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$27M Whistle-Blower Award Is Taxed as Ordinary Income

  Sanjiv Gupta CPA  Published 
$27M Whistle-Blower Award Is Taxed as Ordinary Income

Whistle Blower Award is an incentive for private citizens to uncover and report fraud to the government.   Usually one can get 15 to 25 percent of the money the government recovers from such cases.  In a recent case,  former CFO for a Montana hospital reaped a benefit of $27 million dollars by blowing the whistle on his former employers' accounting fraud.  How is that for an award?

Reward sounds good but how about paying tax on this reward?   What do you think?  After all, the government collected the tax they wouldn’t have collected otherwise.  And now you have to pay the tax on the tax collection.

As far as the IRS is concerned, this is an income and should be taxed as an ordinary income.

San Francisco based 9th U.S Circuit Court of appeals cleared that the income received by Alderson should be treated as an ordinary income.  Alderson filed the case arguing that settlement was a result of the sale of a property and therefore it should be treated as Capital Gains instead of ordinary income.

“If Alderson had offered simply to sell or exchange the information to the government in return for a sum of money, the government would almost certainly have refused the offer,” the 9th U.S Circuit Court expressed in its opinion, explaining that  Mr. Alderson had gone to considerable effort to establish the merits of the case before the federal government got interested in it.

According to Reuters, Alderson failed to convince the appeals court about his theory that this income should be treated as a capital gain because the value of the asset (this case) increased as the case went on.

Well, Sanjiv can figure out the tax on $27M dollars but I am sure its lots of money.  Spending a few thousands of dollars to save millions in taxes was surely a wise try.

Tell us what you think?