, and Jennifer Alderson Page and her husband Walter Page, reported on their joint returns the partnership income they received based on Justin's and Jennifer's forty-nine percent interests in the partnership. All three couples characterized the income as ordinary income.

In 2007, all three couples filed amended returns for tax year 2003, in which they re-characterized their portions of the relator's share as capital gain. This re-characterization, if upheld, would significantly reduce their tax liability for 2003. Alderson and his wife sought a refund of $3,263,431. His two children and their spouses each sought just over one million dollars per couple.

The IRS denied the refund requests in 2008. All three couples then filed suit in district court for refunds. The district court held that the relator's share was ordinary income and granted summary judgment to the United States. Alderson, 718 F.Supp.2d at 1200–01. The three couples timely appealed.

II. Jurisdiction and Standard of Review

We have jurisdiction under 28 U.S.C. § 1291. We review a grant of summary judgment de novo. Red Lion Hotels Franchising, Inc. v. MAK, LLC, 663 F.3d 1080, 1086 (9th Cir.2011). “The taxpayer bears the burden of establishing that proceeds of a settlement are what the taxpayer contends them to be.” Milenbach v. Comm'r, 318 F.3d 924, 933 (9th Cir.2003).

III. Discussion

A. False Claims Act

The False Claims Act imposes civil liability on any person who presents to the federal government “a false or fraudulent claim for payment or approval.” 31 U.S.C. § 3729(a). The government may itself bring a suit, or a private person may bring a suit in the name of the government as a “relator.” § 3730(a), (b)(1). If a private person wishes to bring suit, the relator must first serve on the government a copy of the complaint, together with supporting evidence. § 3730(b)(2). The government then has at least sixty days to decide whether to intervene in the suit. Id. While the government is deciding whether to intervene, the complaint must remain under seal in the district court and may not be served on the defendant until the court so orders. § 3730(b)(2). If the government declines to intervene, the relator may pursue the suit on his or her own. § 3730(b)(4)(B).

If the government declines to intervene and the relator succeeds in obtaining a judgment, the relator is entitled to receive between twenty-five and thirty percent of the recovery, plus fees and costs. § 3730(d)(2). If the government intervenes and if a judgment is not based primarily on information that was already public, the relator is entitled to receive between fifteen and twenty-five percent of the recovery, plus fees and costs. § 3730(d)(1). If the government intervenes and the judgment is “based primarily” on disclosures made in government hearings or reports, or in news reports, the relator is entitled to receive between zero and ten percent of the recovery, plus fees and costs. Id. The percentage awarded to the relator depends “upon the extent to which the [relator] substantially contributed to the prosecution of the action.” Id. In the suit against HCA, where the judgment was not based primarily on public information, Alderson received a sixteen percent relator's share.

The Supreme Court has characterized a relator's share under the FCA as a “bounty” and as a “fee.” The Court observed in Vermont Agency of Natural Resources v. United States ex rel....