Thomas Grande Helps Pass Hawaii Law to Avoid Double Taxation for Whistleblowers

The Double Taxation Problem Explained

Some federal circuit courts of appeals have interpreted the alternative minimum tax (AMT) to require that a person who receives a non-personal injury settlement must pay federal taxes on the full amount of an award or settlement, without receiving a deduction for the attorney's fees portion of the award.

Here's the problem: Attorneys also pay taxes on their portion of a court-awarded or contingency fee award. This results in double taxation on the same money — once when the whistleblower receives the full settlement amount (including attorney fees), and again when the attorney receives their share.

How This Affects Qui Tam Whistleblowers

Qui tam lawsuits are non-physical injury cases where whistleblowers typically receive 15-30% of the government's recovery. Most qui tam attorneys work on a contingency fee basis, meaning they receive a percentage of the whistleblower's award.

Under the problematic AMT interpretation, a whistleblower who receives a $1 million award might have to pay taxes on the full $1 million, even though $400,000 of that goes directly to their attorney. The attorney then also pays taxes on their $400,000 share. This effectively means the attorney fee portion is taxed twice.

Hawaii's Solution: Act 48

Thomas Grande drafted and helped pass SB 2443, which was signed into law as Act 48. This legislation clarified and confirmed that under existing Hawaii law, residents who receive non-physical injury settlements or awards are not subject to this double federal taxation scheme at the state level.

While the federal AMT issue remains a concern in some jurisdictions, Hawaii's Act 48 ensures that Hawaii residents do not face additional state-level double taxation on whistleblower awards.

Impact on Potential Whistleblowers

This legislative achievement demonstrates the importance of working with experienced qui tam attorneys who understand not only the False Claims Act but also the tax implications of whistleblower settlements. Tax planning should be an integral part of any qui tam case strategy.

Federal Developments

At the federal level, the American Jobs Creation Act of 2004 later addressed this issue by allowing an above-the-line deduction for attorney fees in certain whistleblower cases. However, the patchwork of state and federal tax laws means that tax planning remains an important consideration for whistleblowers considering filing a qui tam lawsuit.

Advocacy Beyond the Courtroom

This legislative success illustrates how our attorneys advocate for whistleblowers not just in the courtroom, but also in the legislative arena. Protecting whistleblowers' financial interests requires a comprehensive approach that includes ensuring fair tax treatment of qui tam awards.