[author: Adam Koelsch]
Recently, in O’Donnell v. Allegheny County North Tax Collection Committee, et al., No. 8 WAP 2021 (Dec. 27, 2021), the Pennsylvania Supreme Court held that whistleblower payments constituted compensation subject to local earned income taxes.
In 2014, the taxpayer had filed an action alleging that his employer violated the federal False Claims Act (“FCA”). After a “whistleblower,” such as the taxpayer, files an action under the FCA (known as a “qui tam action”), the government choses whether to pursue the claim, let the whistleblower pursue the claim, or seek dismissal of the claim. Despite this control by the government, the FCA provides the whistleblower with “an interest in the lawsuit,” specifically, an entitlement to part of any settlement the government obtains in the action. Thus, the whistleblower’s monetary incentive drives the initiation of the lawsuit. Here, the taxpayer received an award equal to 16% of the settlement, amounting to $34,560,000, later the same year.
Later, in 2017, the tax collector for the School District and the Borough in which the taxpayer resided discovered that the taxpayer had not filed a local earned income tax return for 2014, and assessed him approximately $437,000 in tax, interest, penalties, and costs based on the award.
The School District and the Borough derive their authority to impose an earned income tax on their residents, such as the taxpayer, from the Local Tax Enabling Act (“LTEA”). The LTEA defines “...
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