UNITED STATES TAX COUR T

BW

134 T . C . No .

3

UNITED STATES TAX COUR T

ALBERT D . CAMPBELL, Petitioner v .

COMMISSIONER OF INTERNAL REVENUE, Responde n

Docket No . 21209-07 .

Filed

January

?1,

2010 .

P included on his return as "Other income" 5 .25

million of an $8 .75 million "qui tam" payment P as

awarded pursuant to a Federal False Claims Act action .

He did not report the remaining $3 .5 million, which was

subtracted from the recovery by P's attorneys as

attorney's fees . P then omitted the $5 .25 milli n net

proceeds of the qui tam payment from the taxable income

of $793 he reported on his return . P disclosed he

$3 .5 million attorney's fee payment on Form 8275,

Disclosure Statement, attached to his return . P

contends that none of the $8 .75 million qui tam ayment

is includable in his gross income because it was a

nontaxable share of the U .S . Government's recove y . R

contends that the entire qui tam payment, including the

portion paid to P's attorneys as their fee, is

includable in P's gross income . . .

Held , the entire $8 .75 million qui tam paym nt

Roco

awarded to P is includable in P's gross income .

v . Commissioner , 121 T .C . 160 (2003), followed .

SERVED Jan 21 2010

Held , further , P substantiated the payment of the

attorney's fees in issue .

Held , further , P is entitled to deduct the

attorney' s fees as a miscellaneous itemized deduction .

Held , further , P is subject to an accuracy-related

penalty pursuant to sec . 6662, I .R .C ., because P's

exclusion of the $8 .75 million qui tam payment from his

gross income resulted in a substantial understatement

of income tax .

Held , further , so much of P's understatement as

relates to his failure-to include in gross income the

$3 .5 million attorney's fee payment is reduced for

purposes of the accuracy-related penalty, pursuant to

sec . 6662(d)(2)(B), I .R .C ., since P adequately

disclosed his position on Form 8275 and had a

reasonable basis for that position .

Held , further , P is not entitled to further

reduction of the accuracy-related penalty, as relates

to the $5 .25 million net proceeds of the qui tam

payment, since, pursuant to sec . 6662(d)(2)(B), I .R .C .,

P did not have substantial authority or make an

adequate disclosure or have a reasonable basis for his

position, and pursuant to sec . 6664(c), I .R .C ., P did

not have reasonable cause for his position or act in

good faith .

I

Bradley J . Davis and Loan B . Kennedy , for petitioner .

Miriam C . Dillard , for respondent .

WELLS,

Judge : Respondent determined a deficiency in

i!

petitioner's Federal income tax for taxable year 2003 of

$3,044,000, an accuracy-related penalty pursuant to section

6662(a) of $608,800, and a delinquency addition to tax pursuan t

Li

3. to section 6651 (a) (1) of $151,955 .50 .1 We must decide

following issues : (1) Whether a "qui tam" settlement

taxable income to petitioner ; (2) whether petitioner h

substantiated that he paid contingent attorney's fees from the

qui tam settlement ; (3) if so, whether the attorney's fee payment

is includable in petitioner's gross income and deductible by .him

as a miscellaneous itemized deduction ; and (4) whether petitioner

is liable for a section 6662(a) accuracy-related penal y . 2

FINDINGS OF FAC T

Some of the facts and certain exhibits have been tipulated .

The stipulations of fact are incorporated in this opinion by

reference and are so found .

At the time he filed the petition, petitioner resided in

Florida .

Petitioner earned a bachelor's degree in business

administration and accounting . From 1981 through July 1995,

petitioner worked for Lockheed Martin . He was employed as a

financial analyst until 1989, when he was promoted to chief of

cost control for a $3 .5 billion contract Lockheed Mar in hel d

'Unless otherwise indicated, all Rule references re to the

Tax Court Rules of Practice and Procedure,'and all se tion

references are to the Internal Revenue Code (Code), a amended .

'Respondent has conceded that petitioner is not liable for

the sec . 6651(a) delinquency addition to tax .

with the U .S . Government . Petitioner remained in that position

.until July 1995 .

During May and December 1995, petitioner filed two lawsuits

against Lockheed Martin under the False Claims Act (FCA), 31

U .S .C . secs . 3729-3733 (2006), alleging that Lockheed Martin had

defrauded the United States . The United States intervened in the

!,first suit, but not the second .

rlik

During September 2003, the United States, Lockheed Martin,

,and petitioner settled both suits . Lockheed Martin agreed to pay

the United States $37 . .9 million . As part of the settlement,

petitioner received a qui tam payment3 of $8 .75 million ($8 .75

,million qui tam payment) for his role as "relator" . The U .S .

Department of Justice filed and sent petitioner a Form 1099-MISC,

Miscellaneous Income, reporting the $8 .75 million qui tam payment

'in 2003 . The $8 .75 million qui tam payment was wired to

petitioner's attorneys . Petitioner's attorneys subtracted from

the $8 .75 million qui tam payment a fee of 40 percent of the

proceeds, or $3 .5 million ($3 .5 million attorney's fee payment )

3"Qui tam" is an abbreviation of the Latin phrase "qui tam

p'ro domino rege quam pro se ipso in hac parte sequitor", which

means "who pursues this action on our .Lord the King's behalf as

well as his own ."

Vt . Agency of Natural Res . v . United States ex

rel . Stevens , 529 U .S . 765, 768 n .l (2000) . The individual who

brings the qui tam suit-on behalf of the Government is known as

the relator .

Vt . Agency of Natural Res . v . United States ex rel .

Stevens , supra at 769 ; 31 U .S .C . sec . 3730(b) (2006) . For a

discussion of the history of qui tam actions, see Vt . Agency of

Natural Res . v . United States ex rel . Stevens , supra at 774-777 .

and then sent-petitioner a check for the remaining $5 . :

($5 .25 million net proceeds of the qui tam payment) .

On October 26, 2004, petitioner filed a Form 1040, U .S .

Individual Income Tax Return, for his 2003 taxable yea (return) .

Petitioner prepared the return without consulting a

t

professional . Petitioner included the $5 .25 million n Et proceeds

of the qui tam payment on line 21 of his return as other income .

However, the return omitted the $5 .25 million net proc eds of the

qul tam payment from the calculation of taxable income on line

40 . The return showed a resulting taxable income of $ 93 ..

Petitioner attached to the return Form 8275, Disclosu r

Statement, in which he argued that the $3 .5 million attorney's

fee payment had been held not to be taxable income by he U .S .

Court of Appeals for the Eleventh Circuit . On the For 8275,

petitioner failed to include a .citation of an opinion of the

Eleventh Circuit, or of any Court of Appeals, standing for that

proposition . Additionally, petitioner failed to ident fy on th e

Form 8275 any authority for excluding from his taxabl e income th e

$5 .25 million net proceeds of the qui tam payment . At the time

Roco

petitioner submitted the return, he was aware of the c~se of

v . Commissioner , 121 T .C . 160 (2003), which holds that

qui tam

payments are includable in gross income of the recipieit .

On October 24, 2004, petitioner sent respondent a lette r

detailing why he believed the $8 .75 million qui tam payment was

6 ,not taxable . Included as attachments to his letter were a copy

.of his return, a copy of the settlement agreement, a copy of Vt .

Agency of Natural Res . v . United States ex rel . Stevens , 529 U .S .

`765 (2000), and a two-page letter from Andrew Grosso, one o f

petitioner's attorneys in the FCA case, stating that, in his

opinion, the $8 .75 million qui tam payment was from Lockheed

Martin and not the United, States .

On December 6, 2004, respondent determined that a math error

ii

was made on petitioner's return and sent him a notice of

assessment of •a tax deficiency of $1,846,108 .63 .

On April 4, 2005, respondent sent petitioner a letter

stating that the $8 .75 million qui,tam payment was taxable income

and that any further consideration would require the filing of a

Form 1040X, Amended U .S . Individual Income Tax Return .

On April 27, 2005, petitioner submitted a Form 1040X .

t(amended return), that he prepared . The amended return excluded

from gross income the entire $8 .75 million qui tam payment ,

is

resulting in taxable income of $793 .

On June 14, 2007, respondent sent petitioner a notice of

deficiency .' Respondent included the entire $8 .75 million qui

tam payment as gross income and determined an income ta x

deficiency of $3,044,000, an accuracy-related penalty pursuant t o

'The record is unclear whether the Dec . 6, 2004, assessment

was abated before the notice of deficiency was sent on June 14,

2 :007 .

- 7 section 6662 of $608,800, and a delinquency addition

pursuant to section 6651 ( a)(1) of $151,955 .50 .

OPINIO N

Generally, the Commissioner ' s determination o f

is presumed correct, and the taxpayer bears the burden

otherwise . Rule 142(a) .5 Pursuant to section 7491(c) ,

Commissioner generally bears the burden . of production

penalty, but the taxpayer bears the ultimate burden o f

Higbee v . Commissioner , 116 T .C . 438, 446 (2001) .

The FCA', enacted during the U .S . Civil War, allow

citizen (the relator) to bring a qui tam action on beh

a privat e

if of the

United States . 31 U .S .C . secs . 3729-3733 . The FCA im oses civil

liability upon any person who, among other things, "kn

wingl y

presents, or causes to be presented, a false or fraudu

ent claim

for payment or approval" to the United States . 31 U .S .C . sec .

3729(a) . The relator may bring the claim on his own ;

the Government has, the right to intervene in the case .

owever,

31 U .S .C .

sec . 3730 . The relator receives a share of the proce e s ranging

from 15 to 25 percent if the Government intervenes, an

25 to 3 0

percent if the Government declines to intervene . 31 U .S .C . sec .

3730(d)(1) and (2) . The relator may also be awarded alttorney' s

fees .

Id .

'Petitioner does not contend that . sec . 7491(a) s h

to shift the burden of proof to respondent, nor did hel establis h

that it should apply to the instant case .

ii

- 8 We must first decide whether the qui tam payment is

includable in petitioner's gross income . . Petitioner contends

.that the qui tam payment is a portion of a nontaxable

reimbursement Lockheed Martin paid to the United'States .

Petitioner relies on Roco v . Commissioner ,

supra at 165 n .2,

a

;case decided by this Court that held that qui tam payments were

taxable as the equivalent .of a reward but expressly reserved

deciding whether a qui tam payment was a nontaxable share in the

recovery of a reimbursement . Petitioner also relies on Vt .

Agency of Natural Res . v . United States ex rel . Stevens ,

supra ,

°for the proposition that a qui tam claim is the assignment of the

. .United States' reimbursement claim to the relator and that,

because the payment would not be taxable to the United States

Government, it should not be taxable to him as an assignee of the

'nontaxable claim, since as an assignee of the claim he stands in

the shoes of the U .S . Government in pursuing the claim . Finally,

petitioner contends that the qui tam payment is not taxable

,income because it is not proceeds from labor or capital .

Respondent contends that the qui tam payment is a taxable

'reward and should be included in petitioner's gross income .

Gross income is "all income from whatever source derived" .

Sec . 61(a) . Courts have given a broad construction to the

definition of gross income .

Commissioner v . Glenshaw Glass Co . ,

348 U .S . 426, 430 (1955) . The effect of such a broad view of

gross income is that exclusions from gross income are

construed .

Commissioner V . Schleier , 515 U .S . 323, 3 2

arrowly

(1995) .

As noted above, this Court has considered the iss e o f

whether a qui tam payment is-taxable income . In Roco y

Commissioner , 121 T .C . 160 (2003), the taxpayer received a qui

tam payment from the United States for his role as •relator in an

action pursuant to the FCA . The Court ruled that rewards are

included in gross income pursuant to section 1 .61-2(a) Income

Tax Regs ., and that the qui tam payment was the equivalent of a

reward and, therefore, includable in the taxpayer's gr ss income .

Roco v . Commissioner ,

supra at 164 .

Petitioner's reliance on note 2 of Roco is mispla ed . In

Roco v . Commissioner ,

supra at 165 n .2, the Court stat d that it

was not deciding whether a qui tam payment is a nontax ble share

in the recovery of a reimbursement . Contrary to petitioner' s

argument, the footnote does not suggest that the Court would have .

held that a qui tam payment is a nontaxable share in t e recovery

of a reimbursement had the issue been properly before it . As the

issue is before us now, we will address it .

In support of his position that a qui tam payment is a

nontaxable share of the recovery, petitioner relies o

Vt . Agency

of Natural Res . v . United States ex rel . Stevens , 529 U .S .

765

(2000) . Petitioner contends .that he is the assignee off th e

United States' claim against Lockheed and, therefore, stands in

10 the shoes of the Government in receipt of a nontaxable recovery .

n Vt . Agency of Natural Res . , the Supreme Court considere d

whether a private individual has standing to bring a qui tam suit

in Federal court against a•State agency . On that issue, th e

;Court held that the relator had standing because the FCA effecte d

a partial assignment of the Government's claim to the relator

and, as the assignee of such a claim, a relator has standing to

assert the injury in fact suffered by the Government .

Id .

'773 . Petitioner's reliance on Vt . Agency of Natural Res .

at

is

misplaced . Although the FCA effects a partial assignment of the

,claim for the purposes of standing, the assignment of the claim

.'does not change the character of the proceeds to petitioner . The

qui tam payment is the equivalent of ,a reward as we held in Roco

v .. Commissioner ,

supra at 164 . In Vt . Agency of Natural Res . ,

the Supreme Court made no ruling regarding the taxability of the

qui tam payment to the relator or the character of the payment

for Federal income tax purposes .

Petitioner also relies-on Lucas v . Earl , 281 U .S . 111

(1930), contending that the qui tam payment was non-taxable

income as an assignment to him by the Government of a portion o f

:a non-taxable recovery . In Lucas v . Earl , supra, the taxpayer

assigned a portion of his earned income to his wife . The Supreme

Court held that a taxpayer cannot exclude his earnings from his

gross income by an anticipatory assignment of them to another

- 11 party .

Id . Lucas v . Earl ,

supra , is inapposite . The payment

from Lockheed Martin to the United States was not earned income ;

it was a reimbursement . to the Government for fraudulent billing

practices . Additionally, the $8 .75 million qui tam payment was a

reward to petitioner for bringing Lockheed's wrongdoing to light ;

it was not an assignment of a right to income . See Ro o v .

Commissioner ,

supra . Accordingly,

Lucas v . Earl , su r does not

stand for the proposition that the claim assigned to the relator

in an action pursuant to the FCA is a transfer of a portion of a

nontaxable recovery that is non-taxable to the relator .

Petitioner also cites

Eisner v . Macomber , 252 U .S . 189

(1920), for the definition of income .

Macomber held tiat income

was the "`gain derived from capital, from labor, or fr m both

combined'" .

Id .

at 207 (quoting Stratton's Inde enden e Ltd . v .

Howbert , 231 U .S . 399, 415 (1913), and Doyle v . Mitchell Bros .

Co . , 247 U .S . 179, 185 (1918)) . However, the Supreme Court later

observed that the Macomber definition of income did no take

precedence over the inclusive statutory definition of gross

income .

Commissioner v . Glenshaw Glass Co . ,

supra at 31 .

On the basis of the foregoing, we .conclude that the qui tam

payment is includable in petitioner's gross income for 2003

because it .is the equivalent of a reward . None of petitioner's

arguments persuade us that our holding in Roco v .

supra , does not apply .

Commissioner ,

Because .the qui tam payment .islincludable

- 12 .in petitioner's gross income, we next decide whether petitioner

must include the entire $8 .75 million qui tam payment in gros s

,,income or is entitled to exclude the $3 .5 million attorney's fee

'payment and thus include only the $5 .25 million qui tam payment

in gross income .

Petitioner contends that only $5 .25 million of the qui tam

payment must be included in gross income because he never

'received the $3 .5 million attorney's fee payment . The $8 .75

million qui tam payment was wired from the United States to

petitioner's attorneys, who subtracted a 40-percent contingency

fee and paid the $5 .25 million net proceeds of the qui tam

'payment to petitioner by check .

Respondent contends that the $3 .5 attorney's fee payment is

includable in petitioner's gross income and thus petitioner must

include the entire $8 .75 million qui tam payment in gross income .

Petitioner relies on Cotnam v . Commissioner,

263 F .2d 119,

(5th Cir . 1959), affg . in part and revg . in part 28 T .C . 947

( ;1957),6 Davis v . Commissioner , 210 F .3d 1346 (11th Cir . 2000),

affg . T .C . Memo . 1998-248, and Foster v . United States , 249 F .3 d

u

The Court of Appeals for the Eleventh Circuit has adopted

as binding precedent the caselaw of the former Court of Appeals

for the Fifth Circuit, as of Sept . 30, 1981 .

Bonner v . City of

Pritchard , 661 F .2d 1206 (11th Cir . 1981) . Absent stipulation to

the contrary, any appeal of the instant case would be to the

Court of Appeals for the Eleventh Circuit Court . The Tax Court

follows the . law of the circuit in which an appeal would lie if

,that law is on point .

Golsen v . Commissioner , 54 T .C . 742, 75 7

(1970), affd . 445 F .2d 985 (10th Cir . 1971) . ,

- 13 1275 (11th Cir . 2001), contending that they control th

treatmen t

of contingent attorney's . fees . However, after those c4ses wer e

decided, the Supreme Court held in Commissioner v .

Banks,

543

U .S . 426 (2005), that when a litigant's recovery constitutes

taxable income, that income includes the portion paid

o

attorneys as a contingent fee . Accordingly, we hold that the

$3 .5 million attorney's fee payment is includable in petitioner's

gross income and, therefore, petitioner must include the entire

$8 .75 million qui tam payment in gross income .

We next address whether petitioner may deduct the $3 .5

million attorney's fee payment as a miscellaneous itemized

deduction . Both parties concede that if petitioner ha

substantiated the attorney's fees, he may deduct them as a

miscellaneous itemized deduction .,' Accordingly, we address the

issue of whether petitioner has properly substantiated his

deduction .

Petitioner contends that his testimony and the attorney's

fee agreement provide sufficient evidence to substantiate the

deduction of attorney's fees . Respondent contends that th e

.08-357 ,

7The American Jobs Creation Act of 2004 , Pub . L .

sec . 703, 118 Stat . 1546, amended sec . 62(a) to allow .an

adjustment from gross income for attorney's fees paid by, or on

behalf of a taxpayer in connection with a claim under the FCA .

However, the adjustment is applicable only to fees an

costs paid

ettlement

after Oct . 22, 2004, with respect to any judgment or

instan t

occurring after that date .

Id .

The settlement in th

case was entered into during September 2003 . Accordingly, the

adjustment is not applicable to the instant case

- 14 offered proof and testimony are insufficient and that petitioner

should have called his attorneys to testify to the receipt of th e

funds .

Deductions are a matter of legislative grace, and a taxpayer

bears the burden of proving that he is entitled to the deductions

s claimed .

INDOPCO, Inc . v . Commissioner , 503 U .S . 79, 84 (1992) ;

Eradesky v . Commissioner , 65 T .C . 87, 89-90 (1975), affd . 540

.F .2d 821 (5th Cir . 1976) . The taxpayer is required to maintain

records that will enable the Commissioner to determine the

correct liability . Sec . 6001 .

Petitioner offered as proof of payment his testimony and a

corroborating document that contained his contingency fee

arrangement with his attorneys . On the basis of that evidence,

we are persuaded that petitioner paid the attorney's fees and,

therefore, hold that petitioner has substantiated the payment o f

the fees .

Finally, we consider whether petitioner is liable for the

accuracy-related penalty pursuant to section 6662(a) . Taxpayers

are subject to a 20-percent penalty for any underpayment which i s

attributable to, among other things, (1) negligence or, disregar d

of rules or regulations or (2) any substantial understatement of

income tax . Sec . 6662(a) and (b) ;

New Phoenix Sunrise Corp . v .

Commissioner , 132 T .C .

(slip

(2009)

op . at 45-47) . .

Negligence includes any failure to make a reasonable attempt to

- 15 comply with the Code . Sec .

6662 ( c) ; see Neely v . Commissioner ,

85 T .C . 934, 947 (1985) (negligence is lack of due ca r

or

failure to do what a reasonably prudent person would d

under th e

circumstances) . Disregard of rules or regulations inc udes any

careless, reckless, or intentional disregard . Sec . 6652(c) . A

substantial understatement of income tax occurs in any year wher e

the amount of the understatement exceeds the greater o

10

percent of the amount required to be shown on the retu n or

$5,000 . Sec . 6662(d)(1)(A) . An understatement is the excess of

the amount of tax required to be shown on the return o er the

amount of tax actually shown on the return less any rebates .

Sec . 6662(d)(2)(A) . The potential understatement will be reduced

by the portion attributable to the tax treatment of an item if

there was substantial authority for such treatment or if the

relevant facts affecting the item's tax treatment are adequately

disclosed in the return or in an attached statement an there i s

a reasonable basis for such treatment . Sec . 6662(d)(2)(B) .

exception to the accuracy-related penalty exists if t e taxpayer

can show there was reasonable cause for such portion nd th e

taxpayer acted in good faith in regard to such porti o

Sec .

6664 (c )

Respondent contends that petitioner is liable f

the

accuracy-related penalty because . he substantially and rstated hi s

income tax as .a result of failing to include the $8 .7

million

- 16 "qui tam payment in his gross income . See sec . 6662(b)(2) .

,Alternatively, respondent contends that the underpayment is

,attributable to negligence or disregard of rules and regulations .

See sec . 6662 (b) (1) .

Petitioner contends that, pursuant to sections 6662(d)(2)(B )

and 6664(c) ., he should not be liable for the accuracy-related

Jpenalty because he disclosed the full settlement payment on his

rreturn, there was reasonable cause for the omission from income,

and he acted in good faith with respect to the omission of the

settlement payment . Specifically, petitioner contends that

because he disclosed the $5 .25 million net proceeds of the qui

tam payment on the face of his return, excluded it from his

calculation of taxable income, and filed Form 8275 disclosing the

$3 .5 million attorney's,fee payment, he should not be liable for

,the accuracy-related penalty .

Generally, the Commissioner bears the burden of production

with respect to any penalty, including the accuracy-related

enalty . Sec . 7491(c) ;

Higbee v . Commissioner , 116 T .C . at 446 .

To meet that burden, the Commissioner must come forward with

sufficient evidence indicating that it is appropriate to impose

the relevant penalty .

Higbee v . Commissioner ,

supra at 446 . The

Commissioner has the burden of production only ; the ultimate

burden of proving . that the penalty is not applicable remains on

the taxpayer .

Id .

- 17 Respondent offers petitioner's original return as evidence

that petitioner understated his income tax and that the

imposition of the accuracy-related penalty is appropriate . The

original return does exclude the $8 .75 million qui tam payment

from the calculation of taxable income . We have held bove that

the $8 .75 million qui tam payment is includable in petitioner's

gross income . Accordingly, we conclude that responden has met

his burden of production to show that his determinatio of the

accuracy-related penalty is appropriate . '

Petitioner is liable-for the accuracy-related penalty if his

underpayment is a result of negligence or disregard of rules and

regulations or . if there is a substantial understatement of income

tax . Sec . 6662(b) ; New Phoenix Sunrise Cor

. v . Commssioner,

supra at (slip op . .at 45-47) . As discussed above, petitioner

should have included the $8 .75 millionqui tam settlement payment

in his gross income for his 2003 taxable year . Had h done so, a

total tax liability of $3,044,110 would have resulted .

Petitioner's deficiency of $3,044,000'exceeds the gre ter of

$5,000 or 10 percent of the amount of tax required to be shown on

the return (10 percent of $3,044,110 is $304,411) . See sec .

6662(d)(1)(A) . Consequently, petitioner will be liab e for th e

'Respondent has met his burden of production for both, the

negligence grounds of the accuracy-related penalty pu suant to

sec . 6662(b)(1) and the substantial understatement gr unds of the

accuracy-related penalty pursuant to sec . 6662(b)(2) .

s

- 18 -

raccurac .y-related penalty unless the penalty can be reduce d

pursuant to section 6662(d)(2)(B) or avoided pursuant to sectio n

„66 .64 (c) . 9

An underpayment may be reduced where the taxpayer has

substantial authority for the tax treatment or, alternatively,

the position is adequately disclosed and the taxpayer has a

.reasonable basis for such treatment . Sec . . 6662(d)(2)(B) ; W .

' Covina Motors, Inc . v . Commissioner , T .C . Memo . 2008-237 .

Substantial authority is an objective standard based on an

'analysis of the law and its application to the relevant facts .

u

Myers v . Commissioner , T .C . Memo . 1994-529 ; sec . 1 .6662-4(d)(2) ,

Income Tax Regs . Taking into account all authorities,

substantial authority exists only if the weight of th e

authorities supporting the treatment is substantial in relation

to the .weight of authorities supporting contrary treatment . Sec .

1? .6662-4(d)(3), Income Tax Regs . Substantial authority is not so

stringent that a tax treatment must be upheld in litigation or

i

have a greater than 50-percent likelihood of being sustained .

O'Malley v . Commissioner , T .C . Memo . 2007-79 ; sec ..

1 .6662-

4(d)(2), Income Tax Reds .

Petitioner argues that substantial authority to exclude th e

u,i tam payment from his'gross income exists because of Roco V .

I1,

9We note that the accuracy-related penalty was imposed on

the taxpayer in Roco v . Commissioner , 121 T .C . 160 (2003) .

19 Commissioner , 121 T .C . .at 165 n .2 . However,

Roco 's ho ding is

directly adverse to his position . As explained . above,

Roco is

not substantial authority for his position,•nor is any case

petitioner cites . Petitioner has failed to show that he

authorities in support of his treatment are substantia i n

relation to those supporting contrary treatment .

Petitioner further argues that the underpayment s ould be

reduced because of adequate disclosure and a showing o

reasonable basis . Sec . 6662(d)(2)(B)(ii) . Adequate

isclosure

may be made either in a statement attached to the ret rn or on

the return . Sec . 1 .6662-4(f), Income Tax Regs . Disci osur e

generally must be made on Form 8275 unless otherwise`

ermitted by

applicable revenue procedure--in this case, Rev . Proc . l .2003-77 ,

2003-2 C .B . 964 . Sec . 1 .6662-4(f)(2), Income Tax Reg

Petitioner included the $5 .25 million net proceeds of th e

qui tam payment as other income on page

1 of his retu n . Qui tam

payments are not addressed in Rev . Proc . 2003-77, su a .

Consequently, the method for adequately disclosing th taxability

of a qui tam payment was by the filing of a Form 8275

Petitioner's Form 8275 did not disclose the $5 .25 mil ion net

proceeds of the qui tam payment . Instead, the Form 8 75

disclosed the $3 .5 million attorney's fee payment . A-cordingly,

.we conclude that petitioner did not adequately disclo e the $5 .25

million net proceeds of the qui tam payment .

20 -

u

Additionally ,

we conclude that petitioner did not have a

; ;reasonable basis for his position with regard to the exclusion of

the $5 . 25 million net proceeds of the qui tam payment from his

.gross income . Reasonable basis is a relatively high standard of

reporting .

Sec . 1 .6662 - 3(b)(3) Income Tax Regs . Taxpayers must

have a position that is more than merely arguable .

Commissioner ,

ar,(

T .C . Memo .

Halby v .

2009-2 .04 ; sec . 1 .6662 - 3(b)(3), Incom e

Tax Regs . As noted above, petitioner's position is based on a

footnote from a case that holds in direct opposition to his

position . See Roco v . Commissioner , 121 T .C . 160 (2003) .

Petitioner's arguments in support of his contention that Roco i s

`distinguishable were at best merely colorable . Consequently, we

hold that petitioner has not shown that he had a reasonable basis

for his return position regarding the $5 .25 million net proceeds

of the qui tam payment .

We next consider whether the accuracy-related penalty should

be reduced because petitioner adequately disclosed the exclusio n

the $3 .5 million attorney's fee payment from gross income an d

had a reasonable basis for that exclusion . Disclosure of

petitioner ' s position regarding the $3 .5 million attorney's fee

payment on the Form 8275 attached to his return constitutes

adequate disclosure .

See sec . 1 .6662 - 4(f)(1), Income Tax Regs .

Petitioner relies on Cotnam v . Commissioner ,

263 F .2d 119 (5th

Cir . 1959 ), Davis v . Commissioner , 210 F . 3d 1346

(11th Cir .

- 21 2000), and Foster v . United States , 249 F .3d 1275 (lit Cir .

2001), for the proposition that, at the time he filed is

original return,10 contingency fee payments made directly to

attorneys were not includable in gross income . At that'. time,

Foster v . United States , supra, had held that attorney's fees

covered by a contingency fee arrangement should be exc uded from

gross income because of the Alabama attorney's lien la governing

the recovery of such fees . Because petitioner was a resident of

Florida, a State with similar lien laws, his reliance on Foster

was a reasonable basis for the exclusion of the attorney, s fee

payment from his income ." At the time petitioner file hi s

original return, the Supreme Court had not yet decide d

Commissioner v . Banks , 543 U .S . 426 (2005), . which over uled

Foster .12 Consequently, we hold that petitioner's underpaymen t

'OPetitioner filed an amended ; return on Apr . 26, 21005 .

Respondent has not raised any issue regarding when lia

the penalty must be determined ; i .e ., as of the time o

original return or the amended return . We therefore n

address the issue . In another context, however, the S

Court has held that liability for the penalty is deter

the time of the original return and not an amended ret

Badaracco v . Commissioner , 464 U .S . 386 (1984) .

"The attorney's lien laws of Florida and Alabama are not

exactly the same but are not sufficiently dissimilar a to

persuade us that Foster v . United States , 249 F .3d 1275 (11th

Foster was decided by the

Cir . 2001), is not reasonable basis .

.

Appeals

for

the

Eleventh

Circuit,

the same Court of

Court of

Appeals having venue, absent stipulation to the contrary, o f

appeals by Florida residents .

12 Commissioner v . Banks , 543 U .S . 426 (2005), was decided on

Jan . 24, 2005 .

- 22 for the purpose of the section 6662(b) penalty must be reduced b y

the portion of the .penalty attributable to the $3 . .5 millio n

attorney's fee payment .

Finally, we consider petitioner's contention that the

'accuracy-related penalty should not apply to the $5 .25 million

net proceeds of the qui tam payment he failed to include in his

income because there was reasonable cause for his position and he

!acted in good faith . See sec . 6664(c) ;

I

v . Commissioner ,

New Phoenix Sunrise Corp .

supra at (slip op . at 50) . Taxpayers

,demonstrate reasonable cause when they exercise ordinary business

care and prudence .

Richardson v . Commissioner , 125 F .3d 551, 558

(7th Cir . 1997), affg . T .C . Memo . 1995-554 . The most importan t

:factor in determining reasonable cause and good faith is . the

taxpayer's efforts to assess the proper tax liability . Sec .

1 .6664-4(b)(1), Income Tax .Regs . A taxpayer's experience ,

knowledge, and education may also be taken into account .

Bachmann v . Commissioner , T .C . Memo . 2009-51 ; sec . 1 .66644(b) (1) , Income Tax Regs .

Petitioner did not have reasonable cause for his position or

act in good faith . Petitioner is a sophisticated taxpayer,

having earned a bachelor's degree in accounting and business

administration and served as chief of cost control for Lockhee d

.Martin for a $3 .5 billion project . Petitioner failed to see k

professional advice when preparing his 2003 tax return . See also

- 23 Bachmann v . Commissioner ,

supra

(taxpayer was a sophisticated

banker who should have sought advice on tax treatment f receipt

of large arbitration award) . Moreover, petitioner's claimed

authority for his position was a footnote from a case that

reached a holding directly adverse to his position . S e Roco v .

Commissioner ,

supra . Petitioner's position was neithe

persuasive nor reasonable . Given his experience, knowledge, and

education, petitioner has failed to meet his burden .of proving

the reasonable cause exception to the accuracy-related penalty .

Consequently, we hold that petitioner is liable for th accuracyrelated penalty with respect to the $5 .25 million net roceeds of

the qui tam payment .

The Court has considered all other arguments made by the

parties and, to the extent we have not addressed them herein, we

consider them moot, irrelevant, or without merit .

On the basis of the foregoing,

Decision willIbe entere d

under Rule 155 .