Patrick v. Comm’r of Internal Revenue

Patrick discovered a Medicaid fraud scheme in which the government paid more than $75 million in phony billings. Patrick and an associate filed a qui tam suit under the False Claims Act against Kyphon, alleging that the company induced hospitals to file claims for Medicare reimbursement “for unnecessary inpatient hospital stays.” The United States intervened and settled the case. For his role in initiating the suit Patrick received a relator’s share of the government’s recovery, totaling $5.9 million. Patrick also received $900,000 from the settlement of related qui tam actions against hospitals that overbillled Medicare. Patrick filed tax returns for 2008 and 2009 reporting his share of the qui tam recoveries as capital gains. The IRS issued deficiency notices, notifying Patrick that the relator’s shares must be reported as ordinary income. The Tax Court upheld that determination. The Seventh Circuit agreed that the relator’s share of a qui tam recovery is not the result of a “gain from the sale or exchange of a capital asset.” Patrick’s relator’s shares are a reward for filing the suit against Kyphon and the hospitals and must be treated as ordinary income. View "Patrick v. Comm'r of Internal Revenue" on Justia Law