Whistleblower wins $8.75 million, claims $793 in taxable income; Tax Court upholds tax and penalty assessment

by Ben Vernia | January 28th, 2010

On January 21, the Tax Court issued a decision in the case of Albert Campbell, who received a relator’s share of $8.75 million in 2003 for two qui tam suits against Lockheed Martin Corp. His attorneys received a 40% contingency fee, or $3.5 million, of the total.

In 2004, he filed a tax return (without consulting a tax professional) in which he identified “other income” of $5.25 million, but this amount was omitted from his taxable income, which he reported as $793. He included a disclosure statement noting that the attorney’s fees had been declared by the 11th Circuit to be non-taxable, but he failed to include any support for not including his portion of the settlement in taxable income, even though he was aware of Roco v. Commissioner, 121 T.C. 160 (2003), which held that qui tam payments are includable in gross income.

The Court held that the relator should have included the entire $8.75 million in gross income, but was entitled to deduct his attorney’s contingency fees. The Tax Court next addressed the accuracy-related penalties the IRS had imposed, concluding that they should have been imposed on the omission of his share (because he knew of the Roco decision, but that he had relied in good faith on the 11th Circuit decision (which the Supreme Court had overruled two years later, in Commissioner v. Banks, 543 U.S. 246 (2005), and that his underpayment for penalty purposes should be reduced accordingly.

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