First Circuit Liberalizes Tax Deductibility Standard of False Claims Act Settlements

Appellate court affirms $50 million tax refund to FCA defendant, holding that the “economic realities” of settlement payments determine whether they are compensatory.

Civil False Claims Act (FCA) settlements, which often involve hundreds of millions — or even billions — of dollars, have significant tax consequences for companies facing fraud suits. The First Circuit Court of Appeals’ recent decision in Fresenius Medical Care Holdings, Inc. v. United States, 2014 U.S. App. LEXIS 15536 (1st Cir. Aug. 13, 2014), upheld a jury verdict allowing the deduction of a significant portion of an FCA settlement amount beyond single damages. This is the first appellate decision addressing the tax deductibility of FCA settlements since the 1997 case Talley Industries Inc. v. United States, No. 13-2144, 116 F.3d 382 (9th Cir. 1997). In Fresenius, the First Circuit rejected the Government’s reading of Talley, which the Government contended required an FCA defendant to show an explicit agreement between the parties as to the tax characterization of the settlement amount. The Fresenius Court held that instead the “economic realities” of FCA settlement payments determine whether the amounts are compensatory and therefore deductible.

The Fresenius decision has significant implications for FCA defendants entering settlement negotiations with the Department of Justice (DOJ). Under the First Circuit’s approach to deductibility, the entirety of the record related to settlement negotiations will be relevant to determining what is compensatory. FCA defendants therefore should be mindful throughout the settlement process as to the characterization of the parties’ settlement offers, and should introduce calculations, analysis, and additional evidence indicating that the purpose of all or the majority of the settlement payments is to make the Government whole.

Please see full alert below for more information.

LOADING PDF: If there are any problems, click here to download the file.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Latham & Watkins LLP | Attorney Advertising

Written by:


Latham & Watkins LLP on:

Popular Topics
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:

Sign up to create your digest using LinkedIn*

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.

Already signed up? Log in here

*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.