1 RECOMMENDED FOR FULL-TEXT PUBLICATION Pursuant to Six

th Circuit Rul e 206

ELECTRO NIC CIT

ATION: 2004 FED App . 0307P (6th C ir.) File Name: 04a03 07p.06



### UNITED STATES COURT OF APPEALS

FOR THE SIXT H CIR CUIT

_________________
J. H IL TON B ROOKS , III, M.D.,

Plaintiff- Appellant

,

v.

U NITED S TAT ES OF A MERICA , Defendant-Appellee. X

- - - -
> , - - N No. 03-5610

Appeal from the United States District Court for the Eastern District of Kentucky at London. No. 01-00452—J. B. Johnson, Magistrate Judge.

Argued: August 5, 2004 Decided and Filed: September 10, 2004

Befor e: KENNE

DY, SUTTO

N, and COO K, Circui

t Judges.

_________________ COUNSEL

ARGUED: Philip E . Wilson , WILSON LAW OFF IC E, Lexington, Kentu cky, for Ap pella nt. Ke nneth W. Ro senbe rg, UNITED STATES DEPA RTMENT OF JUSTICE , Washington, D.C., for

Appelle e. ON BRI EF: Philip E. Wilson, WILSON L

AW OFFICE, Lexington, Kentucky, for Appellant

. Kenneth W. Rosenberg, Kenneth L . Greene, 2 Brooks v. United States No. 03-5610

UNITED STATES DEP ART MEN T OF JU ST IC E , Washington, D.C., for Appellee.

_________________ OPINION

_________________ KE NNE DY, Circuit Judge. The taxpayer, Dr . Hilton Brooks, appeals the distri ct co urt’s order granting summary judgment to the United States, holdi ng that no part of a qui tam relator’s award gra

nted under Section 3730(d) of t he False Claims Act is excludab l e from gross income under Internal Revenue Code § 104(a)( 2) because the award does notconstitute “damages received ... on a ccount of personal injuries” as § 104(a)(2) requires. We ag ree with the district court, a nd AFFI RM.

BACKGROUND

The taxpayer, Dr. Hilton Br ooks, was a physician on the medical staff at Pineville Community Hospital, Pineville, Ke nt uc ky, and was a member of t he hospital’ s quality
assurance commi ttee. Whil e carrying o ut h is committee duties, Dr. Brooks discovered w h at he determined to be
numerous billing improprieties by Pineville Com mun ity Hospital and two physicians. Rather than correcting the improprie ties, the hospital rebuffed Dr. Brook’s eff o rts and subjected him to a variety of re

taliatory abuses. F or instance, he was pressured to cease investigating the fraudulent billing practices and to relocate his practice elsewher e; he was threatened

with loss of clinical pri vileges ; he was reviewed “unfavorably

” and advised that he would not be reappointed to the med ical st aff; and he was criticized in the hospital newsletter for having a “disruptive attitude.”

Pursuant to the qui tam provision s of the F alse Claims Act (FCA), 31 U.S.C . § 3 729 et seq., which allows individual citizens to sue for fraud on behalf o f the governmen t and toNo. 03-5610 Brooks v. United States 3

receive part of

the government’s recovery , Dr. Brooks filed an FCA claim ass erting

that the hospital an

d two of its

docto r s had submitted fraudulent Medicare and Medic aid bills to the gover nme nt fo r pay

ment. Although the

United Sta

tes is entitled to intervene in such a case, it initially

decline d to do
so here. Dr. Brooks litigated the ac tion throu gh di sc ov er y, and trial was scheduled. A t that point, the United States opted to intervene.

Rather than proc eed to trial, the de fe nd an ts ag re ed to pa y a total of $2 .5 million do llars to the Unite d States to settlethe FCA action for fraudulent billing. I n the settlement agreement the defendants admitted that they had violated
numerous regulations governing va rious he alth care p rogra

ms relatingt o pay

me nts for medical procedures. The district court approved this settlement agre ement and granted Dr. Brooks a relator’s award

of 25% of the net settlement amount remainingafter pay

ment of a ttorney fees an d reimbursable costs. The net dollar amount of the qui tam award was $210,067, which resulted in income tax of $78,607.

Inaddition, a separate settlement agree ment was entered into between

Dr. Brooks, the hospital, and four doctors at the hospital, to release them from any pers onal injury

claims, including claims for re taliation and defamation, that might exist against them. The hospital paid Dr. Brooks the sum of $300,000, which wa s expressly stated to b e “dama

ge s received on account of person al injuries within the meaning of Section 104(a)(2).”

Dr. Brooks included the $210,067 re l ator’s a ward in h is grossincome and

timely paid $78, 607 in

income taxes on that amount. He exclud

ed from in

come the separa te settlement of $300,000 in comp ensatory da mages for “personal injuries,” wi th ful l disclosure to the IRS, and the I RS approved the exclusion. He thereafter claimed a re fund of the $78,607 tax he paid on the relator’s award, a ssertin g that at least part of the award c an be excl

udable from income un

der 26 U. S.C. § 104(a) (2) as damages rece ived on account of personal 4 Brooks v. United States No. 03-5610

injuries. The I

RS disallow ed his claim fo r refund, and Dr. Brooks filed suit

i n the district court seeking a refund of the income tax he had paid on the qui tam relator award. Afte r the district c ourt rule d in favor of the g overnme

nt, this appeal followed.

ANALYSIS

We review a grant of

summary judgme

nt de novo. Farhat

v. Jopke , 370 F.3d 580, 587 (6th Cir. 2004). Summar y judgment is appropriate when “the plea dings, d eposition s, answers to interr

ogator ies, and admissions on file, together with the affidavits, if any , show that there is no genuine issue
as to any materia

l fact and that the moving party is entitledto judgment a s a matte r of law. ” Fed. R. Civ. P. 56(c ). Both parties agree that this ca se presents no issue of material fact with respect to the issue of law presented.

The Inte rnal Reve nue Code broadly

defin es g ross inco me as “all income from whateve r source derived .” 26 U.S. C. § 61(a). T

he Supre me Court ha s broadly

cons trued and repeat edly emphasize d the swe eping sc ope of thi s se cti on. See Commissioner v. Schleier , 515 U.S. 323, 3 27 (1995) ; See also Commissioner

v. Glens haw Glass

Co ., 348 U.S. 426, 429 (1955)

. T he corollary

to § 61(a)’s broad construction, the Courthas noted, is “that exclusions from income must be

n arrowly construed.” Schleier , 515 U.S. a t 328 (quot

in g United States v. Burke , 504 U.S. 229, 248 (Souter, J.,
con curring

in judgme

nt)). The taxpay er’s qui tam relato r’ s awar d , therefore, must constitute gross income unless the taxpayer is able to show that it is “expressly excepted by another provision in the Tax Code.” Id

. The taxpayer

relies upon § 104(a)(2) (1995) in arguing that his award, or at leas t part of it, should be exempted from gross income. Section 104(a)(2) provides that gr oss income doe s not include “the amount of any damages receive d (whe ther by suit or ag

reement and whether as lump sums or
as periodic payme

nts) on acc ount of personal injuries orNo. 03-5610 Brooks v. United States 5

1 Congres s amen ded § 104 (a)(2 ) in 1996 to read, gr oss in come does not include “the amoun t of any damages recei ved .

.. on account of personal physi cal

injuries or physi cal

sicknes s.” (em pha sis add ed). Th is amended versi on does not ap ply t o the present case as t he distri ct court grante d the ta xpa yer his aw ard in 1 995 , prior to the 1 996 ame ndm ent. sickness.” 1 The implementing treasury regulation, 26 C.F.R. § 1.104-1(c) (1994), d ef ines “damages received” as “an amount receiv ed ... throu gh pro secution of a legal suit or actionbased upon tort or tort type r ights, or through a sett le ment

agreement entered into in lieu of such prosecution.” Thus, under the statute a nd re gulation, for income to be excluded und er § 104(a) (2), the taxpay er must 1) “demonstrate that the underly ing cause of action

giving rise to the rec overy

is based u

pon tort or

tort ty pe rights;” and 2) “sh ow th at the damages were re ceived on account of personal injuries or si ckness .” Schleier , 515 U.S. at 337 (1995) (internal quotation marks omitted).

Inattempting to establish that at leas t part of his relator’s award may be excluded fr om gross income pu

rsuant to § 104(a )(2), t he tax payer pres ents t he fol lowi ng argu men t. He first note s that a re lator’s qui tam award is limited to a percent age. Since the

gover nment inte

rvened here, his potential award ranged from fif teen to twenty-five pe

rcent of the net amount received by the government. § 3 730( d)(1). He argues that the percentag e to be used in de termining the amount of a relator’s qui tam award is influenced by w

hether the relator suffer ed perso nal injuries or sickness. Since the amount of a rel ator’s qui tam award is influenced by whether he suffer ed personal injuri es in pro secuting the FCA action, he conclude s, the aw ard thus c ompensat e s him for the personal injuries he received while prosecuting the action.

Rather than immed

iately address the taxpay

er’s ar gument,
we first consider the r equirements for exclusion under § 104(a)(2) as enunciated by the Schleier

Court. The taxpayer
runs into immedi ate diff

iculty with the fi rst pr ong, as he fa ils to demonstrate that

the under lyin g caus e of act

ion givin g rise 6 Brooks v. United States No. 03-5610

to his recovery

is based upon tort

or tort type rig

hts. The fact that a qui tam p lai ntiff may suffer persona l injuries while prosecutingan FCA c laim does not trans form the F CA claim into o ne ba sed upon tort or tort type rig hts. The primary purpose of the FCA claim is to ensure that the United States gains restit

ution of mo ney

fraudul ently

obtained from it. Thus, the under

lyin g caus e of act

ion that g ives r

is e to the taxpayer’srelator ’s awar

d is based upon cont

ract fr aud, not a tort.

Not only is the underly

ing cause of action n ot b ased upon tort or tor t type rights, but it also does not compensa te the taxpayer for an in jury inflicte d upon him. R

ather, t h e FCA permits a qui tam plaintiff to bring a suit in the na me of t he United States for contract fraud c omm itted ag ainst it. 31 U.S.C. § 3730(b)(1). The Supre me Court’ s decision in Vermont Agency of

Natural Resources v. United Sta tes ex re l. Stevens , 529 U.S. 765 (2000), highlights the fact that the injury that is redressed in a qui tam act ion u nder the FCA is
aninjury to the government. The issue in Vermont Agency of Natural Resources was whether a qui tam plaintiff had standing to bring

an FCA claim on behalf of the United States agains ta State. Id. at 768. Th e Court no ted that a n intere st sufficient to confer standing to maintai

n the suit “must con sist of obtaining compensation

for, o r preve ntin g, the violation of
a legally protected right.” Id. at 772. A qui tam plaintiff, the Courtn ot ed, “ha s suffer ed no such invasion

[of a leg ally protected right].” Id . at 773. Although the Court found that
a qui tam plaintiff suffers no invasion of a legally protected right, it nonethe less foun

d that a qui tam plaintiff

has standing to assert a claim based on “the doctrine that the assignee of a claim has standing to assert the injury

in fact suffered by

the assignor. [Theref

ore, the False Cla ims Act] can

reasonably

be regar ded as effe cting a

partial a ssignme

nt of th e Government’s damages claim” to the qui tam plaintiff. Id.

The structure of the act further supportsthe conclusion that the qui tam relator’s award is not based upon tort or tort type rights. As the di stri ct court observed, any tort that could beNo. 03-5610 Brooks v. United States 7

considered

to have be en committed against the taxpayer would be one for reta

liation by the defe ndants. T his wrong i s separa tely compensated for under

the FCA’s “whistleblower” provision, 31 U.S.C. § 3 730(h). S ecti on 3 730(h) provides that an “empl oye e who is dis char ged, demoted, ... harassed,
or inany other ma nner disc riminate d again st

... by his or her employer because of lawful acts done by the employee on behalf of the employee

or others in further ance of a [FCA claim] ... shall b e entitle d to all re lie f necessary

to make the employee whole.” Thus, this section, § 3730(h ) , not § 3730(d), provides compensation for injuries suffered

by the qui tam plaintiff. Alth ough § 37 30(h) onl y a pplies to employees

( rather th an independent contractors, for instance), this does not militate

agains tour conc lusion tha t Congre ss did notintend § 3730(d) to c ompensate qui tam plaintiff’s for personal injuries. The fact that Congress, in enacting § 3730(h), not only consider e d allowing personal injury d amage s, but in fact actuall y pr ovided a c ause of a

cti on fo r their recovery , supports our

conclusi on that Con

gress did not intend § 3730(d) to compen sate qui tam plaintiffs for personal injuries.

The taxpayer has also fa

iled to establish that his award was

r eceived on acco unt of personal inju

ries or si ckness . I n arguing that his relator’s award was receiv ed, at le ast in par t,
on account of personal inj uries or sickness, the taxpayer principa lly relies upon United Sta tes v. NEC C orp ., 11 F.3d 136 (11th Cir. 1994). In NEC , the plaintiff brought a qui tam actionagainst the United States to r ecover a portion of a settlement

procured by

the gove rnment as a result of i nfo rmationprovided by the plaintiff. 11 F .3d at 137. Subseque nt ly, h owever, the plaintiff died. Id. The issue in NEC was wh ether the plain tiff-re lator’s qui tam action survived his death. Id. To determine whether the caus e o f actionsurvived the qui tam plaintiff’s death, the court needed to consider

whether the action was re

media l or p enal with respect to the qui tam plaintiff. Id. In considering this issue, the court first asked whether the statute redre ssed individual wrongs or

more gen eral wrongs to the public. Id. In 8 Brooks v. United States No. 03-5610

concluding that the st

atute doe s not red ress solely g eneral wrongs to the publ ic, but ra ther als o re dresses individual wrongs suffered by

a qui tam relator, the court opined that a qui tam relator may

endure e motional strain when he discovers fraud as he is faced with the choice “ o f keeping silentabout the fraud, and suffering potential liability ..., or reportingthe fraud and suffering re per cussion s, [such] ... as dismissal.” Id. at 138. Even i f we we re to agree with the NEC court that a qui tam action is r emedial w

ith respect to the qui tam plaintiff

, that wou

ld nonethe less not c omp el th e conclusionthat a qui tam relator’s awa rd is received on account of personal injuries within the meaning of § 104(a)(2) of the Tax Code.

The FCA pr ovid es tha t the p ercent age of the award that the qui tam plaintiff

will rec eive dep ends upon “th e extent to whichthe [ qui tam plaintiff] substantially contributed to the prosecut i on of the action.” § 3130(d)(1). Even if the percen tage that a qui tam plaintiff recei ve s in p rosecu ting a FCA claim were influenced by w

hether he received personal inju ries in prosecuting the action, that fact would still no t transform the qui tam plain

tiff’ s recovery

into one “on account of persona l injuri es.” It is the nature of the underlying

claim itself that determines whether the plaintiff has received compensation on account of personal injuries within the meaning of § 104(a)(2). Reg ardless of whether a qui tam plaintiff received fifteen perce nt or twenty-five percent of the proceeds recovered by the government, the fact that he rece ives a

nythi ng at all is on account of his decision to bring the lawsuit on behalf of the governme nt, and not

on account of any

personal injuries inflicted upon him.

S ince we conclude 1) that the underly ing cause of action (the FCA claim) is based upon contract fr aud inflicted upon the government, not a tort inflicted upon the relator, and 2) that the relator received his award on account of initiating the pr osecution of the FCA claim on behalf of t h e gover nment, not on account of p ersonal injuries inflicted upon himself, we there fore AFFI RM the district court’sNo. 03-5610 Brooks v. United States 9

holding that

a qui tam relator ’s awar

d is not excludable from gross income under § 104(a)(2).