RECOMMENDED FOR FULL-TEXT PUBLICATION Pursuant to Sixth Circuit Rule 206 2 Brooks v. United States No. 03-5610 ELECTRONIC CITATION: 2004 FED App. 0307P (6th Cir.) File Name: 04a0307p.06 UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellee. UNITED STATES COURT OF APPEALS _________________ FOR THE SIXTH CIRCUIT OPINION _________________ _________________

J. HILTON BROOKS , III, M.D., X KENNEDY, Circuit Judge. The taxpayer, Dr. Hilton - Brooks, appeals the district court’s order granting summary Plaintiff-Appellant, judgment to the United States, holding that no part of a qui - - No. 03-5610 tam relator’s award granted under Section 3730(d) of the v. - False Claims Act is excludable from gross income under > Internal Revenue Code § 104(a)(2) because the award does , not constitute “damages received ... on account of personal UNITED STATES OF AMERICA , - Defendant-Appellee. - injuries” as § 104(a)(2) requires. We agree with the district court, and AFFIRM. N Appeal from the United States District Court BACKGROUND for the Eastern District of Kentucky at London. No. 01-00452—J. B. Johnson, Magistrate Judge. The taxpayer, Dr. Hilton Brooks, was a physician on the medical staff at Pineville Community Hospital, Pineville, Argued: August 5, 2004 Kentucky, and was a member of the hospital’s quality assurance committee. While carrying out his committee Decided and Filed: September 10, 2004 duties, Dr. Brooks discovered what he determined to be numerous billing improprieties by Pineville Community Before: KENNEDY, SUTTON, and COOK, Circuit Hospital and two physicians. Rather than correcting the Judges. improprieties, the hospital rebuffed Dr. Brook’s efforts and subjected him to a variety of retaliatory abuses. For instance, _________________ he was pressured to cease investigating the fraudulent billing practices and to relocate his practice elsewhere; he was COUNSEL threatened with loss of clinical privileges; he was reviewed “unfavorably” and advised that he would not be reappointed ARGUED: Philip E. Wilson, WILSON LAW OFFICE, to the medical staff; and he was criticized in the hospital Lexington, Kentucky, for Appellant. Kenneth W. Rosenberg, newsletter for having a “disruptive attitude.” UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellee. ON BRIEF: Philip E. Pursuant to the qui tam provisions of the False Claims Act Wilson, WILSON LAW OFFICE, Lexington, Kentucky, for (FCA), 31 U.S.C. § 3729 et seq., which allows individual Appellant. Kenneth W. Rosenberg, Kenneth L. Greene, citizens to sue for fraud on behalf of the government and to

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receive part of the government’s recovery, Dr. Brooks filed an injuries. The IRS disallowed his claim for refund, and Dr. FCA claim asserting that the hospital and two of its doctors Brooks filed suit in the district court seeking a refund of the had submitted fraudulent Medicare and Medicaid bills to the income tax he had paid on the qui tam relator award. After government for payment. Although the United States is the district court ruled in favor of the government, this appeal entitled to intervene in such a case, it initially declined to do followed. so here. Dr. Brooks litigated the action through discovery, and trial was scheduled. At that point, the United States ANALYSIS opted to intervene. We review a grant of summary judgment de novo. Farhat Rather than proceed to trial, the defendants agreed to pay a v. Jopke, 370 F.3d 580, 587 (6th Cir. 2004). Summary total of $2.5 million dollars to the United States to settle the judgment is appropriate when “the pleadings, depositions, FCA action for fraudulent billing. In the settlement answers to interrogatories, and admissions on file, together agreement the defendants admitted that they had violated with the affidavits, if any, show that there is no genuine issue numerous regulations governing various health care programs as to any material fact and that the moving party is entitled to relating to payments for medical procedures. The district judgment as a matter of law.” Fed. R. Civ. P. 56(c). Both court approved this settlement agreement and granted Dr. parties agree that this case presents no issue of material fact Brooks a relator’s award of 25% of the net settlement amount with respect to the issue of law presented. remaining after payment of attorney fees and reimbursable costs. The net dollar amount of the qui tam award was The Internal Revenue Code broadly defines gross income $210,067, which resulted in income tax of $78,607. as “all income from whatever source derived.” 26 U.S.C. § 61(a). The Supreme Court has broadly construed and In addition, a separate settlement agreement was entered repeatedly emphasized the sweeping scope of this section. into between Dr. Brooks, the hospital, and four doctors at the See Commissioner v. Schleier, 515 U.S. 323, 327 (1995); See hospital, to release them from any personal injury claims, also Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 429 including claims for retaliation and defamation, that might (1955). The corollary to § 61(a)’s broad construction, the exist against them. The hospital paid Dr. Brooks the sum of Court has noted, is “that exclusions from income must be $300,000, which was expressly stated to be “damages narrowly construed.” Schleier, 515 U.S. at 328 (quoting received on account of personal injuries within the meaning United States v. Burke, 504 U.S. 229, 248 (Souter, J., of Section 104(a)(2).” concurring in judgment)). The taxpayer’s qui tam relator’s award, therefore, must constitute gross income unless the Dr. Brooks included the $210,067 relator’s award in his taxpayer is able to show that it is “expressly excepted by gross income and timely paid $78,607 in income taxes on that another provision in the Tax Code.” Id. amount. He excluded from income the separate settlement of $300,000 in compensatory damages for “personal injuries,” The taxpayer relies upon § 104(a)(2) (1995) in arguing that with full disclosure to the IRS, and the IRS approved the his award, or at least part of it, should be exempted from exclusion. He thereafter claimed a refund of the $78,607 tax gross income. Section 104(a)(2) provides that gross income he paid on the relator’s award, asserting that at least part of does not include “the amount of any damages received the award can be excludable from income under 26 U.S.C. (whether by suit or agreement and whether as lump sums or § 104(a)(2) as damages received on account of personal as periodic payments) on account of personal injuries or No. 03-5610 Brooks v. United States 5 6 Brooks v. United States No. 03-5610

sickness.”1 The implementing treasury regulation, 26 C.F.R. to his recovery is based upon tort or tort type rights. The fact § 1.104-1(c) (1994), defines “damages received” as “an that a qui tam plaintiff may suffer personal injuries while amount received ... through prosecution of a legal suit or prosecuting an FCA claim does not transform the FCA claim action based upon tort or tort type rights, or through a into one based upon tort or tort type rights. The primary settlement agreement entered into in lieu of such purpose of the FCA claim is to ensure that the United States prosecution.” Thus, under the statute and regulation, for gains restitution of money fraudulently obtained from it. income to be excluded under § 104(a)(2), the taxpayer must Thus, the underlying cause of action that gives rise to the 1) “demonstrate that the underlying cause of action giving rise taxpayer’s relator’s award is based upon contract fraud, not a to the recovery is based upon tort or tort type rights;” and tort. 2) “show that the damages were received on account of personal injuries or sickness.” Schleier, 515 U.S. at 337 Not only is the underlying cause of action not based upon (1995) (internal quotation marks omitted). tort or tort type rights, but it also does not compensate the taxpayer for an injury inflicted upon him. Rather, the FCA In attempting to establish that at least part of his relator’s permits a qui tam plaintiff to bring a suit in the name of the award may be excluded from gross income pursuant to United States for contract fraud committed against it. § 104(a)(2), the taxpayer presents the following argument. 31 U.S.C. § 3730(b)(1). The Supreme Court’s decision in He first notes that a relator’s qui tam award is limited to a Vermont Agency of Natural Resources v. United States ex rel. percentage. Since the government intervened here, his Stevens, 529 U.S. 765 (2000), highlights the fact that the potential award ranged from fifteen to twenty-five percent of injury that is redressed in a qui tam action under the FCA is the net amount received by the government. § 3730(d)(1). an injury to the government. The issue in Vermont Agency of He argues that the percentage to be used in determining the Natural Resources was whether a qui tam plaintiff had amount of a relator’s qui tam award is influenced by whether standing to bring an FCA claim on behalf of the United States the relator suffered personal injuries or sickness. Since the against a State. Id. at 768. The Court noted that an interest amount of a relator’s qui tam award is influenced by whether sufficient to confer standing to maintain the suit “must consist he suffered personal injuries in prosecuting the FCA action, of obtaining compensation for, or preventing, the violation of he concludes, the award thus compensates him for the a legally protected right.” Id. at 772. A qui tam plaintiff, the personal injuries he received while prosecuting the action. Court noted, “has suffered no such invasion [of a legally protected right].” Id. at 773. Although the Court found that Rather than immediately address the taxpayer’s argument, a qui tam plaintiff suffers no invasion of a legally protected we first consider the requirements for exclusion under right, it nonetheless found that a qui tam plaintiff has standing § 104(a)(2) as enunciated by the Schleier Court. The taxpayer to assert a claim based on “the doctrine that the assignee of a runs into immediate difficulty with the first prong, as he fails claim has standing to assert the injury in fact suffered by the to demonstrate that the underlying cause of action giving rise assignor. [Therefore, the False Claims Act] can reasonably be regarded as effecting a partial assignment of the Government’s damages claim” to the qui tam plaintiff. Id. 1 Congress amended § 104 (a)(2) in 1996 to read, gross income does not include “the amount of any damages received ... on account of The structure of the act further supports the conclusion that personal physical injuries or physical sickness.” (emphasis added). This the qui tam relator’s award is not based upon tort or tort type amended version does not apply to the present case as the district court granted the taxpayer his award in 1 995 , prior to the 1996 amendm ent. rights. As the district court observed, any tort that could be No. 03-5610 Brooks v. United States 7 8 Brooks v. United States No. 03-5610

considered to have been committed against the taxpayer concluding that the statute does not redress solely general would be one for retaliation by the defendants. This wrong is wrongs to the public, but rather also redresses individual separately compensated for under the FCA’s “whistleblower” wrongs suffered by a qui tam relator, the court opined that a provision, 31 U.S.C. § 3730(h). Section 3730(h) provides qui tam relator may endure emotional strain when he that an “employee who is discharged, demoted, ... harassed, discovers fraud as he is faced with the choice “of keeping or in any other manner discriminated against ... by his or her silent about the fraud, and suffering potential liability ..., or employer because of lawful acts done by the employee on reporting the fraud and suffering repercussions, [such] ... as behalf of the employee or others in furtherance of a [FCA dismissal.” Id. at 138. Even if we were to agree with the claim] ... shall be entitled to all relief necessary to make the NEC court that a qui tam action is remedial with respect to the employee whole.” Thus, this section, § 3730(h), not qui tam plaintiff, that would nonetheless not compel the § 3730(d), provides compensation for injuries suffered by the conclusion that a qui tam relator’s award is received on qui tam plaintiff. Although § 3730(h) only applies to account of personal injuries within the meaning of § 104(a)(2) employees (rather than independent contractors, for instance), of the Tax Code. this does not militate against our conclusion that Congress did not intend § 3730(d) to compensate qui tam plaintiff’s for The FCA provides that the percentage of the award that the personal injuries. The fact that Congress, in enacting qui tam plaintiff will receive depends upon “the extent to § 3730(h), not only considered allowing personal injury which the [qui tam plaintiff] substantially contributed to the damages, but in fact actually provided a cause of action for prosecution of the action.” § 3130(d)(1). Even if the their recovery, supports our conclusion that Congress did not percentage that a qui tam plaintiff receives in prosecuting a intend § 3730(d) to compensate qui tam plaintiffs for personal FCA claim were influenced by whether he received personal injuries. injuries in prosecuting the action, that fact would still not transform the qui tam plaintiff’s recovery into one “on The taxpayer has also failed to establish that his award was account of personal injuries.” It is the nature of the received on account of personal injuries or sickness. In underlying claim itself that determines whether the plaintiff arguing that his relator’s award was received, at least in part, has received compensation on account of personal injuries on account of personal injuries or sickness, the taxpayer within the meaning of § 104(a)(2). Regardless of whether a principally relies upon United States v. NEC Corp., 11 F.3d qui tam plaintiff received fifteen percent or twenty-five 136 (11th Cir. 1994). In NEC, the plaintiff brought a qui tam percent of the proceeds recovered by the government, the fact action against the United States to recover a portion of a that he receives anything at all is on account of his decision settlement procured by the government as a result of to bring the lawsuit on behalf of the government, and not on information provided by the plaintiff. 11 F.3d at 137. account of any personal injuries inflicted upon him. Subsequently, however, the plaintiff died. Id. The issue in NEC was whether the plaintiff-relator’s qui tam action Since we conclude 1) that the underlying cause of action survived his death. Id. To determine whether the cause of (the FCA claim) is based upon contract fraud inflicted upon action survived the qui tam plaintiff’s death, the court needed the government, not a tort inflicted upon the relator, and to consider whether the action was remedial or penal with 2) that the relator received his award on account of initiating respect to the qui tam plaintiff. Id. In considering this issue, the prosecution of the FCA claim on behalf of the the court first asked whether the statute redressed individual government, not on account of personal injuries inflicted wrongs or more general wrongs to the public. Id. In upon himself, we therefore AFFIRM the district court’s No. 03-5610 Brooks v. United States 9

holding that a qui tam relator’s award is not excludable from gross income under § 104(a)(2).