To generate revenue, increase enforcement resources, and “crack down on tax fraudsters,” the District of Columbia amended its False Claims Act (DC FCA) in 2021 to expressly impose liability arising from DC tax code violations. The District recently reaped its first significant windfall from this provision, with the DC Attorney General announcing a $40 million settlement with MicroStrategy Inc. and Michael Saylor, the co-founder and Executive Chairman of the company, to resolve DC FCA liability arising out of Saylor’s alleged avoidance of District taxes.

The settlement resolved allegations made in a post-DC FCA amendment qui tam action against MicroStrategy and Saylor. The DC Attorney General intervened, and the District filed its own complaint, alleging that Saylor, assisted by MicroStrategy, avoided paying more than $25 million in DC taxes by falsely claiming to be a resident of other jurisdictions. MicroStrategy and Saylor denied all liability, and MicroStrategy publicly reported that Saylor would pay the entire settlement amount.

DC FALSE CLAIMS ACT BACKGROUND

Section 3729(d) of the federal False Claims Act (FCA) excludes liability based on “claims, records, or statements made under the Internal Revenue Code.” [1] In 2021, DC joined eight states (plus some local jurisdictions) in deviating from the federal model.

As amended, the DC FCA expressly permits actions for tax violations where “the District taxable income, District sales, or District revenues of the person against whom the action is brought equals $1 million for any taxable year . . . and the damages pleaded in the action total $350,000 or more.” [2]

Even so, the DC FCA places some guardrails on tax-related claims by (1) requiring the Attorney General to consult with the District’s Chief Financial Officer regarding any such claims made by a qui tam relator, (2) barring such qui tam actions if they are the “subject of an existing investigation, audit, examination, ruling, agreement, or administrative enforcement action” by the Chief Financial Officer, and (3) limiting the discovery of certain tax information in the possession of the Chief Financial Officer. [3]

Upon a finding of liability, the DC FCA mandates treble damages and statutory penalties of between $5,500 and $11,000 for each violation. [4] If the action is brought by a qui tam relator, the relator (with some exceptions) is entitled to recover a share of any judgment or settlement, with a recovery range of 15% to 25% if the Attorney General intervenes in the action, and 25% to 30% if the recovery follows non-intervention. [5]

Prior to the 2021 amendment, DC’s recoveries under the DC FCA were relatively small and primarily from alleged contractor or grantee non-performance, Medicaid fraud, and non-resident tuition fraud.

HOW DO OTHER STATES HANDLE TAX-RELATED FALSE CLAIMS ACT ACTIONS?

DC’s amendment is similar to New York’s False Claims Act (NY FCA), under which liability can be imposed only if the net income or sales of the taxpayer exceeds $1 million for any affected tax year and if the total damages exceed $350,000. [6] The NY FCA also requires the NY Attorney General to consult with the commissioner of the department of taxation regarding any qui tam allegations arising out of tax liability and, in the event the Attorney General does not intervene, requires Attorney General consent before the relator can obtain certain state tax records. [7]

Since New York began permitting such suits in 2010, its reported tax-related NY FCA recoveries exceed $460 million. [8] The lion’s share of this bounty was the product of a $330 million settlement in a qui tam case alleging that Sprint Nextel had failed to collect and pay over $100 million in local taxes. In that action, the relator received a $62 million share of the settlement proceeds.

By imposing a minimum income/revenue threshold and setting a damages minimum, the District avoided a phenomenon that has plagued states like Illinois, [9] which has no such barriers and has seen an influx of low-value tax-related qui tam claims. Likewise, as discussed further below, by requiring that the Attorney General consult with the District’s Chief Financial Officer regarding tax claims raised in any qui tam complaint, the District may be able to avoid circumstances where private parties—unaccountable to the citizens and perhaps harboring other motivations beyond tax code compliance—are establishing tax law and enforcement policy through litigation.

While other states—namely, Nevada, Rhode Island, Hawaii, Indiana, Delaware, and Florida—either expressly authorize tax claims or have not enacted bars against such claims under their respective false claims legislation, there appears to be little reported litigation or settlements based on such claims in those jurisdictions. Notably, Rhode Island and Indiana allow such claims only if they are not related to personal income taxes. [10] Hawaii’s bar on tax claims was removed in 2012. [11] Delaware, Florida, and Nevada have no express prohibition on tax claims. [12]

CONCLUSION

When first enacted three years ago, the DC FCA amendment expressly allowing certain tax-related false claims cases rightfully garnered concern over an influx of such cases, particularly from qui tam relators.

Although it is too soon to determine whether those fears are unfounded—as qui tam actions in particular often take years to investigate before being unsealed—it is noteworthy that beyond the MicroStrategy case, to date there has been very little activity in this arena. In fact, when publicly announcing the settlement, the Attorney General described it as the first such DC FCA action pursued by the District.

In an earlier reported case, the Attorney General intervened in and moved to dismiss a qui tam action raising tax claims, telling the court that, following an investigation and consultation with the District’s Chief Financial Officer, the relator’s claims were not meritorious and in any event did not meet the DC FCA’s minimum threshold for alleged damages. [13]

This latest settlement, in which the relator could receive $10 million (plus attorney fees), likely will generate renewed relator’s bar interest in potential tax-related claims in the District and elsewhere, and should cause businesses and high-net-worth individuals to take steps to evaluate and, if necessary, mitigate against compliance risk in this area.

Summer associate Seth Hochman contributed to this LawFlash.

[1] 31 U.S.C. § 3729(d).

[2] D.C. Code Ann. § 2-381.02(d).

[3] D.C. Code Ann. §§ 2-381.03(a-1), (c)(3), (h), 2-381.05(a).

[4] D.C. Code Ann. § 2-381.02(a).

[5] D.C. Code Ann. § 2-381.03(f).

[6] N.Y. Fin. Law § 189(4)(a).

[7] N.Y. Fin. Law § 189(4)(b).

[8] D.C. Council, Committee of the Whole Report on Bill 23-35, at 4 (2020) (reporting on New York’s recoveries as found on the New York attorney general’s website).

[9] 740 Ill. Comp. Stat. §§ 175/1-175/8.

[10] R.I. Gen. Laws § 9-1.1-3 (2018); Ind. Code §§ 5-11-5.5-1—5-11-5.18.

[11] See Haw. Rev. Stat. §§ 661-21—661-31.

[12] Del. Code Ann. tit. 6, §§ 1201-1211; Fla. Stat. §§ 68.081-68.092; Nev. Rev. Stat. §§ 357.010 —357.250. Nevada’s statute does not expressly authorize tax-related claims, but the Nevada Supreme Court has held that the absence of an express bar against tax claims (akin to the express bar in the federal FCA) means that such claims are permissible.

[13] Dist. of Columbia ex rel. Deubert v. Levien, No. 2021 CA 3200 B, 2023 WL 9518604 (D.C. Super. May 23, 2023).

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