Payments Received by Qui Tam Relator Are Includable in Gross Income

From Campbell v. Commissioner of Internal Revenue, 2011 U.S. App. LEXIS 19745 (11th Cir. Sept. 28, 2011):

Section 61(a) of the Internal Revenue Code defines gross income as "all income from whatever source derived." I.R.C. § 61(a). There is no exclusion enumerated in the Code for qui tam awards. See Treas. Reg. § 1.61-1(a). "The taxpayer's qui tam relator's award, therefore, must constitute gross income unless the taxpayer is able to show that it is 'expressly excepted by another provision in the Tax Code.'" Brooks v. United States, 383 F.3d 521, 523 (6th Cir. 2004). The payment to a relator in a qui tam action is a financial incentive for a private person to provide information and prosecute claims relating to fraudulent activity. See United States ex rel. Semtner v. Med. Consultants, Inc., 170 F.R.D. 490, 495 (W.D.Okla. 1997). It is not a penalty imposed on the wrongdoer. Id.

Although the question of whether or not qui tam payments are includable in gross income is an issue of first impression in this circuit, other courts that have addressed this issue have uniformly concluded that they are. See Brooks, 383 F.3d at 525 (qui tam payments are not excludable from gross income as personal injuries inflicted upon the relator in tort); Roco, 121 T.C. at 164-65 (qui tam payments are the equivalent of a reward, and rewards are generally includable in gross income); Trantina v. United States, 512 F.3d 567, 570 n.2 (9th Cir. 2008) (the legal question is whether qui tam payments should be taxed as ordinary income or as a capital gain); Alderson v. United States, 718 F.Supp.2d 1186, 1191 (C.D.Cal. 2010) (the parties do not dispute that a qui tam award is taxable income, the dispute is whether or not the award is ordinary income or capital gain). We agree with our sister courts that qui tam payments are includable in gross income.5

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