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Tax Income Classification

By: Derek Hawkins//September 1, 2015//

Tax Income Classification

By: Derek Hawkins//September 1, 2015//

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Civil

7th Circuit Court of Appeals

Officials: RIPPLE, WILLIAMS, and SYKES, Circuit Judges

Tax Income Classification

No.14-2190 Craig Patrick v. CIR

Monies paid to appellants in government settlement stemming from qui tam claim properly classified as other income rather than capital gain.

“Treating a relator’s reward as a capital gain would contravene the long-recognized rule that a “capital gain” generally involves a “realization of appreciation in value accrued over a substantial period of time” of an initial investment of capital. Comm’r v. Gillette Motor Transp., Inc., 364 U.S. 130, 134–35 (1960); see also Alderson, 686 F.3d at 797. But here Patrick made no initial investment in some asset. Instead, he expended time and effort to discover and document Kyphon’s fraud, and that work was not an investment of capital. See Alderson, 686 F.3d at 797. Further, there was no “realization of appreciation in value” of an underlying investment that “accrued over a substantial period of time.” Gillette Motor Transp., Inc., 364 U.S. at 134. Patrick had an interest in a portion of the government’s recovery, but that interest did not grow in value over time. It did not even vest until the government received its recovery. See Vt. Agency of Natural Res., 529 U.S. at 772”

Affirmed

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Attorney Derek A. Hawkins is the managing partner at Hawkins Law Offices LLC, where he heads up the firm’s startup law practice. He specializes in business formation, corporate governance, intellectual property protection, private equity and venture capital funding and mergers & acquisitions. Check out the website at www.hawkins-lawoffices.com or contact them at 262-737-8825.

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