Court Opinion

ID: 4644622
Source: CourtListenerOpinion
Date Created: 2020-12-18 15:16:02.580463+00
Date Added: 2024-06-11T08:00:47.026600
License: Public Domain

IN THE COMMONWEALTH COURT OF PENNSYLVANIA

Edward J. O’Donnell,                  :
                       Appellant      :
                                      :
             v.                       :              No. 880 C.D. 2019
                                      :              Argued: May 14, 2020
Allegheny County North Tax Collection :
Committee, and Borough of Fox Chapel :
and Fox Chapel Area School District   :

BEFORE:         HONORABLE MARY HANNAH LEAVITT, President Judge
                HONORABLE RENÉE COHN JUBELIRER, Judge
                HONORABLE P. KEVIN BROBSON, Judge
                HONORABLE ANNE E. COVEY, Judge
                HONORABLE MICHAEL H. WOJCIK, Judge
                HONORABLE ELLEN CEISLER, Judge
                HONORABLE J. ANDREW CROMPTON, Judge

OPINION NOT REPORTED

MEMORANDUM OPINION
BY JUDGE CROMPTON                                    FILED: December 18, 2020

                Before this Court is the appeal of Edward J. O’Donnell (Taxpayer) from
the June 11, 2019 order of the Allegheny County Court of Common Pleas (Trial
Court), denying Taxpayer’s Appeal and entering judgment in favor of the Allegheny
County Tax Collection Committee (TCC), the Borough of Fox Chapel (Borough),
and the Fox Chapel Area School District (School District) (collectively known as
Taxing Authority1) and against Taxpayer in the amount of $437,194.92.

      1
          The TCC, Borough, and School District, together, filed a single brief.
                                        I.     Background
               On February 6, 2019, the parties entered into a Joint Stipulation of Facts
   (Jt. Stip.) before the Trial Court, which is substantially recounted below for
   background purposes.

               In June of 2014, Taxpayer filed a qui tam action[2] in federal court
               alleging that a certain financial institution as well as its affiliates
               and subsidiaries (collectively, the “Institution”) violated the
               federal False Claims Act, 31 U.S.C. §[§]3729[-3733] (FCA) in
               connection with the sale of residential mortgage loans by the
               Institution’s consumer markets division to the Federal National
               Mortgage Association (“Fannie Mae”) and the Federal Home
               Loan Mortgage Corporation (“Freddie Mac”).

               After Taxpayer filed his qui tam action, the [F]ederal
               [G]overnment intervened . . . [and decided] to proceed with the
               lawsuit . . . .

               In August of 2014, the [United States] Department of Justice,
               acting on behalf of the United States of America, entered into a
               global settlement agreement with the Institution resolving certain
               claims . . . including claims related to Taxpayer’s allegation in
               the action. This agreement did not act as a release to claims filed
               by [] Taxpayer in his qui tam action.

               In December . . . 2014, the United States entered into a settlement
               agreement with [] Taxpayer resolving his claim under the FCA
               wherein [] Taxpayer accepted sixteen percent (16%) of the
               proceeds of the global settlement with the Institution, plus an
               additional sum, resulting in Taxpayer’s receipt of a federal
               whistleblower payment, less . . . [a] deduction of attorney’s fees,
               in the amount of $34,560,000.

       2
         “In a qui tam action, a private party called a relator brings an action on the government's
behalf. The government, not the relator, is considered the real plaintiff. If the government
succeeds,       the      relator       receives        a       share       of       the      award.”
https://www.law.cornell.edu/wex/qui_tam_action (last visited on December 17, 2020).

                                                 2
              In preparing Taxpayer’s 2014 Pennsylvania Personal Income
              Tax (PA PIT) [or PIT] return, Taxpayer’s accountant reflected
              the federal whistleblower payment as compensation for PA PIT
              purposes.

              The whistleblower payment was reported by the [F]ederal
              [G]overnment to Taxpayer as “other income” on Line 3 of a
              federal [f]orm 1099-MISC.

              Taxpayer filed an amended 2014 PA PIT Return (the “Amended
              Return”)[,] which remove[d] from his PIT base the
              whistleblower payment included as compensation and [included]
              a corresponding Petition for Refund of the PIT paid thereon.

              The Pennsylvania Board of Finance and Revenue (“Board”) in a
              decision and order dated September 26, 2018[,] ordered the
              Pennsylvania Department of Revenue (“Department”) to refund
              to [Taxpayer] the PA PIT paid on the whistleblower payment.

              The Department thereafter filed a Petition for Review with [this
              Court] challenging the Board’s decision and order . . . . This
              Petition . . . is currently pending . . . at docket number 932 F.R.
              2018.[3]

              The power of the Borough and the School District to impose an
              Earned Income Tax (“EIT”) is derived exclusively from the
              Local Tax Enabling Act [(LTEA)],[4] 53 P.S. [§]§6924.101[-
              6924.901], . . . which allows certain political subdivisions to
              impose a tax on the earned income of natural persons.

              Pursuant to the LTEA, both the Borough and the [School]
              District levy [an earned income tax/income tax].[5] The
              combined effective rate is 1.0% . . . .

       3
          An Order of this Court, dated November 5, 2020, stayed 932 F.R. 2018, by agreement of
the parties, pending the outcome of the present matter.

       4
         The Local Tax Enabling Act, Act of December 31, 1965, P.L.1257, No. 511, as amended,
53 P.S. §§6924.101-6924.901.

       5
        “The parties disagree over whether the Borough and School District levy an ‘earned
income tax’ or an ‘income tax.’ Taxpayer argues that the Borough and School District levy an
(Footnote continued on next page…)

                                              3
              Pursuant to the LTEA, the Borough and [School] District are
              members of the Allegheny North Tax Collection District
              (hereinafter the “Tax Collection District”).

              Pursuant to the LTEA, the [TCC] appointed Keystone
              Collections Group [(Keystone)] as its Tax Officer for the Tax
              Collection District.

              [Keystone] serves as the appointed Tax Officer for the School
              District and Borough in the audit and collection of delinquent
              [EIT] accounts.

              Keystone’s records indicate that [] Taxpayer did not file a local
              [EIT] return for the 2014 tax year.

              Keystone conducted an initial comparison of earnings reported
              by [] Taxpayer to the [Department] on his originally filed PA PIT
              return for the 2014 tax year with earnings information reported
              to the School District and Borough for the 2014 tax year.

              As a result of this comparison, a discrepancy was identified
              based on the amount of compensation reported by Taxpayer to
              the Department and a “Notice[,]” dated May 24, 2017
              (“Notice”)[,] was generated by Keystone and mailed to
              Taxpayer.

              The Notice showed an alleged underpayment by . . . Taxpayer in
              the amount of $437,194.92 . . . .

              On June 15, 2017, Taxpayer’s counsel, Robert Careless
              [(Careless)], called Keystone’s counsel, Christopher Vincent
              [(Vincent)], to discuss this matter. During the phone call,
              [Careless] requested that the account be placed [“]in suspense[”]
              while the matter was investigated further.[6]

‘earned income tax.’ The Borough and School District argue that they levy an ‘income tax’. . . .”
Reproduced Record (R.R.) at 166a.

       6
         Between July 21, 2017, and August 14, 2017, Vincent and Careless exchanged emails
regarding tax documents previously requested by Vincent, the need to review the qui tam
settlement agreement, and the status of the qui tam settlement documents.

                                               4
On August 21, 2017, [Careless] emailed to [Vincent] a copy of a
document . . . titled “Edward O’Donnell – Petition for
Administrative Appeal,” the original of which had been sent via
certified mail, return receipt requested on the same date to
Keystone.

The document that Taxpayer titled “Edward O’Donnell –
Petition for Administrative Appeal[,]” submitted on August 21,
2017[,] was not on the TCC’s appeal form. The TCC’s appeal
form is not . . . available online. [It was] obtained directly from
Vincent.

On August 22, 2017, [Vincent] confirmed receipt of [the
document entitled “Edward O’Donnell – Petition for
Administrative Appeal.”]

On August 23, 2017, [Vincent] sent an email to [Careless], which
included three documents titled “Administrative Procedures
Applicable to Petitions for Appeal and Refund,” “Disclosure
Statement,” and “Petition for Appeal and Refund.”

On August 25, 2017, [Careless, via email,] provided [Vincent] .
. . with a copy of the qui tam Settlement Agreement between the
United States and the Institution and the Stipulation and Order of
Settlement between the United States and Taxpayer.

On September 7, 2017, [Vincent] advised [Careless,] by email[,]
that the full amount alleged in the Notice is taxable earned
income and that there remains a balance of $437,194.92 . . . due
and owing the Borough and School District. In response, [and]
on the same date, [Careless] requested from [Vincent] the
rationale for Keystone’s position. On September 11, 2017,
[Vincent] responded [with same].

On September 18, 2017, [Careless] emailed . . . [Vincent] a copy
of a document titled “Supplement to Petition for Appeal filed on
August 21, 2017,” the original of which was mailed [to
Keystone] on the same date . . . . [Vincent] confirmed [receipt
of this document in an email dated September 18, 2017].
The [TCC] Board of Appeals is appointed by the [TCC] to hear
and decide appeals filed by taxpayers of assessments of EIT.

                             5
                On October 30, 2017, the [TCC] Board of Appeals issued . . .
                Taxpayer a Notice of Administrative Hearing to be held on
                November 14, 2017.

                The TCC, through . . . [the TCC] Appeals Board, issued a
                decision dated November 16, 2017, denying Taxpayer’s Petition
                for Administrative Appeal.

Reproduced Record (R.R.) at 161a-71a (paragraph numbering omitted).

                Taxpayer subsequently appealed the TCC’s decision to the Trial Court,
which held oral argument on May 28, 2019. Taxpayer’s Br. at 9. On June 11, 2019,
the Trial Court issued its order in favor of the Taxing Authority and against
Taxpayer. R.R. at 529a. Taxpayer now appeals to this Court.7

                                    II.     Issues on Appeal
                Taxpayer argues that his Administrative Appeal should have been
deemed approved pursuant to Section 8433 of the Local Taxpayers Bill of Rights
Act (LTBR)8 because it was decided by the TCC more than 60 days after he
submitted it to Keystone. Taxpayer further argues that the qui tam lawsuit settlement
payment he received is not taxable for the purposes of the Borough’s and School
District’s EIT. Taxpayer’s Br. at 4.

       7
          This Court’s standard of review is limited to determining whether the Trial Court abused
its discretion, committed an error of law or rendered a decision unsupported by the evidence.
Pugliese v. Twp. of Upper St. Clair, 660 A.2d 155, 156 (Pa. Cmwlth. 1995). “Questions of law
are subject to de novo review, and our scope of review is plenary.” In re P-Ville Assocs., 87 A.3d
898, 901 n.5 (Pa. Cmwlth. 2014).

       8
           53 Pa.C.S. §8433.

                                                6
                           A. Timeliness of TCC Decision
             Section 8431(a) of the LTBR states that petitions for reassessment of
an eligible tax must be filed within 90 days of the date of an assessment notice. 53
Pa.C.S. §8431(a). Once a petition is filed, Section 8433 of the LTBR mandates that
a decision on the petition be issued within 60 days. 53 Pa.C.S. §8433. “Failure to
act within 60 days shall result in the petition being deemed approved.” Id.

             Taxpayer argues that the Trial Court erred by failing to determine that
the TCC was required to issue a decision on his Petition for Administrative Appeal
by October 20, 2017, pursuant to Section 8433 of the LTBR, and that since the TCC
did not issue its decision until November 16, 2017, the Petition was deemed
approved. As part of his argument regarding timeliness, Taxpayer asserts the Trial
Court erred when it concluded that the 60-day period for the TCC to render a
decision on his Petition for Administrative Appeal did not begin when he filed same
on August 21, 2017, because Keystone did not issue its final determination until the
September 7, 2017 email from Keystone’s counsel, Vincent. R.R. at 7a; Taxpayer’s
Br. at 14-15. Taxpayer asserts that there is no reference to a “final determination”
under the LTBR, and there is no authority to suggest that an email from a tax
collector is an assessment notice for purposes of Section 8431 of the LTBR.
Taxpayer’s Br. at 15 (citing 53 Pa.C.S. §8431).

             Taxpayer argues that the Trial Court erred when it accepted Keystone’s
argument that the Notice sent to Taxpayer, in May 2017, was an “initial audit inquiry
notice” and not an “assessment” and that the Trial Court did not determine that the
Notice was not an “assessment” under the LTEA, stating only that a “final
determination” was not made until September 7, 2017. Taxpayer argues that the

                                         7
LTBR makes no provision for an “initial audit inquiry notice,” and, in fact, the
document that was identified as such was a formal notice from Keystone demanding
payment within 30 days of the total amount of EIT, plus penalties, interest, and costs.
Taxpayer’s Br. at 15.

             Taxpayer also argues that the Trial Court abused its discretion when it
determined that “[o]ngoing email exchanges from June 2017 through September
2017[,] clearly indicate the parties’ continuous efforts [to] work it out” because there
is no authority to support the proposition that a statutory time period is tolled while
the parties communicate in an effort to resolve an assessment notice. R.R. at 7a;
Taxpayer’s Br. at 16. Taxpayer further asserts that he clearly informed Keystone
that he did not consider any efforts to resolve the matter to be a waiver of the 60-day
decision period pursuant to the LTBR and that the May 2017 Notice from Keystone
was an assessment which triggered the 90-day appeal period for Taxpayer to
challenge same. Taxpayer’s Br. at 16.

             Taxpayer asserts that he filed his Petition for Administrative Appeal
with Keystone on August 21, 2017, and that he had a statutory right to have the
appeal heard and decided within 60 days. Taxpayer argues that the TCC failed to
issue a decision by October 20, 2017, as required by Section 8433 of the LTBR, and
that, under the plain language of the statute, any petition not addressed and decided
within that time limit is “deemed approved.” Taxpayer’s Br. at 17. Taxpayer adds
that, even assuming the September 7, 2017 email from Attorney Vincent was the
“triggering event,” the TCC would have had 60 days from that point to issue a

                                           8
decision, i.e., a decision would have been required by November 6, 2018. However,
the TCC did not issue its decision until November 16, 2017. Taxpayer’s Br. at 20.

             In response to Taxpayer’s contentions, the Taxing Authority states that:
“Pursuant to the LTBR, an assessment is defined as ‘[t]he determination by a local
taxing authority of the amount of underpayment by a taxpayer.’ 53 Pa.C.S. §8422.
Once an assessment is made and notice given, ‘petitions for reassessment of an
eligible tax shall be filed within 90 days.’ 53 Pa.C.S. §8431(a)(2) . . . .” Taxing
Authority’s Br. at 11.

             Taxing Authority argues that Taxpayer’s August 21, 2017 Petition for
Administrative Appeal could not have been an actual appeal because no final
decision had been rendered in the matter at that point in time. Taxing Authority’s
Br. at 15. Taxing Authority notes that, “[f]inally, in a letter dated August 25, 2017,
[Taxpayer’s] counsel recognized that a final determination had not yet been made
when he stated ‘we will wait for Keystone's final determination before’ submitting
an appeal on the [TCC’s] Appeal Form. R. [R.R. at] 334 (Jt. Stip.[,] Exhibit ‘T’).”
Taxing Authority further notes:

             [t]he Trial Court found that a final determination was made by
             the Tax Officer on September 7, 2017. It was only after this date
             that a Petition for Reassessment could be filed. Accordingly, on
             September 18, 2017, [Taxpayer] filed with the Tax Officer a
             document titled “Supplement to Petition for Appeal Filed on
             August 21, 2017.” The Petition of September 18, 2017[,] was a
             timely appeal to the final determination of September 7, 2017.
Taxing Authority’s Br. at 16.

             Taxing Authority asserts that

                                          9
             [a]fter the timely Petition was accepted on September 18, 2017,
             the [TCC] Appeals Board had sixty (60) days to render a
             decision. The record clearly reflects that a decision was rendered
             and mailed to all parties on November 16, 2017. This occurred
             fifty-nine (59) days after the appeal was filed. Accordingly, the
             timing requirements established by the LTBR were met.
Taxing Authority’s Br. at 17.

             Upon review of Taxpayer’s contention that the Trial Court erred when
it determined the Taxing Authority issued a timely opinion in this matter, we
disagree. Taxpayer had not received the Notice from which he could file his
administrative appeal until September 7, 2017. He filed his appeal on September
21, 2017, and he received a final determination from the TCC on November 16,
2017, i.e., 59 days later.

             Although we acknowledge Taxpayer filed a document, in August 2017,
that he contends was his Petition for Administrative Appeal, we agree with Taxing
Authority’s assertion that no final assessment had been issued at that point. Thus,
Taxpayer’s “Appeal” was premature. The document that Taxpayer filed, in August
2017, expressed his disagreement with the May 24, 2017 Notice from Keystone,
which informed him of a “preliminary analysis,” that indicated a deficiency in his
account in the amount of $437,194.92, and which requested that he “contact [the]
office at once,” if he believed “the earnings or credits shown above are incorrect.”
R.R. at 36a. Subsequent to Taxpayer’s August 2017 filing, Taxpayer’s and Taxing
Authority’s attorneys engaged in an email exchange that was, as the Trial Court
stated, an attempt to “work it out.” R.R. at 7a.

                                         10
            On September 7, 2017, Keystone’s attorney, Vincent, contacted
Taxpayer’s attorney, Careless, via email, to thank him for providing “the requested
information regarding [Taxpayer’s] 2014 earnings,” informing him that “Keystone
has determined that the full amount alleged in Keystone’s initial audit notice is
taxable earned income at the local level,” and noting: “[a]s we have discussed
previously, now that this determination has been made an appeal of this
determination is proper.” R.R. at 142a. On September 18, 2017, Taxpayer filed a
form entitled “Supplement to Petition for Appeal Filed on August 21, 2017,” which
attached his August 2017 Petition for Administrative Appeal and checked a box
indicating “Hearing Requested.” R.R. at 391a-393a. The Authority issued its
determination on the appeal by November 16, 2017, within the 60-day window
provided by the LTBR. R.R. at 147a-148a.

            Given the aforementioned timeline and the representations made in the
various documents, including email exchanges between the parties, it is apparent
that Keystone’s May 24, 2017 notice to Taxpayer was not a determination from
which an appeal could be taken. Such finality did not occur until September 7, 2017,
when Taxpayer was informed of the assessment, and, thus, Taxpayer’s actual
Petition for Administrative Appeal was the supplemental document he timely filed
on September 21, 2017. This is the point at which the 60-day clock began to run.
As the Trial Court stated: “[a] final determination was rendered on September 7,
2017, when [Vincent] emailed [Careless], stating “[a]fter reviewing the documents
provided, Keystone has determined that the full amount alleged in Keystone’s initial
audit notice is taxable earned income at the local level.” R.R. at 7a. As the Trial
Court’s decision is supported by the evidence of record, and we discern no abuse of

                                        11
discretion or error of law, there is no basis upon which we would disturb the Trial
Court’s determination that the TCC issued a timely decision, and Taxpayer did not
prevail by default. Thus, we next address the matter of whether Taxpayer’s qui tam
settlement proceeds are taxable income, for the purposes of, and subject to, the
Taxing Authority’s EIT.

      B. Are Taxpayer’s Qui Tam Settlement Payments Taxable as Earned
                            Income in Pennsylvania?
             As Taxpayer notes:

             The Borough's EIT Ordinance expressly incorporates the
             definitions contained in Section [501] of the LTEA, as amended
             by the Act of July 2, 2008 (P.L. 197, No. 32) (“Act 32 of 2008”),
             53 P.S. §6924.501, for purposes of imposing its EIT. The School
             District’s power to levy and collect an EIT is derived exclusively
             from the LTEA. The School District cannot levy a tax ‘unless
             the power to do so is plainly and unmistakably conferred by the
             legislature.’ Ski Roundtop, Inc. v. Fairfield Area Sch. Dist., 533
A.2d 828, 831 (Pa. Cmwlth. 1987). Accordingly, the LTEA’s
             definition of the term ‘earned income’ controls the items of
             income on which the School District’s EIT can be imposed.
Taxpayer’s Br. at 21-22.

             The LTEA defines “earned income,” in pertinent part, as follows: “The
compensation as required to be reported to or as determined by the [Department]
under section 303 [72 P.S. §7303] of the act of March 4, 1971 (P.L. 6, No. 2), known
as the Tax Reform Code of 1971, and rules and regulations promulgated under that
section . . . .” 53 P.S. §6924.501.

             There are eight classes of income for purposes of the PIT in
Pennsylvania. Those eight classes are: (1) compensation, (2) net profits, (3) net

                                         12
gains or income from disposition of property, (4) net gains or income derived from
or in the form of rents, royalties, patents and copyrights, (5) dividends, (6) interest
“derived from obligations which are not statutorily free from State or local taxation
under any other act of the General Assembly . . . or under the laws of the United
States . . . .” (7) gambling and lottery winnings other than noncash prizes of the
Pennsylvania State Lottery, and (8) net gains or income derived through estates or
trusts. Section 303 of the Tax Reform Code of 1971 (Tax Code);9 72 P.S. §7303.

                There is no dispute in the present case that the definition of “earned
income,” pursuant to the LTEA, equates to the amount of “compensation”10 required
to be reported under Section 303 of the Tax Code, and the Department’s associated
regulations. 53 P.S. §6924.501; 72 P.S. §7303; Taxpayer’s Br. at 22.

                It is a truism that “[n]either the [Tax] Code nor the Department’s
regulations include whistleblower payments within the definition of ‘compensation,’
and . . . do not provide for the taxation of settlement payments received as the result
of a lawsuit brought pursuant to the FCA under any class of income subject to PA
PIT.” Taxpayer’s Br. at 22.

       9
           72 P.S. §§7101-10004.

       10
           “Compensation” is defined in the Tax Code, in pertinent part, as follows: “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,
and whether in cash or in property . . . .” Section 301(d) of the Tax Code, added by the Act of
Aug. 31, 1971, P.L. 362, 72 P.S. §7301(d).

                                                13
             The Taxing Authority asserts that, in its published guidance on the
matter, the Department lists “whistleblower payments” as miscellaneous
compensation which is taxable for purposes of the PIT. Taxing Authority’s Br. at
20 (citing the Department’s Personal Income Tax Guide11 (Personal Income Tax
Guide); R.R. at 503a). The Taxing Authority further notes that, “if a particular item
of income is not explicitly listed in the definition of, or does not fit neatly within,
any class of income, the relevant inquiry is ‘whether the payment is a substitute for
income that would have been included in one of the eight classes of income subject
to [PA PIT].’        [Department’s Personal Income Tax Letter Ruling] Pa.
[Letter][Ruling]PIT-6-007[, June 15, 2006;]” Taxing Authority’s Br. at 20
(emphasis added). The Taxing Authority acknowledges qui tam payments are not
explicitly listed in the statutory definition of compensation. However, it argues that
the Trial Court properly held qui tam payments constitute compensation to Taxpayer
because he was acting as an agent of the Federal Government, performing services
on its behalf. Taxing Authority’s Br. at 20.

             The Taxing Authority argues that the FCA requires the whistleblower
to bring an action in the name of the government and that an individual cannot
initiate legal action on behalf of another without the existence of an agency
relationship. Taxing Authority’s Br. at 22. Citing the Black’s Law Dictionary
definition of “agent,” the Taxing Authority argues that an agent is “one who is
authorized to act for or in place of another; a representative.           Black’s Law
Dictionary, (7th [ed.] 1999).” Taxing Authority’s Br. at 21.           Further, Taxing
Authority, citing Basile v. H&R Block, Inc., 761 A.2d 1115, 1120 (Pa. 2000)

      11
          https://www.revenue.pa.gov/FormsandPublications/PAPersonalIncomeTaxGuide/Pages
/default.aspx (last visited on December 17, 2020).

                                          14
(internal citations omitted), notes that the three basic elements of agency in
Pennsylvania are “‘1) the manifestation by the principal that the agent shall act for
him, (2) the agent’s acceptance of the undertaking, and (3) the understanding of the
parties that the principal is to be in control of the undertaking.’” Taxing Authority’s
Br. at 21.

             Citing the FCA, Taxing Authority states that, “[i]n a qui tam action, the
whistleblower . . . brings a civil action on [his] own behalf ‘and for the United States
Government.’ 31 U.S.C. §3730(b)(1).” Taxing Authority’s Br. at 22. The Federal
Government is the principal in the relationship because “[it] is given the authority to
dismiss the action, settle the action, or substantially limit the relator’s prosecution of
the case, all without the assent of the [whistleblower].” Taxing Authority’s Br. at
22 (citing 31 U.S.C. §3730(c)(2)).

             The Taxing Authority further asserts that Taxpayer provided services
to the Federal Government via the qui tam action and that “the [f]ederal [c]ourts, in
holding that qui tam payments are taxable for [f]ederal [i]ncome [t]ax purposes, have
established that qui tam relators provide services to the government. See United
States ex rel. Kelly v. Boeing Co., 9 F.3d 743 (9th Cir. 1993).” Taxing Authority’s
Br. at 25.

             The Taxing Authority states:

             The [whistleblower’s] “concrete, private interest” in the outcome
             of the suit is the “bounty” he will receive if the suit is successful.
             [Vt.] Agency of Natural [Res.] v. United States ex rel. Stevens,
             529 U.S. 765 (2000).

                                           15
             Accordingly, the [f]ederal [c]ourts have held that qui tam
             payments are both “rewards” and “bounties.” Black’s Law
             Dictionary defines a “reward” as “payment given in return for
             services (such as recovering property).” Black’s Law Dictionary
             (9th ed. 2009). Similarly, “bounty” is defined as a “payment
             given to induce someone to take action or perform a service.” Id.

Taxing Authority’s Br. at 25-26.

             Taxpayer argues that his qui tam recovery was not payment for services
rendered to the government because such payments “are meant as a financial
incentive for a private person to bring a lawsuit for the prosecution of claims relating
to fraudulent activity.” Taxpayer’s Br. at 27. Further, he was entitled to a share of
the settlement proceeds because of the lawsuit he initiated against the Institution.
Taxpayer asserts that “this is consistent with the reporting of the qui tam payment as
‘other income’ on a federal [f]orm 1099-MISC, as opposed to ‘nonemployee
compensation’ on the [f]orm.” Id. Taxpayer argues that Internal Revenue Service
(IRS) guidance makes it clear that “nonemployee compensation” includes awards
for services performed as a nonemployee and other forms of compensation for
services performed by an individual who is not an employee, “while ‘other income’
encompasses income not reportable in one of the other boxes on the . . . 1099,
including awards that are not for services performed.” Taxpayer’s Br. at 27-28.
Accordingly, Taxpayer contends that, if a payment from the Federal Government is
not taxable as compensation for federal income tax purposes, it cannot be taxable as
compensation for PA PIT purposes or for purposes of the local EIT. Taxpayer’s Br.
at 28. Although contending the Trial Court did not address whether he was an
employee of the Federal Government, Taxpayer asserts that, for PA PIT purposes,
an “employee” means “an individual from whose wages an employer is required
under the Internal Revenue Code to withhold [f]ederal income tax. 72 P.S.

                                          16
§7301(g).” Taxpayer’s Br. at 26. Taxpayer argues that he does not fall within this
definition and that “the lawsuit settlement payment he received was not reported as
wages paid to an employee (regular or casual) on a federal Form W-2.” Taxpayer’s
Brief at 26.

               In addition, Taxpayer argues that the Federal Government’s decision to
intervene and become a co-plaintiff in the qui tam action did not convert him into an
agent of the Federal Government.         Taxpayer asserts there was no fiduciary
relationship between himself and the Federal Government. He contends that he had
no power conferred upon him by the Federal Government, and he had no authority
to act on behalf of the Federal Government with respect to the qui tam action “or to
bind the Federal Government with his actions.” Taxpayer’s Br. at 25-26. Taxpayer
asserts that “[t]he Trial Court overlooked section 3730(c)(1) of the FCA which
specifically provides that ‘[i]f the Government proceeds with the action, it shall have
the primary responsibility for prosecuting the action, and shall not be bound by an
act of the person bringing the action.’ 31 U.S.C. §3730(c)(1) (emphasis added).
R.[R.] at 173a (Jt. Stip., Exhibit A).” Taxpayer’s Br. at 25. Citing United States ex
rel. Taxpayers Against Fraud v. General Electric Company, 41 F.3d 1032, 1041 (6th
Cir. 1994), Taxpayer notes “a whistleblower is not vested with any governmental
power.” Taxpayer’s Br. at 25-26.

               In addition to its arguments that Taxpayer was an agent of the Federal
Government and received a qui tam payment as remuneration for his services, the
Taxing Authority asserts that Taxpayer’s qui tam payment was an incentive
payment/reward made for the purpose of inducing performance and that, “by
allowing relators to share in a percentage of a qui tam recovery, the FCA rewards

                                          17
relators for their whistleblowing activity and participation in prosecuting the case.”
Taxing Authority’s Br. at 31. Taxing Authority adds that the FCA incentivizes
whistleblowing and that “the greater the effort and level of participation in the case
by the relator, the greater the possible share of any award or settlement. See 31
U.S.C. § 3730(d)(1).” Id. The Taxing Authority maintains that “[t]he [f]ederal
[c]ourts have supported this position, describing qui tam payments as ‘a financial
incentive for a private person to provide information and prosecute claims related to
fraudulent activity.’ Campbell v. Commissioner [of Internal Revenue], 658 F.3d
1255, 1258 (11th Cir. 2011).” Id. The Taxing Authority notes that “a qui tam
payment is includable in gross income for [f]ederal income taxes because it is
equivalent to a reward. Campbell, 658 F.3d at 1258-59.[12] See also Patrick v.
Commissioner [of Internal Revenue], 142 T.C.13 No. 5 (2014) (‘a qui tam award is a
reward for the relator's efforts in obtaining repayment to the Government’).” Id.
The Taxing Authority adds that “rewards are explicitly listed as compensation in
[the Department’s Regulations at] 61 Pa. Code §101.6(a).”14 Id.

       12
         To this point, Taxpayer argues that “[a]s both the Borough[’s] and School District’s EIT
can be imposed only on ‘earned income’ as defined in the LTEA, and neither is[,] or can be[,]
imposed on the entirety of an individual’s gross income from whatever source (as is the case with
the federal income tax), the same analysis cannot be applied to allow the taxation of the
whistleblower payment for EIT purposes.” Taxpayer’s Br. at 29.

       13
            This was a case in the United States Tax Court.

       14
            The Department’s Regulations define “compensation,” in pertinent part, as

                 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, . . . incentive payments, . . .
                 rewards, . . . and other remuneration received for services rendered.
(Footnote continued on next page…)

                                                  18
              Alternatively, the Taxing Authority argues that Taxpayer’s qui tam
recovery is the equivalent of an award for damages, asserting that “Pennsylvania
regulations provide that damages from a settlement agreement are taxable unless
‘pain and suffering, emotional distress or other like noneconomic element was, or
would have been, a significant evidentiary factor in determining the amount of the
taxpayer's damage.’ 61 Pa. Code § 101.6(c)(1).” Taxing Authority’s Br. at 31-32.
The Taxing Authority acknowledges that “‘damages from personal injury or
sickness are excludable from Pennsylvania [c]ompensation,’” but argues that
Taxpayer’s qui tam payment did not stem from personal injury or sickness. Taxing
Authority’s Br. at 31-32 (citing R.R. at 503a, i.e., Personal Income Tax Guide, which
states that “[d]amages or settlement for lost wages other than personal injury” are
included in “Miscellaneous Compensation,” (i.e., “nonemployee compensation
from sources other than a federal Form W-2 or 1099-MISC”)).

              While acknowledging that this Court is not bound by the opinions of
the New Jersey courts, Taxing Authority encourages us to look there for persuasive
authority. Citing Kite v. Director, Division of Taxation, 180 A.3d 725 (N.J. Super.
2018), the Taxing Authority states that the New Jersey Superior Court held that a
qui tam payment is an “award,” which is commonly understood as “monies a person
receives as damages in a lawsuit,” in holding that a qui tam payment is taxable as
gross income in New Jersey, a state that, like Pennsylvania, also excludes damages
received “‘on account of personal injuries or sickness.’ N.J. [Stat. Ann] 54A:6-6(b).”
Taxing Authority’s Br. at 32. The Taxing Authority states that the court, in Kite,

61 Pa. Code §101.6(a) (emphasis added).

                                          19
held that “‘the exclusion indicates that the [New Jersey] Legislature intended that
other monies recovered as damages in a lawsuit or settlement, such as damages in a
qui tam action under the FCA, would be considered an “award” and gross income
under the [New Jersey Gross Income Tax] Act.’ Kite, 180 A.3d at 730.” Taxing
Authority’s Br. at 32.

              In refuting the Taxing Authority’s position, Taxpayer asserts:

              In Kite, . . . the New Jersey Superior Court . . . held that a payment
              received by a New Jersey resident pursuant to the FCA was
              subject to New Jersey Gross Income Tax under the taxable class
              of ‘amounts received as prizes and awards . . . .’ As Pennsylvania
              does not have an enumerated class of taxable income for amounts
              received as prizes and awards,[15] the decision in Kite supports the
              conclusion that Taxpayer was not subject to PA PIT on [his qui
              tam] settlement. This is consistent with the decision of the
              [Board][16] that the whistleblower payment was received by
              Taxpayer as a co-plaintiff who received a share of the settlement
              proceeds from the lawsuit, and thus, was not subject to PA PIT
              since it did not fall within any of the eight (8) classes of taxable
              income enumerated in the PA PIT statute. Accordingly, the
              whistleblower payment received by Taxpayer cannot be subject
              to the EIT imposed by the Borough or the School District.
Taxpayer’s Br. at 30-31.

       15
         We note here that Act 84 of 2016 established that the PA PIT of 3.07% now applies to
Pennsylvania Lottery cash prizes paid after January 1, 2016. Act of July 13, 2016, P.L. 526,
No. 84, amending the Tax Code.

       16
          For purposes of clarification, this is a reference to the Pennsylvania Board of Finance
and Revenue’s September 26, 2018, decision and order which directed the Department to refund
the PA PIT paid by Taxpayer on his whistleblower proceeds and which is currently pending before
this Court at Number 932 F.R. 2018 (see, supra n.3). We reiterate here that 932 F.R. 2018 was
stayed, by a November 5, 2020 Order of this Court, pending the outcome of the present matter.

                                               20
                  Upon review of the Trial Court’s determination in the present matter,
i.e., that Taxpayer’s qui tam recovery is taxable for EIT purposes, we disagree.
There is no question that EIT in Pennsylvania is tied to the definition of
compensation for purposes of the PA PIT. There is also no question that there is no
specific reference to a qui tam recovery in Pennsylvania’s Tax Code. Thus, the
determination of whether such a recovery is taxable for EIT purposes comes down
to whether said recovery fits, or arguably fits, into one of the kinds of compensation
contemplated in the Tax Code. As Taxpayer notes: “[t]he Department’s regulations
provide that ‘compensation’ is defined as ‘items of remuneration received . . . for
services rendered as an employee or casual employee, agent or officer . . . . These
items include salaries, wages, commissions, bonuses, stock options . . . rewards,
vacation and holiday pay . . . and other remuneration received for services
rendered.’ 61 Pa. Code §101.6(a) (emphasis added).” Taxpayer’s Br. at p. 23. In
order for Taxpayer’s proceeds from the qui tam settlement to be compensation, they
would have to have been for services rendered, which, in turn, would mean that
Taxpayer was employed by the Federal Government or served as its agent. Taxpayer
was neither.

                  Merriam-Webster’s Dictionary defines an “employee” as “one
employed by another usually for wages or salary and in a position below the
executive level.”17 In Borough of Emmaus v. Pennsylvania Labor Relations Board,
156 A.3d 384, 389-390 (Pa. Cmwlth. 2017), we noted that “[t]he payment of
compensation, particularly financial compensation based upon the number of hours

         17
              https://www.merriam-webster.com/dictionary/employee (last visited on December 17,
2020).

                                                21
worked, is the hallmark of ‘employee’ status in the labor relations context.” In
addition, when examining whether someone is an employee in the context of
workers’ compensation or unemployment compensation matters, we typically look
at whether, and to what extent, that individual’s efforts were under the control of
another. In the present matter, the Federal Government may have decided to pursue
the qui tam litigation, but it had little to no control over Taxpayer. Taxpayer
independently initiated the qui tam action, and had the Federal Government not
moved forward with it, Taxpayer could have done so on his own.

                We reject the notion that Taxpayer was an agent of the Federal
Government for much the same reason we reject the notion that he was its employee.
Once the Federal Government decided to proceed with the action, it assumed
primary responsibility for prosecuting the matter. Further, and as Taxpayer aptly
notes: “a whistleblower is not vested with any governmental power.” Taxpayer’s
Br. at 25-26.

                Taxing Authority engages in an exercise to shoehorn Taxpayer’s qui
tam recovery into a type of compensation that is taxable for EIT purposes. However,
the Commonwealth’s tax laws are to be narrowly and strictly construed. “It is well
settled that 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 law.” In re Husband’s Estate, 175 A. 503, 506 (Pa. 1934).
Here, the Taxing Authority engages in a somewhat strained effort to attempt to
convert a type of payment that was not contemplated by the Tax Code into something
that was (and is).

                                         22
             As to whether the qui tam proceeds were taxable under Pennsylvania
law as an award, which Taxing Authority suggests is typically a sum that an
individual may receive as damages in a lawsuit, we are not convinced. While it is
true that the qui tam recovery was the result of his initiation of a lawsuit, the proceeds
were not a recovery for any damages sustained by Taxpayer. In other words, the
proceeds were not part of an effort to make Taxpayer whole. Further, the Taxing
Authority relies on the Department’s guidance, and New Jersey law, rather than the
Tax Code or the Department’s regulations, in its attempt to suggest damages should
be considered compensation for purposes of the EIT.              We find this attempt
unavailing, especially in light of the differences between Pennsylvania’s and New
Jersey’s tax laws.

             It may be more plausible that the qui tam recovery was a reward for
Taxpayer’s efforts.     However, here again, we stress, through reiteration, that
Pennsylvania’s 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 law.” In re Husband’s Estate, 175 A. at 506.
Further, there was no guarantee that Taxpayer’s efforts would result in any financial
recovery whatsoever. Unlike a reward for providing information about criminal
activity or for recovering an individual’s lost pet, for example, where a fund may be
established and announced as an incentive for a particular outcome, there was no
certainty, here, that Taxpayer would receive any payment for his efforts.

                                           23
              The FCA is not a new law. It was “adopted in 1863 as a ‘way of
combating the fraud suffered by the Union Army when it received deliveries of
defective or non[-]existing military supplies.’ After reviewing evidence of massive
procurement fraud, Congress believed that military contractors, aided and abetted
by civil servants were robbing the Treasury in a way that could undermine the war
effort.”18 Accordingly, our General Assembly has had ample time to consider, and
to address, specifically if it so desired, the proceeds from qui tam recoveries in the
Commonwealth’s tax laws. In the absence of same, there is no “clear warrant of
law,” and, thus, Taxpayer, here, should not be burdened with taxation, in the form
of EIT, on the proceeds of his qui tam recovery. In re Husband’s Estate, 175 A. at
506. It seems incongruous that, on the one hand, we would encourage individuals
to ferret out government waste, and, on the other hand, we would punish them by
taxing the proceeds for doing so.

                                     III.   Conclusion
              For all of the foregoing reasons, we reverse the Order of the Trial Court.

                                                 J. ANDREW CROMPTON, Judge

Judge Fizzano Cannon did not participate in the decision of this case.

       18
         Geoffrey Christopher Rapp, Beyond Protection: Invigorating Incentives for Sarbanes-
Oxley Corporate and Securities Fraud Whistleblower, B. U. L. Rev., Vol. 87:91, 127 (2007).

                                            24
           IN THE COMMONWEALTH COURT OF PENNSYLVANIA

Edward J. O'Donnell,                  :
                       Appellant      :
                                      :
             v.                       :    No. 880 C.D. 2019
                                      :
Allegheny County North Tax Collection :
Committee, and Borough of Fox Chapel :
and Fox Chapel Area School District   :

                                 ORDER

           AND NOW, this 18th day of December 2020, the Order of the
Allegheny County Court of Common Pleas is REVERSED.

                                          J. ANDREW CROMPTON, Judge
         IN THE COMMONWEALTH COURT OF PENNSYLVANIA

Edward J. O'Donnell,              :
                 Appellant        :
                                  :
                                  :
      v.                          : No. 880 C.D. 2019
                                  : ARGUED: May 14, 2020
Allegheny County North Tax        :
Collection Committee, and Borough :
of Fox Chapel and Fox Chapel Area :
School District                   :
                  Appellees       :

BEFORE:     HONORABLE MARY HANNAH LEAVITT, President Judge
            HONORABLE RENÉE COHN JUBELIRER, Judge
            HONORABLE P. KEVIN BROBSON, Judge
            HONORABLE ANNE E. COVEY, Judge
            HONORABLE MICHAEL H. WOJCIK, Judge
            HONORABLE ELLEN CEISLER, Judge
            HONORABLE J. ANDREW CROMPTON, Judge

OPINION NOT REPORTED

CONCURRING AND DISSENTING OPINION
BY JUDGE CEISLER                                    FILED: December 18, 2020

      I concur with the majority regarding the timeliness of Allegheny North Tax
Collection Committee Board of Appeals’ November 16, 2017 denial of Appellant
Edward J. O’Donnell’s (O’Donnell) earned income tax (EIT) assessment appeal. I
also join the majority as to the conclusion that O’Donnell was neither an agent nor
an employee of the federal government during the qui tam action that ultimately
produced the at-issue settlement payment.

      However, I must respectfully dissent with my colleagues as to whether
O’Donnell’s qui tam settlement payment constitutes taxable income for purposes of
Appellees Borough of Fox Chapel’s (Borough) and Fox Chapel Area School
District’s (School District) EIT. Section 501 of the Local Tax Enabling Act1 defines
“earned income” in relevant part as “[t]he compensation as required to be reported
to or as determined by the Department of Revenue under section 303 of the act of
March 4, 1971 (P.L. 6, No. 2), [as amended, 72 P.S. § 7303,] known as the Tax
Reform Code of 1971 [(Tax Code)] and rules and regulations promulgated under
that section[.]” 53 P.S. § 6924.501. In turn, Section 303(a)(1)(i) of the Tax Code
defines “compensation” in relevant part 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 and whether in cash or in property[.]” 72 P.S. § 7303(a)(1)(i). The Department
of Revenue’s administrative regulations contain a slightly different definition of
“compensation,” stating in relevant part that this term “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.” 61 Pa. Code § 101.6(a). Thus, the relevant
statutory definition of compensation is more expansive than that contained in this
administrative regulation, as, unlike the latter, the former does not make the
taxability of remuneration contingent on the recipient’s employment status. This is
critical, because it means that “compensation,” for purposes of the Local Tax
Enabling Act and, by extension, the Borough’s Ordinance 687, encompasses Section
303(a)(1)(i) of the Tax Code’s broader definition of the term. There is thus no need
to determine whether O’Donnell was an agent or an employee of the federal
government in the context of the qui tam action, as the answer to this question has

      1
        Act of December 31, 1965, P.L. 1257, No. 511, as amended, 53 P.S. §§ 6924.101-
6924.901.

                                       EC - 2
no bearing on whether the settlement payment O’Donnell received is taxable by the
Borough and the School District.
      To that end, I would conclude that O’Donnell’s qui tam settlement payment
constituted an “incentive payment” and is therefore compensation which constitutes
taxable earned income. Indeed, the whole reason the qui tam cause of action exists
is to incentivize private citizens to aid the federal government in rooting out fraud
and corruption.
               [T]he [False Claims] Act [FCA][2] authorizes a private
               citizen to commence and prosecute a civil action on behalf
               of the United States, known as a “qui tam” action. 31
               U.S.C. § 3730(b)(1). “‘The purpose of the qui tam
               provisions of the FCA is to encourage private individuals
               who are aware of fraud being perpetrated against the
               Government to bring such information forward.’” United
               States ex rel. Dick v. Long Island Lighting Co., 912 F.2d
13, 18 (2d Cir.1990) (quoting H.R. Rep. No. 660, 99th
               Cong. 2d Sess. 22, (1986), U.S. Code Cong. & Admin.
               News 1986, p. 5266). If the action is successful, the
               individual initiating the action, known as the “relator” or
               “qui tam plaintiff,” is entitled to a portion of the recovery.
               31 U.S.C. § 3730(d).
Mager v. Bultena, 797 A.2d 948, 951 n.1 (Pa. Super. 2002). Here, O’Donnell
initiated the qui tam action against a financial institution, with the understanding that
he could benefit financially if the suit was successful, and then actively assisted the
federal government once it took over the suit’s prosecution. The settlement payment
O’Donnell received as a result was ultimately the prospective incentive for his
decision to initiate this qui tam action in the first place. Therefore, I would affirm
the Court of Common Pleas of Allegheny County’s June 11, 2019 order on this

      2
          31 U.S.C. §§ 3729-3733.

                                          EC - 3
slightly alternate basis and respectfully dissent from the majority opinion on this
basis.3

                                            __________________________________
                                            ELLEN CEISLER, Judge

Judge Cohn Jubelirer joins in this Concurring and Dissenting opinion.

       3
         We may affirm a lower court for any reason supported by the record. Bonifate v. Ringgold
Sch. Dist., 961 A.2d 246, 253 n.2 (Pa. Cmwlth. 2008).

                                            EC - 4