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. If a class action suit or other manner of retribution is possible, count me in. I have email and voicemail from the man. He colluded with opposing counsel, I am certain. My case was damaged so severely it nearly lost me everything and I am still paying dearly.

  2. There's probably a lot of blame that can be cast around for Indiana Tech's abysmal bar passage rate this last February. The folks who decided that Indiana, a state with roughly 16,000 to 18,000 attorneys, needs a fifth law school need to question the motives that drove their support of this project. Others, who have been "strong supporters" of the law school, should likewise ask themselves why they believe this institution should be supported. Is it because it fills some real need in the state? Or is it, instead, nothing more than a resume builder for those who teach there part-time? And others who make excuses for the students' poor performance, especially those who offer nothing more than conspiracy theories to back up their claims--who are they helping? What evidence do they have to support their posturing? Ultimately, though, like most everything in life, whether one succeeds or fails is entirely within one's own hands. At least one student from Indiana Tech proved this when he/she took and passed the February bar. A second Indiana Tech student proved this when they took the bar in another state and passed. As for the remaining 9 who took the bar and didn't pass (apparently, one of the students successfully appealed his/her original score), it's now up to them (and nobody else) to ensure that they pass on their second attempt. These folks should feel no shame; many currently successful practicing attorneys failed the bar exam on their first try. These same attorneys picked themselves up, dusted themselves off, and got back to the rigorous study needed to ensure they would pass on their second go 'round. This is what the Indiana Tech students who didn't pass the first time need to do. Of course, none of this answers such questions as whether Indiana Tech should be accredited by the ABA, whether the school should keep its doors open, or, most importantly, whether it should have even opened its doors in the first place. Those who promoted the idea of a fifth law school in Indiana need to do a lot of soul-searching regarding their decisions. These same people should never be allowed, again, to have a say about the future of legal education in this state or anywhere else. Indiana already has four law schools. That's probably one more than it really needs. But it's more than enough.

  3. This man Steve Hubbard goes on any online post or forum he can find and tries to push his company. He said court reporters would be obsolete a few years ago, yet here we are. How does he have time to search out every single post about court reporters and even spy in private court reporting forums if his company is so successful???? Dude, get a life. And back to what this post was about, I agree that some national firms cause a huge problem.

  4. rensselaer imdiana is doing same thing to children from the judge to attorney and dfs staff they need to be investigated as well

  5. Sex offenders are victims twice, once when they are molested as kids, and again when they repeat the behavior, you never see money spent on helping them do you. That's why this circle continues