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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. I'm not sure what's more depressing: the fact that people would pay $35,000 per year to attend an unaccredited law school, or the fact that the same people "are hanging in there and willing to follow the dean’s lead in going forward" after the same school fails to gain accreditation, rendering their $70,000 and counting education worthless. Maybe it's a good thing these people can't sit for the bar.

  2. Such is not uncommon on law school startups. Students and faculty should tap Bruce Green, city attorney of Lufkin, Texas. He led a group of studnets and faculty and sued the ABA as a law student. He knows the ropes, has advised other law school startups. Very astute and principled attorney of unpopular clients, at least in his past, before Lufkin tapped him to run their show.

  3. Not that having the appellate records on Odyssey won't be welcome or useful, but I would rather they first bring in the stray counties that aren't yet connected on the trial court level.

  4. Aristotle said 350 bc: "The most hated sort, and with the greatest reason, is usury, which makes a gain out of money itself, and not from the natural object of it. For money was intended to be used in exchange, but not to increase at interest. And this term interest, which means the birth of money from money, is applied to the breeding of money because the offspring resembles the parent. Wherefore of an modes of getting wealth this is the most unnatural.

  5. Oh yes, lifetime tenure. The Founders gave that to the federal judges .... at that time no federal district courts existed .... so we are talking the Supreme Court justices only in context ....so that they could rule against traditional marriage and for the other pet projects of the sixties generation. Right. Hmmmm, but I must admit, there is something from that time frame that seems to recommend itself in this context ..... on yes, from a document the Founders penned in 1776: " He has refused his Assent to Laws, the most wholesome and necessary for the public good."

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