by Ben Vernia | July 9th, 2010
In a June 25, opinion in Fresenius Medical Care Holdings, Inc. v. United States, Judge Patty B. Saris of the District of Massachusetts denied the company’s motion for summary judgment in a suit to recover taxes paid on disallowed deductions for portions of its 2000 settlement of a False Claims Act case.
The company had claimed deductions for the entire $385 million it paid to the United States under its civil settlement agreement. The IRS revenue agent assigned to review the firm’s returns disallowed over $192 million of this sum after reviewing an internal DOJ “Healthcare Fraud Tracking Form” which described the disposition of the settlement proceeds amongst the relator and government agencies. The IRS eventually conceded that the company was entitled to deduct the relator’s share – approximately $65 million – but it demanded payment of taxes on the balance, nearly $127 million. Under the Internal Revenue Code, 26 U.S.C. 162(f), a taxpayer may not deduct amounts paid “for any fine or similar penalty paid to a government for the violation of any law.” The company paid the tax bill, then sued the IRS for a refund.
In its suit, the company argued that a standard provision in the settlement agreement with DOJ dispositively characterized the settlement payment as non-punitive. In that provision, the settling companies waived defenses to subsequent criminal prosecution or administrative action under the Fifth Amendment’s Double Jeopardy Clause and the Eighth Amendment’s Excessive Fines Clause, and “further agree[d] that nothing in this Agreement is punitive in purpose or effect.” The agreement also contained a second standard provision stating: “Nothing in this Agreement constitutes an agreement by the United States concerning the characterization of the amounts paid hereunder for purposes of any proceeding under Title 26 of the Internal Revenue Code.”
Interpreting the civil settlement agreement under principles of federal common law, Judge Saris first acknowledged that multiple damages under the False Claims Act (which provides for treble damages) are not necessarily punitive, and serve to compensate the government for “costs, delays, and inconveniences occasioned by the fraudulent claims, as well as pre-judgment interest,” and that because of this, a trial is often necessary to determine the deductible amount. She then rejected the company’s contention that the settlement agreement made such a trial unnecessary: the Supreme Court had noted in Hudson v. United States that the Double Jeopardy Clause does not apply to the imposition of sanctions which many might call “punishment.” She wrote:
As such, one reasonable interpretation of the nothing-punitive language was that it was intended to nail down the waiver in the uncertain area of the law governing when a civil penalty constitutes criminal punishment. This interpretation is bolstered not only by the placement of the nothing-punitive sentence, but also by its wording. That is, only FMCH, not the government, agreed that the purpose was not punitive. Moreover the agreements state that, notwithstanding their other terms, the United States does not release FMCH from any claims arising out of the Internal Revenue Code and that the United States agrees to no characterization of the payments under the Code. The presence of specific provisions expressly disavowing an agreed upon tax treatment of the payments supports the government’s reading of the nothing-punitive language.
She found the agreement to be ambiguous, foreclosing summary judgment. She also found to be premature the company’s argument that the IRS’s use of the tracking form – what the company called “after-the-fact secret government forms”.
