James Alderson v. United States

In 1993, James Alderson filed a qui tam action under the False Claims Act (“FCA”) alleging Medicare fraud by Quorum Health Group, Inc. (“Quorum”), a hospital management company, and several related entities including the Hospital Corporation of America, Inc. (“HCA”). The United States intervened in 1998. The United States settled its FCA claims against HCA for $631 million in 2003. Alderson received sixteen percent of the settlement as his relator’s share.

Alderson and related taxpayers, Appellants, filed income tax returns for tax year 2003 reporting the relator’s share as ordinary income. They later filed amended returns characterizing it as capital gain, seeking refunds of about $5 million. The Internal Revenue Service (“IRS”) denied the refund claims. Appellants then filed suit in federal district court. The court granted summary judgment to the United States, holding that the relator’s share was ordinary income. Alderson v. United States, 718 F.Supp.2d 1186, 1200-01 (C.D.Cal.2010).

We affirm.

I. Background

Alderson was the Chief Financial Officer for North Valley Hospital in Whitefish, Montana, in 1990. That year, Quorum, an affiliate of HCA, began managing the…