In Uncategorized on 02/25/2014 at 18:05

That’s the story of Craig Patrick. No, not that Craig Patrick. That Craig Patrick was the man who blew the whistle for the 1980 US Olympic Ice Hockey Team, of glorious memory. Fans will remember the 2004 cinematic retelling of that epic feat, wherein Kurt Russell played the late Herb Brooks and Noah Emmerich played Assistant Coach Craig Patrick, he who blew the whistle endlessly as the exhausted US amateurs skated back and forth in the darkened rink.

Who can forget Russell’s bark “Again”, and Emmerich, pitying and disgusted, blowing the whistle once more, as the hangdog rink rats gave it their last gasping breath?

I will not discuss the debacle in Sochi. My alibi is that I was on a ship in the Caribbean, and it wasn’t on my watch.

No, I herald my return to snow, cold and blogdom with this,  the story of Craig Patrick and Michele Patrick, 142 T. C. 5, filed 2/24/14, with Judge Kroupa on the bench.

Craig did blow the whistle, however. No, not in a Section 7623 scrimmage. And he won.

Craig worked for a medical equipment manufacturer, whose gadget was designed for outpatient application, but was marketed to providers for inpatient (admitted to hospital) use, to boost the Medicare reimbursement illegally. Craig managed the reimbursement side, got hold of incriminating material, and filed a classic 31 USC False Claims Act qui tam. That’s the “everything but taxes” variety.

If you care, the phrase qui tam comes from the Latin “qui tam pro domino rege quam pro se ipso in hac parte sequitur,” which means “who pursues this action on our Lord the King’s behalf as well as his own.” 142 T. C. 5, at p. 5, footnote 4.

Well, there isn’t a king any more, but the Federales leapt in to Craig’s lawsuit, and took $75 million from the various skullduggers in two bites. Craig was in for about $6 million one year and nearly $900K the next. He also got Forms 1099-MISCs for those amounts, at no extra cost.

But Craig is nothing if not inventive. He agrees it’s income, but claims capital gains treatment. He says he held the proofs of thuggery of a year and sold it to the Feds. He had a contract right to sell the info to the Feds, thus a “sale or exchange” of a “capital asset”.

Craig gets a real good “nice try” from me, and a brusque “who’re you kiddin’?” from Judge Kroupa.

“Petitioners argue the sale or exchange requirement is met because the qui tam complaint establishes the relator’s contractual right to a share of the recovery. We disagree. 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 under the FCA. 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.” 142 T. C. 5, at p. 8 (Citations omitted).

Not dismayed, “Petitioners analogize the relator’s provision of information to the sale of a trade secret. A transfer of trade secret rights, however, constitutes a sale for capital gains purposes only when all substantial rights are transferred. Petitioner husband did not transfer any rights to the Government.

“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.” 142 T. C. 5, at pp. 8-9 (Citations omitted).

The right to receive income is not a capital asset. Check out Judge Holmes’ take on what is a capital asset in my blogpost “Das Kapital”, 8/6/13. So whatever Craig sold, if he sold anything (and Judge Kroupa said he didn’t), it wasn’t a capital asset.

“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 most significant rights held by the owner of a trade secret are the rights to prevent both the unauthorized use and the disclosure of the secret. Petitioner husband obtained documents through his employment. The FCA (False Claims Act) obligated petitioner husband to give the Government all supporting documentation. Petitioner husband did not demonstrate any right to prevent [the skulldugger] or the medical providers from using or disclosing the information.” 142 T. C. 5, at p. 11 (Citations omitted)..

Oh, by the way, Craig, ya done good. “Petitioner husband helped bring to light systematic fraud, causing the recovery of tens of millions of dollars. Those efforts are to be applauded and were rewarded. Rewards, however, are treated as ordinary income, and the qui tam award is subject to tax as such. Petitioners have not demonstrated that either requirement for capital gains treatment was met.”, 142 T. C. 5, at p. 12.

Now how about those who unmask tax shenanigans, and get nothing?

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