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7th Circuit: expenses were capital expenditures

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An Indianapolis-based health insurer can't deduct its settlement payments or legal expenses from the litigation because the insurer's payments were actually capital expenditures, the 7th Circuit Court of Appeals affirmed today.

In WellPoint Inc. v. Commissioner of Internal Revenue, No. 09-3163, WellPoint challenged the U.S. Tax Court's ruling that upheld the IRS' refusal to allow the insurer to deduct a $113 million settlement to three states or the nearly $1 million in legal fees from the litigation as "ordinary and necessary business expenses."

The 7th Circuit briefly addressed the parties' arguments about the scope of appellate review and held it would still affirm the tax court's decision under either standard proposed.

WellPoint, the nation's largest health insurer based on membership, is a for-profit company. When it was still Anthem in the 1990s, the company acquired three Blue Cross Blue Shield insurance companies, which had been formed as non-profits. Attorneys general from Connecticut, Kentucky, and Ohio sued WellPoint alleging it was using the acquired assets to make profits in violation of those companies' charitable statuses. The case was settled, and WellPoint attempted to write off the settlement and legal expenses as ordinary and necessary business expenses.

WellPoint claimed its expenses were "ordinary" because it was defending against claims that it was improperly using its property - the assets of the acquired companies. The government argued WellPoint was defending its title to the acquired assets, which the 7th Circuit Court has said aren't ordinary expenses.

The 7th Circuit judges pointed out the remedy sought or agreed to is a clue to the nature of the claim in the instant case. The attorneys general were trying to strip WellPoint of its equitable ownership, its right to use the acquired assets for profit.

An alternative argument raised was that the settlement was in effect a partial restoration of the acquired assets to their rightful owners and that like any other repayment of money, it wasn't a capital expenditure and shouldn't have any tax consequences at all. The judges declined to accept this alternative option.

"It is true that if you receive money as a loan and repay it, the repayment is not deductible from your taxable income, because you never claimed to own the money you had borrowed," wrote Judge Richard Posner. "But WellPoint always claimed (it still claims) to have equitable title to the assets it acquired. The expenses that it reasonably incurred to defend that claim - the claim to own the assets free and clear - are capital expenditures, not repayments."

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  1. The practitioners and judges who hail E-filing as the Saviour of the West need to contain their respective excitements. E-filing is federal court requires the practitioner to cram his motion practice into pigeonholes created by IT people. Compound motions or those seeking alternative relief are effectively barred, unless the practitioner wants to receive a tart note from some functionary admonishing about the "problem". E-filing is just another method by which courts and judges transfer their burden to practitioners, who are the really the only powerless components of the system. Of COURSE it is easier for the court to require all of its imput to conform to certain formats, but this imposition does NOT improve the quality of the practice of law and does NOT improve the ability of the practitioner to advocate for his client or to fashion pleadings that exactly conform to his client's best interests. And we should be very wary of the disingenuous pablum about the costs. The courts will find a way to stick it to the practitioner. Lake County is a VERY good example of this rapaciousness. Any one who does not believe this is invited to review the various special fees that system imposes upon practitioners- as practitioners- and upon each case ON TOP of the court costs normal in every case manually filed. Jurisprudence according to Aldous Huxley.

  2. Any attorneys who practice in federal court should be able to say the same as I can ... efiling is great. I have been doing it in fed court since it started way back. Pacer has its drawbacks, but the ability to hit an e-docket and pull up anything and everything onscreen is a huge plus for a litigator, eps the sole practitioner, who lacks a filing clerk and the paralegal support of large firms. Were I an Indiana attorney I would welcome this great step forward.

  3. Can we get full disclosure on lobbyist's payments to legislatures such as Mr Buck? AS long as there are idiots that are disrespectful of neighbors and intent on shooting fireworks every night, some kind of regulations are needed.

  4. I am the mother of the child in this case. My silence on the matter was due to the fact that I filed, both in Illinois and Indiana, child support cases. I even filed supporting documentation with the Indiana family law court. Not sure whether this information was provided to the court of appeals or not. Wish the case was done before moving to Indiana, because no matter what, there is NO WAY the state of Illinois would have allowed an appeal on a child support case!

  5. "No one is safe when the Legislature is in session."

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