Whistleblower's Tax Relief Effort of 2012 Fails

James Alderson filed a whistleblower action alleging Medicare fraud by Quorum Health Group and several related entities, including the Hospital Corporation of America. The U.S. settled Alderson's whistleblower action claims, and Alderson received over $100 million for his efforts (less counsel fees and taxes).

Alderson filed income tax returns reporting his reward as ordinary income. Later Alderson filed amended returns characterizing the whistleblower award as a capital gain and sought a refund. The Internal Revenue Service (IRS), clearly unappreciative of Alderson's efforts, denied the refund claim. Alderson then filed suit for his refund.

Remarkably, whether a whistleblower's award is ordinary income or capital gain is a question of first impression. The government contended that Alderson did not "sell" or "exchange" his information and, therefore, had no sale or exchange of an asset to qualify for capital gains treatment. Alderson contended he exchanged his documents, information and know-how and, in turn, received a whistleblower award, thus consummating a sale or exchange.

The court found that Alderson did not "sell" or "exchange" his information and that the information was not a capital asset and that Alderson's whistleblower award was ordinary income. Alderson et al., v. United States (9th Cir. July 18, 2012).

Sounds Like a Political Ad - Are You Lying Now or Did You Lie Then? -- Helpful Whistleblower's Counsel in Hot Water

A whistleblower claimed she had been threatened, harassed and discriminated against as a result of filing a whistleblower action. Initially alleging that she had been directed to participate in her employer's alleged Medicare fraud, the whistleblower's complaint specifically referenced a letter in which she said that she would not lie to the Medicare authorities, would not help cover up violations.

The whistleblower's story changed when asked in her deposition if she had ever been requested to lie to Medicare auditors or ever felt like it was a job requirement that she assist in fraud. She said no. After the deposition, her counsel submitted an errata sheet containing 101 corrections to the whistleblower's testimony, some of which again changed her answers to match her original complaint allegations that her supervisors wanted her to lie to Medicare authorities.

At trial, the whistleblower's story changed yet again. She testified that she had never been asked to lie and that her answers in her deposition had been accurate. She testified that her attorney had "literally word[ed]" some of the errata sheet changes and also had helped her write the July 3 letter referenced in her complaint.

Sensing bad faith, the district court concluded that counsel had helped the whistleblower push a meritless claim to trial. On this basis, the district court awarded the provider attorneys' fees from the whistleblower's counsel under 28 U.S.C. § 1927, which provides that any attorney who multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses and attorneys' fees reasonably incurred because of such conduct. Gonzalez v. Fresenius Medical Care North America, (5th Cir. July 30, 2012).