Wednesday, June 20, 2012

Does Receiving a Tax Benefit Make You a Grantee for False Claims Act Liability?

False Claims Act liability arises not simply for false claims presented to the federal government, but also false claims presented to "a contractor, grantee, or other recipient, if the money or property is to be spent or used on the Government's behalf or to advance a Government program or interest." 31 U.S.C. 3729(b)(2)(A)(i)-(ii).  So who is a "grantee" of government funds?  It can be an organization that has received some form of subsidy by the federal government.  But, does that mean that any so called false claim for payment presented to that organization which receives a federal benefit or subsidy gives rise to a false claim? The Third Circuit recently applied common sense when it refused to the extend the False Claims Act to every person or organization who enjoyed a federal tax benefit.

The Third Circuit Court of Appeals recently addressed whether a grantee can be an organization that enjoys tax benefits from the federal government, and it found that the False Claims Act simply did not stretch that far.  See U.S. ex rel Garg v. Covanta Holding Corporation et al., (3rd Cir. May 8, 2012).   In the Covanta case, the Court considered whether a state sponsored Utility Authority that issued tax exempt bonds qualified as a "grantee" under the False Claims Act ("FCA") because the tax exemption it enjoyed essentially functioned as a direct "financial subsidy" from federal government.   Faced with the Relator's argument that urged it to apply the FCA to "anyone who happens to receive money from the federal government," the Court balked, holding that the Utility Authority did not qualify as a grantee.

In Covanta, the Utility Authority had issued $280 million in tax exempt bonds to finance construction of a solid waste disposal facility, and it leased the facility to Covanta to control and operate the business and facility.  The Relator, the former executive director of the Utility Authority, alleged that Covanta failed to make two different types of payments that it owed to the Utility Authority and that it issued invoices to the Utility Authority containing false certifications.  The Relator argued that the Utility Authority qualified as a federal grantee under the FCA by "virtue of the fact that it receives a financial benefit from the deductibility of interest on the tax-exempt bonds it issued to finance the facility.  In other words, [the Relator] asserted that the federal government contributes tax revenue it otherwise would collect on interest paid to bondholders directly to the [Utility Authority]."

The Court found that the Covanta's alleged false claims and statements to the Utility Authority could not support a claim under the FCA. Citing cases that hold that tax exemptions are the functional equivalent of direct cash grants from the government, the Relator argued that the "grant of tax-exempt status to [Utility Authority's] bonds means the entity has more money in its proverbial pocket . . . than it would if it had to issue non-tax-exempt bonds at a regular rate" thereby making it a "federal grantee."   Acknowledging the Relator's point that tax exempt status may essentially qualify as a direct subsidy, the Third Circuit observed:

"In the tax realm alone, every taxpaying American receives some form of exemption or deduction, such as the home mortgage interest deduction, the charitable contributions deduction, or even simply the standard deduction.  Just like the tax-exempt bonds, the government's decision to grant these deductions is a matter of grace, and the money saved by these deductions goes straight to the bottom line of the American-taxpayer.  . . . . That does not mean, however, that every fraud against a government employee or taxpayer supports a claim under the FCA."

The False Claims Act, observed the Court, "only prohibits fraudulent claims that cause or would cause economic loss to government."  Covanta's alleged false claims, however, did not cause loss to the federal government but established only that the Utility Authority "had to pay money out of its general operating funds that it should not have had to pay."  The Court went on, "The fact that some unknown portion of those general operating funds might be tangentially attributable to a tax break from the federal government is irrelevant."

In contrast to this clear opinion by the Third Circuit, what is not clear is why the Court marked this opinion as "Not Precedential."

A. Brian Albritton
6/20/12

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