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Thursday, June 19, 2014

Jordan Goodman Quoted in Qui Tam Article

Chicago-based Law Firm Filing Qui Tam Tax Actions Driving National Discussion about Potential Abuses of State False Claims Acts

Excerpt from State Tax Notes, Monday, June 9, 2014

For more than a decade, a Chicago-based class action law firm has been stepping into the role of "whistleblower" and filing hundreds of qui tam tax actions under the Illinois False Claims Act. The private suits filed by the firm -- first as Beeler, Schad & Diamond PC and more recently as Schad, Diamond & Shedden PC -- are driving much of the national discussion about potential abuses of state false claims acts that extend to taxes.

"It seems to me that the purpose of these suits isn't to get at the correct amount of tax," said Jordan Goodman, a partner in the Chicago office of Horwood Marcus & Berk Chartered. "It's for the awards given to the relator. The relator is making a lot of money off this."

Goodman talks often about the steep combined penalties and potential payouts in state false claims acts, which create what he calls "perverse incentives" that can lead to parasitic lawsuits. First, the relator in an Illinois whistleblower action is entitled to at least 25 percent of any proceeds recovered by the government -- regardless of whether that money is recovered through litigation or in a settlement.

Second, while the treble damages for back taxes under false claims acts naturally attract the most attention, Goodman said the civil penalty -- generally $5,000 to $10,000 per false claim under the federal law and $5,500 to $11,000 per false claim under the Illinois statute -- can be just as oppressive, depending on what counts as a false claim. If each monthly sales tax return is a false claim carrying a $10,000 penalty, and 12 returns are filed in one year, that's a $120,000 penalty. If every failure to collect taxes on shipping and handling is a false claim, and the business averages 10 sales into the state per month for 120 false claims, that's a $1.2 million penalty for the year, which can turn into $12 million for the 10-year period covered by the false claims act.

Businesses in these suitsalso are potentially on the hook for attorney fees. According to practitioners, Schad Diamond is seeking maximum fees for filing the same complaint repeatedly, with only the name of the business being sued changed.

"I have a client with approximately $100 of tax due over a 10-year period," Goodman said. "The relator wanted in the mid-to-high five figures to pay for their attorney fees for filing the suit. The relator got 50 times more than what was owed in tax. My client was forced to pay because to litigate on the merits is an expensive proposition."

Dyckman said the DOR is sympathetic to targeted businesses that have hired reputable law firms and are paying large sums just to try to get dismissals of the cases. That has generated a number of settlements in the shipping and handling cases, in which businesses paid double the amount of potential tax owed plus fees because hiring a quality law firm to defend them would cost more than their exposure, Dyckman said.

"The problem is, that's created a moral hazard," Dyckman said. The settlements encourage the relator to file actions against big companies for small sums to get two times the tax and fees from businesses thatjust want to make the cases go away, he said.

How much Schad Diamond received in those settlements is unclear. But a December 10, 2012, column in Crain's Chicago Business followed up on the Revenue and Finance Committee's hearing that year. Under the headline "State Blows the Whistle on This Whistleblower," the columnist quoted Rep. Michael Zalewski (D) as saying Schad Diamond isn't going after businesses that are willfully avoiding taxes, but is only interested in collecting damages and attorney fees.

"I'd imagine it amounts to millions," Zalewski told the publication.

Copyright 2014 Tax Analysts. Reprinted with permission.

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