APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS. Hon. Douglas P. Woodlock , U.S. District Judge.
Anthony T. Sheehan, Attorney, Tax Division, United States Department of Justice, with whom Kathryn Keneally, Assistant Attorney General, Tamara W. Ashford, Principal Deputy Assistant Attorney General, Carmen M. Ortiz, United States Attorney, Gilbert S. Rothenberg, Attorney, Tax Division, and Bruce R. Ellisen, Attorney, Tax Division, United States Department of Justice, were on brief, for appellant.
James F. Bennett, with whom William H. Kettlewell, Maria R. Durant, Megan S. Heinsz, Collora LLP, and Dowd Bennett LLP were on brief, for appellee.
Before Thompson, Baldock[*] and Selya, Circuit Judges.
SELYA, Circuit Judge.
This tax-refund litigation requires us to explore the uncertain terrain surrounding the tax treatment of settlement payments made under the False Claims Act (FCA), 31 U.S.C. § § 3729-3733. We hold, as a matter of first impression in this circuit, that in determining the tax treatment of an FCA civil settlement, a court may consider factors beyond the mere presence or absence of a tax characterization agreement between the government and the settling party. While this holding may be at odds with the decision in Talley Industries Inc. v. Commissioner, 116 F.3d 382 (9th Cir. 1997), we are convinced that generally accepted principles of tax law compel us to part company with the Ninth Circuit.
The case before us involves the tax treatment of roughly $127,000,000 paid to the government in partial settlement of a kaleidoscopic array of claims. The district court concluded that where, as here, the parties had eschewed any tax characterization, the critical consideration in determining deductibility was the extent to which the disputed payment was compensatory as opposed to punitive. At trial, the court's jury instructions embodied this conclusion and directed the jury's focus to the economic realities of the situation. The jury split the baby and found that a large chunk of the money ($95,000,000) was deductible. Accepting this finding, the court ordered tax refunds which, with accrued interest, totaled more than $50,000,000.
The government appeals. We take note of the district court's skillful handling of this complicated litigation, and we affirm.
Fresenius Medical Care Holdings, Inc. is a major operator of dialysis centers in the United States and around the world. Between 1993 and 1997, whistleblowers brought a series of civil actions against Fresenius under the FCA. The government paid heed and, in 1995, a number of government agencies opened civil and criminal investigations into Fresenius's dealings with various federally funded health-care programs. Because the FCA was in play, Fresenius faced potential liability for treble damages. See 31 U.S.C. § 3729(a).
In 2000, Fresenius entered into a complex of criminal plea and civil settlement agreements with the government. These
agreements called for Fresenius to pay, in the aggregate, $486,334,232, $101,186,898 of which was earmarked as criminal fines. The remainder -- $385,147,334 -- was the price for Fresenius's absolution from civil liability.
The civil settlement agreements released a gallimaufry of claims against Fresenius (including claims under the FCA). Of paramount pertinence for present purposes, these agreements eschewed any commitment as to how the payments were to be treated for tax purposes.
Despite the global nature of the settlement, a new dispute soon enveloped the parties. This dispute centered on the tax treatment of the sums paid. Over time, the parties pared the scope of their dispute: they agreed that the amounts paid as criminal fines, totaling $101,186,898, were not deductible; and that, out of the payments required by the civil settlement agreements, an amount equal to single damages under the FCA ($192,550,517) was deductible. They could not agree to the tax treatment of the balance of the civil settlements ($192,596,817).
Acting under protest, Fresenius filed amended tax returns that took no deduction for this balance. Following an administrative appeal, the government conceded that a further figure equal to the amount owed to the FCA whistleblowers as qui tam relators ($65,800,555), see id. § 3730(d), was deductible. Fresenius then commenced a tax-refund action in the United States District Court for the District of Massachusetts for the purpose of determining the deductibility of the amount still in dispute ($126,796,262). See 26 U.S.C. § 7422.
After some preliminary skirmishing, the district court convened a jury trial. At the close of all the evidence, the court reserved decision on the government's Rule 50 motion for judgment as a matter of law and submitted the tax characterization question to the jury. The jury found that $95,000,000 was deductible. The court then denied the reserved motion.
In the aftermath of the jury verdict, the parties stipulated to the verdict's tax effects. Thereafter, the court entered judgment for Fresenius in the amount of $50,420,512.34, see Fresenius Med. Care Holdings, Inc. v. United States, No. 08-12118, 2013 WL 1946216, at *1 (D. Mass. May 9, 2013), and denied the ...