Taxing Lessons Case Summaries

Case — Whistleblower Award—Capital Gain or Ordinary Income?

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TL Case Summ


Is a qui tam award capital gain or ordinary income?


Taxpayer Says: He sold information to the government in exchange for a share of any recovery, and the whistleblower lawsuit should be considered a capital gain.

Internal Revenue Service Says: The taxpayer’s share is similar to a reward and does not satisfy the requirements for capital gains treatment.


From Internal Revenue Code Section 1221(a) : The term “capital asset” means property held by the taxpayer.

From Freda v. Commissioner, 656 F.3d 570, 577 (7th Cir. 2011), aff’g T.C. Memo. 2009-191: Transactions involving the transfer of capital assets must be “in the nature of a sale” to qualify for capital gains treatment.

From Commissioner v. Brown, 380 U.S. 563, 571 (1965): A sale is a transfer of property for a fixed price in money or its equivalent.

From Guest v. Commissioner, 77 T.C. 9, 24 (1981): An exchange occurs when property is transferred in return for other property.

From Tempel v. Commissioner, 136 T.C. 341, 348 (2011): Absent a legislature’s clear indication to contractually bind the government, a law does not create private contractual rights.

From United States v. Midland-Ross Corp., 381 U.S. 54, 57 (1965): The ordinary income doctrine excludes from the definition of a capital asset “property representing income items or accretions to the value of a capital asset themselves properly attributable to income.”

From Commissioner v. P.G. Lake, Inc., 356 U.S. 260, 265-266 (1958); Davis v. Commissioner, 119 T.C. 1, 6-7 (2002): The right to future payments of ordinary income is not a capital asset.


When you sell or exchange a capital asset, you can generally use capital gain rules to report the income on your tax return. The rules require a “sale or exchange”, as well as a “capital asset.”

A sale is defined as a transfer of property for money or its equivalent, while an exchange occurs when you transfer property in return for other property. A capital asset is property you own (with the exception of eight excluded categories listed in Internal Revenue code section 1221).

In this case, the taxpayer, a reimbursement manager for a medical equipment company, filed a lawsuit alleging his employer had defrauded the government. He later filed a second suit against other medical providers. Both were “qui tam” suits (generally pronounced “key tam”), which are lawsuits filed on behalf on the government to recover money from fraud committed against the government (also known as whistleblower suits).

In 2008 and 2009, the taxpayer received two whistleblower awards totaling $6,835,405, as well as Forms 1099 reporting the payments. He included the proceeds on his tax returns as capital gains.

The IRS says the proceeds from whistleblower litigation are similar to a reward, and that there was no sale or transfer, and no capital asset. Therefore, the proceeds should be taxed as ordinary income because they do not satisfy the requirements for capital gains.

The taxpayer argues that the False Claims Act, which authorizes whistleblower awards, forms a contract under which a taxpayer sells information to the government in exchange for a share of the lawsuit proceeds. He says the documents and information provided to the government were capital assets.


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For a Taxing Lessons case summary on the topic of the taxability of whistleblower awards, see 134 T.C. No. 3 – Campbell.

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Sorry, wrong answer :(
Right answer!
For the IRS. Absent a legislature’s clear indication to contractually bind the government, a law does not create private contractual rights. The government does not purchase information from a relator (the private individual who brings the lawsuit) under the Fair Claims Act. Rather, it permits the person to advance a claim on behalf of the government. The award is a reward for doing so. No contractual right exists. Put simply, a relator does not sell or exchange his information for a fixed amount of money or in return for other property. The sale or exchange requirement is not met.

Information supporting a qui tam complaint and provided to the government does not constitute a capital asset. A general characteristic of property is that an owner has the legal right to exclude others from use and enjoyment of that property. The taxpayer obtained documents through his employment. The FCA obligated him to give the government all supporting documentation. He did not demonstrate any right to prevent his employer or the medical providers from using or disclosing the information.

We hold that the taxpayer did not demonstrate that the information provided to the government was a capital asset. Rewards are treated as ordinary income, and the qui tam award is subject to tax as such. The taxpayer has not demonstrated that either requirement for capital gains treatment was met.