Court Opinion

ID: 5140867
Source: CourtListenerOpinion
Date Created: 2021-12-27 21:15:06.540343+00
Date Added: 2024-06-11T08:24:26.187984
License: Public Domain

[J-72-2021] [MO: Wecht, J.]
                   IN THE SUPREME COURT OF PENNSYLVANIA
                               WESTERN DISTRICT

 EDWARD J. O'DONNELL              :                No. 8 WAP 2021
                                  :
                                  :                Appeal from the Order of the
            v.                    :                Commonwealth Court entered
                                  :                December 18, 2020 at No. 880 C.D.
                                  :                2019, reversing the Order of the
 ALLEGHENY COUNTY NORTH TAX       :                Court of Common Pleas of Allegheny
 COLLECTION COMMITTEE, AND        :                County entered June 11, 2019 at No.
 BOROUGH OF FOX CHAPEL AND FOX    :                SA-17-001040.
 CHAPEL AREA SCHOOL DISTRICT      :
                                  :                ARGUED: October 27, 2021
                                  :
 APPEAL OF: BOROUGH OF FOX CHAPEL :
 AND FOX CHAPEL AREA SCHOOL       :
 DISTRICT                         :

                                 DISSENTING OPINION

JUSTICE TODD
      The majority finds that the definition of “compensation” in Section 303 of the Tax

Reform Code, 72 P.S. § 7303(a)(1)(i) (“Tax Code”), unambiguously includes qui tam

payments, rendering such payments “earned income” subject to taxation under the Local

Tax Enabling Act, 53 P.S. § 6924.501 (“LTEA”). Unlike the majority, but consistent with

the Commonwealth Court below, in my view, the relevant language of the Tax Code is

sufficiently ambiguous in this regard such that the taxpayer herein should benefit from the

principle that tax statutes be “construed most strongly and strictly against the Government

and any reasonable doubt must be resolved in favor of the taxpayer.” In re Good’s Estate,

182 A.2d 721, 723 (Pa. 1962); see 1 Pa.C.S. § 1928(b)(3) (provisions imposing taxes are

to be strictly construed). Thus, I would construe the statute in favor of O’Donnell and
conclude that qui tam payments do not constitute compensation under Section

303(a)(1)(1). Accordingly, I must dissent.

      As the majority notes, Section 303 sets forth eight different classes of income

subject to state personal income tax, including, as pertinent herein, “compensation,”

which it defines as “[a]ll salaries, wages, commissions, bonuses and incentive payments

whether based on profits or otherwise, fees, tips and similar remuneration received for

services rendered whether directly or through an agent.” 72 P.S. § 7303(a)(1)(i). Neither

party disputes that qui tam payments are not explicitly listed in this definition.

Nevertheless, the majority concludes that qui tam awards unequivocally constitute

taxable compensation under Section 303, finding definitively that they are an incentive

payment. I do not agree that the proper characterization of qui tam awards for tax

purposes is so clear.

      The majority finds that qui tam awards are an incentive payment, and, thus,

compensation under Section 303, because they financially incentivize a relator to make

a claim under the False Claims Act (“FCA”) and to provide the federal government with

information related thereto.    For the reasons the majority offers, this is certainly a

reasonable interpretation of Section 303.        In my view, however, there are other

reasonable interpretations of the Tax Code implicated herein. First, the Tax Code’s

definition of compensation as imported into the LTEA reasonably suggests an

employment relationship is required, which is absent here. Second, and regardless, a

relator’s actions in connection with a qui tam lawsuit can reasonably be viewed as

providing services to the relator himself, and not to the federal government.

      Distilled to its essence, Section 303 provides that “compensation is something

which is received for services rendered.” Commonwealth v. Staley, 381 A.2d 1280, 1282

(Pa. 1978). While Section 303 contains no express requirement that compensation must

                               [J-72-2021] [MO: Wecht, J.] - 2
be received through an employment relationship, and although Section 303 does not

define “services,” the other categories of compensation included in the provision ─

salaries, wages, commissions, bonuses, incentive payments, fees, and tips ─ appear to

have an employment nexus, suggesting that the catch-all language “similar remuneration

received for services rendered” does as well.

      Furthermore, in defining “earned income,” Section 501 of the LTEA expressly

references both the definition of compensation in Section 303 of the Tax Code and the

Code’s accompanying rules and regulations. See 53 P.S. § 6924.501. The above

employment-focused view of the Tax Code is consistent with the definition of

“compensation” in its controlling regulation, which focuses more overtly on an

employment relationship:

             Compensation includes items of remuneration received,
             directly or through an agent, in cash or in property, based on
             payroll periods or piecework, for services rendered as an
             employee or casual employee, agent or officer of an
             individual, partnership, business or nonprofit corporation, or
             government agency. These items include salaries, wages,
             commissions, bonuses, stock options, incentive payments,
             fees, tips, dismissal, termination or severance payments,
             early retirement incentive payments and other additional
             compensation contingent upon retirement, including
             payments in excess of the scheduled or customary salaries
             provided for those who are not terminating service, rewards,
             vacation and holiday pay, paid leaves of absence, payments
             for unused vacation or sick leave, tax assumed by the
             employer, or casual employer signing bonuses, amounts
             received under employee benefit plans and deferred
             compensation arrangements, and other remuneration
             received for services rendered.
61 Pa. Code § 101.6(a).        In my view, the ambiguity in this regard – whether

“compensation” requires an employment nexus – redounds in O’Donnell’s favor as I reject

                            [J-72-2021] [MO: Wecht, J.] - 3
the Taxing Authorities’ argument1 that a qui tam relator’s role in initiating and participating

in the litigation renders them an employee or agent of the government.

       At any rate, regardless of whether the remuneration is deemed to be an incentive

payment as the majority concludes, it is undisputed that under the Tax Code such

remuneration must be given in exchange for “services rendered.” 72 P.S. § 7303(a)(1)(i).

In one respect, and as the majority illustrates, the qui tam relator’s actions in initiating and

participating in the qui tam action under the FCA and providing the federal government

with information related thereto can be viewed as a service to the federal government, as

the relator’s actions in this regard aid the federal government in identifying and combating

fraud, and as the relator may receive a percentage of the proceeds of the action or

settlement based upon “the extent to which [he or she] substantially contributed to the

prosecution of the action.” 31 U.S.C. § 3730(d)(1).

       On the other hand, however, as the high Court observed in Stevens, a qui tam

relator “has a concrete private interest in the outcome of the suit.” Vermont Agency of

Natural Resources v. Stevens, 529 U.S. 765, 772 (2000) (internal quotation marks

omitted). Indeed, the Court observed the FCA provides that:

              [a] person may bring a civil action for a violation of section
              3729 for the person and for the United States Government,” §
              3730(b) (emphasis added); gives the relator “the right to
              continue as a party to the action” even when the Government
              itself has assumed “primary responsibility” for prosecuting it,
              § 3730(c)(1); entitles the relator to a hearing before the
              Government's voluntary dismissal of the suit, § 3730(c)(2)(A);
              and prohibits the Government from settling the suit over the
              relator's objection without a judicial determination of
              “fair[ness],   adequa[cy]      and    reasonable[ness],”     §
              3730(c)(2)(B).

1Like the majority, I refer to the Borough of Fox Chapel and the Fox Chapel School
District collectively as the “Taxing Authorities”.

                               [J-72-2021] [MO: Wecht, J.] - 4
Id. at 772 (quoting 31 U.S.C. § 3730). As a result, regardless of the government’s

participation, the relator remains substantially personally vested in the litigation.

Moreover, as the high Court also found, the “FCA can reasonably be regarded as effecting

a partial assignment of the Government's damages claim,” providing the relator with a

direct financial interest in the outcome of the case as a plaintiff. Id. at 773. In my view,

a plaintiff in a lawsuit, brought in his name, with (in some circumstances) exclusive control

over it, who is personally invested in its outcome, and who has a direct financial interest

in the damages award funded not by the government but by the defendant, can be viewed

as principally serving himself and not the federal government. From this perspective, a

qui tam plaintiff receiving an award is not being remunerated for services rendered under

the Tax Code.

       Again, I accept that the majority’s conclusion that a qui tam plaintiff provides

services to the federal government under Section 303 to be a reasonable one. But, in my

view, the alternative interpretation – that a qui tam plaintiff is principally serving himself

and not the government – is also reasonable. As a result, I consider Section 303 to be

ambiguous in this respect as well.

       Herein, Taxing Authorities advanced no less than three differing and inconsistent

theories as to why they consider qui tam payments to be taxable compensation: that the

qui tam award is compensation for services O’Donnell rendered as a qui tam plaintiff

generally; that it is compensation for services O’Donnell rendered while working as an

agent or employee of the federal government; and that it is compensation in the form of

an incentive payment. For the above reasons, I find the relevant provisions of the Tax

Code to be susceptible to multiple reasonable, but conflicting, interpretations. Yet, tax

laws “are to be construed most strictly against the government and most favorably to the

taxpayer, and a citizen cannot be subjected to a special burden without clear warrant of

                              [J-72-2021] [MO: Wecht, J.] - 5
law.” In re Husband’s Estate, 175 A. 503, 506 (Pa. 1934). Because I consider the tax

consequences of qui tam payments under Section 303 to be less than clear, I would find

in favor of O’Donnell. Accordingly, I dissent.

       Chief Justice Baer and Justice Donohue join this dissenting opinion.

                             [J-72-2021] [MO: Wecht, J.] - 6