Whistleblower faces tax penalty for misreporting qui tam reward

Albert D. Campbell worked for Lockheed Martin from 1981 to 1995. He worked as a financial analyst, and was promoted in 1989 to chief of cost control for the $3.5 billion LANTIRN project. The LANTIRN project built navigation and targeting pods for fighter jets. Between 1993 and 1995, Campbell used sophisticated analytic exercises to show that LANTIRN was wasting millions of dollars in non-productive costs.  Company management warned him that it would be career suicide to raise these concerns. In 1995, Campbell filed two qui tam whistleblower suits under the False Claims Act (FCA) against Lockheed Martin, alleging that the company had defrauded the federal government. The government intervened in one case, and in 2003, Lockheed Martin entered into a settlement of both claims. Campbell received a reward of $8.75 million from the government.  This reward was paid to his attorneys who deducted their fee of $3.5 million and then paid $5.25 million to Campbell. Instead of reporting this income and paying taxes on it, Campbell filed a "disclosure" of the reward, but paid no tax. Campbell did not consult with a tax attorney, but prepared and filed his own tax return. When the IRS disagreed with this tax position, Campbell claimed that his reward was not taxable income, but rather an assignment of the government’s non-taxable fraud recovery.  The Tax Court has disagreed. While the government had no duty to pay tax on its recovery, the reward to Campbell was income to him, and taxable.  The Tax Court did allow Campbell to deduct the $3.5 million paid to his attorneys. For the other $5.25 million, Campbell now has to pay taxes, and also a penalty for asserting a position that had no reasonable basis. The case is Albert D. Campbell v. Commissioner, 134 T.C. No. 3 (January 21, 2010). Campell testified to a House Committee about his support for FCA amendments. It is too bad that the government could not be content with collecting the taxes and interest due. Imposing a penalty on the whistleblower works a disservice to the goal of encouraging knowledgeable officials to come forward with information that will actually save the taxpayers money. Given that this decision now requires whistleblowers to pay taxes on qui tam rewards, it would be wise for whistleblowers getting such a reward to hire a good tax attorney to prepare their return.