MEMORANDUM AND ORDER
PATTI B. SARIS, District Judge.
Plaintiff Fresenius Medical Care Holdings, Inc., ("FMCH") brings this suit to recover taxes on civil settlement payments made pursuant to a 2000 global resolution of civil and criminal claims under the False Claims Act ("FCA"), 31 U.S.C. §§ 3729-3733, and other statutory and common law provisions. Plaintiff claims that language in the civil settlement agreements provides that those settlement payments are non-punitive and therefore tax deductible as ordinary and necessary business expenses under 26 U.S.C. § 162(a). Challenging the decision of the Internal Revenue Service ("IRS") to disallow a deduction, FMCH now moves for summary judgment. After discovery, hearing, and review of the briefs, the Court
With all reasonable inferences drawn in the government's favor, the record contains the following facts, which are undisputed unless otherwise noted.
The 2000 Global Settlement Agreement
On January 18, 2000, the parties signed a global settlement agreement (the "Global Agreement") resolving a series of qui tam suits against FMCH and its subsidiaries on claims of Medicare fraud.
The agreements are interconnected and contingent upon the guilty pleas of three of FMHC's subsidiaries and FMHC's performance of its obligations under the Civil Agreements. Each Civil Agreement refers explicitly to the obligations of the "other civil Settlement Agreements and criminal Plea Agreements executed contemporaneously. . . ." (Compl. Ex. E at 15; Ex. F at 11;
The Civil Agreements release FMCH from any civil claims under the False Claims Act, the Program Fraud Civil Remedies Act, 31 U.S.C. §§ 3801-3812, the Civil Monetary Penalties Law, 42 U.S.C. § 1320a-7a, and common law, as well as the qui tam claims. The agreements contain no provisions governing how the United States should allocate the money, aside from directing $65,800,555 to the relators of the qui tam suits. The Civil Agreements provide, "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." (Compl. Ex. E at 42; Ex. F at 26; Ex. G at 31; Ex. H at 22.) Another section explains, "Notwithstanding any term of this Agreement, the United States specifically does not release [the FMCH entities] from . . . any potential criminal, civil or administrative claims arising under Title 26, U.S. Code (Internal Revenue Code). . . ." (Compl. Ex. E at 26; Ex. F at 17; Ex. G at 17; Ex. H at 14.) The Agreements also state:
(Compl., Ex. E at 37 (emphasis added);
FMCH's Tax Returns and the IRS Examination
In its 2000 and 2001 federal income tax returns, FMCH claimed deductions for the entire civil payment and $92,345,665 of the criminal payment as ordinary and necessary business expenses under 26 U.S.C. § 162(a). FMCH filed amended returns on April 4, 2005, and no longer claims a deduction for payments made under the Criminal Agreements. The IRS examined FMCH's 1999, 2000, and 2001 returns, ultimately issuing a Revenue Agent's Report disallowing $192,595,817 of the $385,147,334 deduction claimed by FMCH for payments made under the Civil Agreements.
The Report relied upon an internal Department of Justice Healthcare Fraud Tracking Form ("Tracking Form") describing the distribution of the settlement money among the affected agencies. FMCH did not have access to the Tracking Form prior to filing its 1999, 2000, and 2001 tax returns. The Report drew a distinction between "single" and "multiple" damages, determining that the latter constituted punitive damages not deductible under section 162(a). It concluded that the "government's single damages can be measured solely by reference to the amounts paid to the defrauded agencies," as indicated on the Tracking Form. (Compl., Ex. J at 23.) The IRS audit team determined that the remaining payments, consisting of relators' fees, investigation expenses, and a sum labeled on the Tracking Form as "Penalties and Damages," constituted a penalty and therefore were not deductible. FMCH paid the taxes owed on the disallowed sum, but protested the IRS's position. During the administrative appeal, the IRS agreed to allow FMCH to deduct the approximately $65 million in relators' fees.
The Present Refund Suit
On February 12, 2007, FMCH filed a claim for refund for tax years 1999, 2000, and 2001. The IRS maintains that the remaining civil settlement payments, totaling $126,796,262, are not deductible. FMCH brings the present suit for refund of the taxes paid on that amount under 26 U.S.C. § 7422. Pursuant to this Court's June 15, 2009, scheduling order, the parties took preliminary discovery on the issue of whether the Global Agreement and Civil Agreements alone provide a sufficient basis to justify FMCH's claimed deduction for the payments made under the Civil Agreements.
III. LEGAL STANDARD
"Summary judgment is appropriate when `the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.'"
Once the moving party has made such a showing, "the burden shifts to the non-moving party, who `may not rest on mere allegations or denials of his pleading, but must set forth specific facts showing there is a genuine issue for trial.'"
Taxation of Penalties
The core issue is whether the $126,796,262 portion of the settlement is tax deductible. It is FMCH's burden to demonstrate that it is entitled to a deduction.
The Internal Revenue Code permits taxpayers to deduct "all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. . . ." 26 U.S.C. § 162(a). Longstanding precedent establishes that amounts paid to settle litigation may constitute such an expense.
Treasury regulations interpreting Section 162(f) define a "fine or similar penalty" as payment made under one of the following four circumstances:
20 C.F.R. § 1.162-21(b)(1). "Compensatory damages . . . paid to a government do not constitute a fine or penalty."
Interpretation of the Civil Agreement
FMCH argues that the plain language of the Civil Agreements identifies the payments as non-punitive, and therefore not a penalty within the meaning of Section 162(f). FMCH's argument hinges on language present in each of the Civil Agreements stating that "[the FMCH entities] further agree nothing in this Agreement is punitive in purpose or effect." (Compl., Ex. E at 37;
The Court applies federal common law to interpret the settlement agreement.
An analysis of this dispute must begin with the damages provisions of the FCA. The Supreme Court has recognized that the treble damages provision in § 3729(a) added by the 1986 amendments to the FCA has "a compensatory side, serving remedial purposes in addition to punitive objectives."
Defendants insist that the plain language in the civil settlements resolves the issue of the purpose of the payments because the parties agreed that the damages were not punitive. While having surface appeal, this argument is not persuasive because of the context of the language, which appeared in the last sentence of a paragraph waiving FMCA's rights under the Double Jeopardy Clause of the Fifth Amendment and the Excessive Fines Clause of the Eighth Amendment. Arguing that the government cannot have its cake and eat it too, plaintiffs raise the point that it is hardly reasonable to construe this language as agreeing that a payment is not punitive for constitutional purposes, but that it is punitive for tax purposes. However, the Supreme Court has "long recognized that the Double Jeopardy Clause does not prohibit the imposition of all additional sanctions that could, `in common parlance,' be described as punishment."
116 F.3d at 388.
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
Because of this conflicting language in the agreements, the placement of the nothing-punitive language, and its wording, I conclude that the contract is ambiguous, making the issue of the purpose of the payments inappropriate for summary judgment.
FMCH challenges the IRS's determination that all damages beyond the compensation paid directly to defrauded government agencies necessarily constitute punitive fines. In reaching this conclusion, the IRS relied on the DOJ Tracking Forms, which FMCH attacks as "after-the-fact secret government forms". (Pl.'s Br. 25.) While this challenge may ultimately prove meritorious as a factual matter, the question presently before the Court is whether FMCH is entitled to a deduction as a matter of law based on the plain language of the contract. It is not.
Plaintiff's Motion for Summary Judgment [Docket No. 23] is