ANTHONY Y. KITE v. DIRECTOR, DIVISION OF TAXATION

 

(NOTE: The status of this decision is Published.)

                   NOT FOR PUBLICATION WITHOUT THE
                  APPROVAL OF THE APPELLATE DIVISION

                                       SUPERIOR COURT OF NEW JERSEY
                                       APPELLATE DIVISION
                                       DOCKET NO. A-3349-15T3



ANTHONY Y. KITE,                           APPROVED FOR PUBLICATION

                                               February 8, 2018
     Plaintiff-Appellant,
                                               APPELLATE DIVISION
v.

DIRECTOR, DIVISION OF
TAXATION,

     Defendant-Respondent.
_________________________________________

           Submitted December 19, 2017 – Decided February 8, 2018

           Before Judges Yannotti, Carroll and Leone.

           On appeal from the Tax Court of New Jersey,
           Docket No. 0190-2013, whose opinion is
           reported at 
29 N.J. Tax 75 (Tax 2016).

           Steven D. Janel, attorney for appellant.

           Christopher S. Porrino, Attorney General,
           attorney for respondent (Jason W. Rockwell,
           Assistant Attorney General, of counsel;
           Ramanjit K. Chawla, Deputy Attorney General,
           on the brief).

     The opinion of the court was delivered by

YANNOTTI, P.J.A.D.

     Plaintiff Anthony Y. Kite appeals from a judgment entered

by   the   Tax   Court,   granting   summary   judgment   in   favor   of

defendant Director, Division of Taxation (Division), and denying
plaintiff's motion for summary judgment. The court upheld the

Division's    assessment        of        additional       taxes,        penalties,          and

interest pursuant to the New Jersey Gross Income Tax Act (the

Act),   
N.J.S.A.      54A:1-1        to     10-12.     The       court's       opinion        is

published at Kite v. Dir., Div. of Taxation, 
29 N.J. Tax 75 (Tax

2016). We affirm.

                                            I.

    The      relevant      facts      are        undisputed.         In    2004,        while

performing    certain      financial         consulting           services,      plaintiff

discovered    what    he    believed        to    be   a   pattern        of    fraudulent

practices by certain hospitals. According to plaintiff, these

hospitals    were    submitting       false      claims      to    the    United       States

government under the Medicare program by inflating charges for

routine procedures by as much as four hundred percent. After

conducting    further      research,        plaintiff      concluded       that        he    had

sufficient    evidence       to      substantiate          his      belief       that       the

hospitals were engaging in fraudulent billing practices, which

had resulted in millions of dollars of Medicare overpayments.

    Plaintiff retained a law firm to file a qui tam action on

behalf of the United States, pursuant to a provision of the

False Claims Act (FCA), 31 U.S.C. § 3730(b). The FCA requires a

qui tam plaintiff to file his or her complaint in camera and

serve   the    federal       government           with       a     copy        along        with




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substantially all of the material evidence and information that

supports the claim. 31 U.S.C. § 3730(b)(2). A qui tam plaintiff

is generally referred to as the "relator." See U.S. ex rel.

Hefner v. Hackensack Univ. Med. Ctr., 
495 F.3d 103, 109 (3d Cir.

2007).

    The FCA provides that the federal government has sixty days

in which to decide whether to proceed with the action. 31 U.S.C.

§ 3730(b)(4)(A). If the federal government chooses to do so, it

takes control of the lawsuit, but the person who brought the

action remains a party and is entitled to receive a portion of

the amount recovered. 31 U.S.C. § 3730(d)(1). Under the FCA, the

person who brought the action is entitled to receive at least

fifteen percent, but not more than twenty-five percent, of the

proceeds of the action or settlement of the claim, "depending

upon the extent to which the person substantially contributed to

the prosecution of the action." Ibid.

    Plaintiff commenced his qui tam action in June 2005, by

filing a complaint in the United States District Court for the

District of New Jersey. As required by the FCA, the complaint

was filed under seal and served upon the federal government.

Thereafter, the government elected to proceed with the action.

When the complaint was unsealed, plaintiff learned that private

parties had filed two other qui tam actions under the FCA, and




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the complaints in those cases included claims against many of

the same hospitals that were defendants in plaintiff's action.

      In 2006, plaintiff and the relators in the other actions

entered      into   a      "Relators'     Joint       Prosecution       and    Sharing

Agreement." In that agreement, plaintiff and the other relators

agreed      to   work      together     to       successfully     prosecute        their

respective actions against the hospitals. They also agreed to

share "all monies that [were] awarded as relator's share awards

as a result of [the] claims" asserted in the complaints. The

relators' agreement provides in pertinent part that

             [u]pon receipt by any one law firm of any or
             all settlement proceeds from the United
             States, the proceeds shall be placed in a
             trust escrow account maintained by the
             recipient law firm for the benefit of its
             [r]elator or [r]elators pursuant to the
             Rules of Professional Conduct in the state
             in which the escrow account is located.

The relators' agreement further provides for the allocation of

the settlement proceeds of the qui tam actions.

      In 2008, plaintiff and the other parties in his qui tam

action     executed     agreements      resolving        claims   asserted     against

three      hospitals.      Each   agreement        set    forth   the    amount      the

hospital would pay to the United States, and the amount the

United States would pay to plaintiff "through his legal counsel"

as   his    share     of   the    amounts        recovered.   Pursuant        to   these




                                             4                                 A-3349-15T3
agreements, the defendant hospitals paid the United States $7.5

million, and plaintiff's share of the recovery was $1,229,255.

      The   federal     government     paid     that       amount     to    plaintiff's

attorneys, and they withheld $368,776.50 as their agreed-upon

contingency      fee.     Plaintiff's          attorneys           also     distributed

$307,313.75 to the other relators, pursuant to the "Relators'

Joint   Prosecution       and   Sharing             Agreement."       The     attorneys

distributed the remaining $553,164.75 to plaintiff.

      The Internal Revenue Service (IRS) issued a 1009-Misc form

to plaintiff for the 2008 tax year showing income of $1,229,255,

the   amount    he   received   from      his       qui    tam     action.    Plaintiff

reported that amount as "other income" on his federal income tax

form 1040 for 2008. For federal income tax purposes, the fees

that plaintiff paid to his attorneys for prosecuting the qui tam

action were deductible from his taxable income.

      Plaintiff did not, however, report the $1,229,255 recovery

as income on his 2008 New Jersey gross income tax return. In

January 2012, the Division of Taxation issued a notice of tax

deficiency to plaintiff. In the notice, the Division informed

plaintiff that the $1,229,255 recovered from the qui tam action

was   taxable   income    because    it       was    a    "prize    or     award"   under


N.J.S.A. 54A:5-1(l).




                                          5                                     A-3349-15T3
       As    a   result       of    the   resulting         increase       in    plaintiff's

taxable income, the Division increased the amount of plaintiff's

property tax deduction. The Division also adjusted the return to

add    plaintiff's        gambling        winnings         as     taxable       income.       The

Division did not, however, allow plaintiff to deduct the fees he

paid to his attorneys for the qui tam action, or the amounts he

paid to the other relators pursuant to the "Joint Prosecution

and    Sharing         Agreement."        The       Division        therefore         assessed

plaintiff $118,882.52, which represented the additional gross

income tax of $95,517.19, penalties, and interest.

       Plaintiff filed a protest with the Division and requested

an    administrative          conference.       The       conference       took       place    on

October      23,      2012.    Thereafter,          the    Division    issued         a   final

decision in the matter, upholding the assessment of additional

taxes,      penalties,        and    interest.       With       interest    calculated         to

December 15, 2012, the assessment totaled $124,476.

       Thereafter, plaintiff filed a complaint in the Tax Court

challenging the Division's final determination. The court later

granted      the      Director's      motion        for    summary    judgment         on     the

inclusion        of    plaintiff's        gambling        winnings     in       his    taxable

income, which plaintiff did not oppose.

       Thereafter,       the       parties   filed        cross    motions      for    summary

judgment on the remaining issues pertaining to the assessment.




                                                6                                      A-3349-15T3
Plaintiff argued that the amount he recovered in the qui tam

action      was    not    subject     to    New     Jersey      gross    income      tax.

Alternatively, he argued that if the recovery is subject to

taxation, he is entitled to deductions for the fees he paid to

his   attorneys         and   the   amounts      paid    to     the   other   relators

pursuant to the sharing agreement.

      After hearing oral argument, Judge Patrick DeAlmeida filed

an opinion in which he found that the amount plaintiff recovered

from the qui tam action constituted an "award" under 
N.J.S.A.

54A:5-1(l) and therefore was properly included as taxable gross

income. Kite, 
29 N.J. Tax at 85-86. The judge also determined

that the fees plaintiff paid to his attorneys to prosecute the

action   and      the    amounts    paid   to     the   other    relators     were    not

deductible. Id. at 86.

      The     judge       therefore    entered          an    order     granting      the

Division's motion for summary judgment and denying plaintiff's

motion for summary judgment. Id. at 90. This appeal followed.

                                           II.

      On appeal, plaintiff argues that the Tax Court erred by

upholding the Division's deficiency assessment. He contends the

funds he received as a relator's share for prosecuting his claim

under the FCA are not taxable under the Act. Plaintiff contends

his recovery does not meet the definition of a "prize or award"




                                            7                                  A-3349-15T3
under   
N.J.S.A.    54A:5-1(l),   and      therefore    does   not    constitute

taxable gross income. He further argues that if the recovery is

subject to taxation, the Division should have permitted him to

deduct the fees he paid to his attorneys for prosecuting the

action and the amounts paid to the other relators pursuant to

the sharing agreement.

      We note initially that the trial court shall grant a motion

for summary judgment when "the pleadings, depositions, answers

to interrogatories and admissions on file, together with the

affidavits, if any, show that there is no genuine issue as to

any   material     fact   challenged    and   that     the   moving    party   is

entitled to a judgment or order as a matter of law." Templo

Fuente De Vida Corp. v. Nat'l Union Fire Ins. Co., 
224 N.J. 189,

199 (2016) (quoting R. 4:46-2(c)). We apply the same standard

when reviewing an order granting or denying a motion for summary

judgment. Globe Motor Co. v. Igdalev, 
225 N.J. 469, 479 (2016)

(citing Bhagat v. Bhagat, 
217 N.J. 22, 38 (2014)).

      Here, there is no dispute as to the material facts, and the

issue on appeal is whether the trial court correctly determined

as a matter of law that plaintiff's recovery from the qui tam

action is subject to taxation under the Act, and if so, whether

plaintiff should have been permitted to deduct his attorneys'

fees and the monies paid to other relators from the amount of




                                       8                                A-3349-15T3
the recovery. In considering those issues, we owe no special

deference   to    the   trial   court's    legal   determinations.       Templo

Fuente, 
224 N.J. at 199 (citing Manalapan Realty, L.P. v. Twp.

Comm. of Manalapan, 
140 N.J. 366, 378 (1995)).

                                    III.

      We turn first to plaintiff's contention that the amounts he

received from the proceeds of the qui tam litigation are not

subject to taxation under the Act. He contends the recovery is

not   taxable    income   because   it    is   neither   a   "prize"   nor    an

"award" under 
N.J.S.A. 54A:5-1(l). We disagree.

      In interpreting a statute, "we must identify and implement

the legislative intent." Smith v. Millville Rescue Squad, 
225 N.J. 373, 389 (2016) (quoting State v. Smith, 
197 N.J. 325, 332

(2009)). In doing so, we first consider the plain language of

the statute, which is "the best indicator of that intent[.]"

Ibid. (alteration in original) (quoting DiProspero v. Penn, 
183 N.J. 477, 492 (2005)).

      We must interpret language of a statute "in accordance with

its ordinary and common-sense meaning." Id. at 389-90 (quoting

Saccone v. Bd. of Trs. of the Police & Firemen's Ret. Sys., 
219 N.J. 369, 380 (2014)). We also must read the statute "in context

with related provisions so as to give sense to the legislation




                                     9                                 A-3349-15T3
as   a     whole."      DiProspero,   
183 N.J.      at    492   (citing    Chasin        v.

Montclair State Univ., 
159 N.J. 418, 426-27 (1999)).

           
N.J.S.A.     54A:5-1    defines       New   Jersey       gross    income       and

identifies various categories of taxable income, which include

"[a]mounts received as prizes and awards." 
N.J.S.A. 54A:5-1(l).

Here, Judge DeAlmeida correctly determined that the term "award"

in 
N.J.S.A. 54A:5-1(l) is commonly understood to include the

monies a person receives as damages in a lawsuit. Kite, 
29 N.J.

Tax at 83. The judge's conclusion is supported by dictionary

definitions of the word "award," which are indicative of the

ordinary meanings of the word.

         As a noun, "award" means "a decision, as by a judge or

arbitrator" and "something that is awarded; [such as a] prize."

Webster's         New    World    College    Dictionary        95    (3d     ed.        1997).

Furthermore, as a verb, "award" means "to give by the decision

of     a    law    court    or    arbitrator      [the       plaintiff      was     awarded

damages]" and "to give as the result of judging the relative

merits of those in competition; grant [to award a prize for the

best       essay]."       Ibid.   (alterations         in     original).          See     also

Webster's         Third     New    International            Dictionary      152         (1981)

(defining         "award"   to    mean,   among     other     things,       "to    give    by

judicial decree").




                                            10                                      A-3349-15T3
         Judge    DeAlmeida       noted    that     
N.J.S.A.    54A:6-6(b)           also

supports the conclusion that monies a person receives as damages

in a lawsuit are taxable gross income. Kite, 
29 N.J. Tax at 84.

That statute excludes from gross income "the amount of damages

received, whether by suit or agreement, on account of personal

injuries or sickness." 
N.J.S.A. 54A:6-6(b). Thus, the exclusion

indicates        that    the     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 Act. Kite, 
29 N.J. Tax at 84.

         The judge also noted that the FCA expressly refers to the

amounts a person receives from the proceeds of a qui tam action

or settlement as an "[a]ward." Kite, 
29 N.J. Tax at 83 (citing

31 U.S.C. § 3730(d)). In addition, in their sharing agreement,

plaintiff and the other relators referred to the monies awarded

in their respective qui tam actions as "awards."

         Plaintiff argues, however, that his recovery in the qui tam

action is not a taxable "prize or award" under 
N.J.S.A. 54A:5-

1(l). In support of this argument, plaintiff cites certain other

dictionary definitions of the words "prize" and "award." Based

on   those       definitions,      plaintiff      argues     that    a     "prize"      is

something offered in a competition or contest of chance, and an




                                           11                                    A-3349-15T3
"award" is something that is conferred or bestowed especially on

the basis of merit or need.

       We are convinced, however, that plaintiff's interpretation

of the word "award" is unduly narrow and, as we have explained,

inconsistent with the ordinary meanings of that word. In any

event, the dictionary definitions that plaintiff selected do not

support his interpretation of 
N.J.S.A. 54A:5-1(l). Rather, those

definitions    support     the   Tax    Court's   interpretation    of    the

statute.

       Here, plaintiff claims the federal government's recovery in

his qui tam action was due, in part, to his skill at identifying

and prosecuting the claims. Thus, according to plaintiff, his

recovery in the qui tam action was based on the merit of the

claims presented in that action. Ibid. As the judge commented,

"even if the court were to look to the dictionary definitions

upon   which   plaintiff    relies,    [the]   conclusion   would   be    the

same." Kite, 
29 N.J. Tax at 85-86.

       We therefore conclude the Tax Court correctly found that

the Division's interpretation of the term "award" in 
N.J.S.A.

54A:5-1(l) is reasonable and consistent with the plain meanings

of the words used in the statute. The court correctly determined

that an "award" includes the proceeds plaintiff received for

prosecuting the qui tam action.




                                       12                           A-3349-15T3
                                        IV.

       Plaintiff further argues that if the monies he received

from the recovery in the qui tam action are an "award" under


N.J.S.A. 54:5-1(l) and considered to be gross income under the

Act,    the   Division    should    have      permitted   him    to   deduct    his

expenses in obtaining the award, specifically the fees paid to

his attorneys to prosecute the action. He also argues that the

Division should have allowed him to deduct the amounts paid to

the other relators. Neither argument has merit.

       Here, the judge noted that the federal government paid the

entire $1,229,225 to plaintiff's attorneys and those funds were

deposited in the firm's trust account. Kite, 
29 N.J. Tax at 86-

87.    The    judge   found      that   thereafter,       plaintiff    paid     his

attorneys $386,776.50 from the trust account pursuant to the

retainer agreement, and a share of the proceeds to the other

relators pursuant to their sharing agreement. Id. at 87.

       The judge determined that these payments were made after

the    federal   government      had    disbursed   to    plaintiff     the    full

amount of his share of the recovery. Ibid. The judge correctly

found that the entire $1,229,225 paid to plaintiff was taxable

to him under the Act. Ibid. The judge aptly observed that the

tax    consequences      would     be   no    different     if   plaintiff      had




                                         13                              A-3349-15T3
instructed his attorney to pay other debts or obligations from

those funds. Ibid.

    Plaintiff    argues      that    in    the    Act,    the    Legislature       only

intended to assess the tax upon income after credit was given

for the costs and expenses incurred in the generation of the

income. The judge noted, however, that sixteen categories of

income are identified in the Act as gross income, and only a few

of those categories are "net income." See 
N.J.S.A. 54A:5-1(b)

("[n]et    profits   from    business");         
N.J.S.A.     54A:5-1(c)      ("[n]et

gains or income from disposition of property"); 
N.J.S.A. 54A:5-

1(d) ("[n]et gains or net income from or in the form of rents,

royalties,    patents,       and    copyrights");           N.J.S.A.       54A:5-1(h)

("[n]et gains or income derived through estates or trusts"); and


N.J.S.A.    54A:5-1(p)   ("[n]et      pro      rata   share      of   S   corporation

income").

    The judge pointed out that the other categories of income,

including "awards" under 
N.J.S.A. 54A:5-1(l), are not defined as

"net income." Kite, 
29 N.J. Tax at 87-88. The judge therefore

determined that the gross amount of plaintiff's recovery was

taxable, not the net amount after deductions. Id. at 88. The

judge   correctly    found    that    plaintiff          could    not     deduct    his

attorney's fees or the amounts paid to the other relators from

his recovery. Ibid.




                                          14                                 A-3349-15T3
    The judge also correctly found that even though the IRS

permitted plaintiff to deduct his attorneys' fees on his federal

tax return, this was not controlling. Id. at 89. The Act is

distinctly different from the federal income tax law. See Smith

v. Dir., Div. of Tax., 
108 N.J. 19, 32 (1987) (noting that our

Legislature rejected the federal tax model "in favor of a gross

income tax" without the loopholes available under the federal

law). The Division properly disallowed the deductions plaintiff

was seeking because they are not provided by the Act.

    Plaintiff also contends the Tax Court erred by failing to

consider public policy concerns and equitable considerations,

which he asserts should allow him to deduct his attorneys' fees

from his recovery. He contends he provided a benefit to the

public by facilitating the repayment of $7.5 million to the

federal   government       due   to    fraudulent    billing,   and   that   his

efforts   put   a   stop    to   the    fraudulent    billing   practices.    He

contends that if the tax burden is too onerous, individuals will

not pursue these claims.

    We note that the federal taxation of qui tam awards has not

discouraged relators such as plaintiff from pursuing them. In

any event, as Judge DeAlmeida determined, these public policy

concerns and equitable considerations should be addressed to the

representatives of the other branches of government. Kite, 29




                                         15                            A-3349-15T
3 N.J. Tax at 90. The judge observed that it is not the "province

of the judiciary to determine public policy." Ibid. The judge

noted that whether recoveries in qui tam actions brought under

the FSA should be exempt from taxation, in whole or in part, is

a   question   for   elected   branches   of   government,   not    the

judiciary. Ibid. We agree.

     Affirmed.




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