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Roco v. Commissioner - 121 T.C. 160 (2003)


A qui tam payment that a taxpayer receives is includable in gross income.


Emmanuel Roco, a taxpayer, sued the New York University Medical Center (NYUMC) in a qui tam action under the False Claims Act (FCA), 31 U.S.C. secs. 3729-3733 (2000). In the qui tam action, Roco claimed that NYUMC had submitted false information to the United States which resulted in a substantial overpayment of federal funds to NYUMC. NYUMC agreed to pay $ 15,500,000 to the United States in settlement of the case. The United States paid Roco $ 1,568,087 in 1997 as his share of the settlement proceeds. Roco did not report this payment in his 1997 state and federal income tax returns. The Commissioner of Internal Revenue (Commissioner) determined a tax deficiency and assessed an accuracy-related penalty against the taxpayer.


Was the $ 1,568,087 qui tam payment includable in Roco's gross income for 1997?




The court first held that the qui tam payment was the equivalent of a reward for Roco's efforts to obtain repayment to the United States of overcharges by Roco's former employer. Rewards were generally includable in gross income pursuant to Treas. Reg. § 1.61-2(a). The court also compared the qui tam payment to punitive damages. Punitive damages were not intended to compensate the recipient for actual damages and punitive damages were includable in gross income. Regarding the penalty, Roco's received an I.R.S. Form 1099-MISC for the qui tam payment. Roco's alleged that his research into tax cases provided no precedent for whether the qui tam payment was includable in gross income. He decided to "test" the tax laws by omitting the income, knowing this would have triggered an audit. Triggering an audit in this manner was not a good faith attempt to comply with the tax laws. Roco's claim that he was seeking to test the tax laws was not credible because he failed to disclose the payment on his return. Finally, Roco had requested a private letter ruling on the matter, and withdrew the request upon learning that it would have been adverse.

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