Fresenius Medical Care Holdings, Inc. v. United States, 2014 U.S. App. LEXIS 15536

Fresenius settled with the government over FCA-related claims, paying about $127 million with civil and criminal components; civil settlements included a large compensatory element without a tax treatment agreement.
Fresenius' civil settlement payments eschewed any tax characterization agreement; government investigations and a complex settlement produced treble damages potential.
District court instructed the jury to measure deductibility by economic reality and make-whole considerations, focusing on compensatory versus punitive nature.
Jury found $95,000,000 deductible; district court entered judgment ordering a tax refund of about $50.4 million.
Government appealed arguing only a tax-characterization agreement could determine deductibility and that the district court erred in its approach.
Court held that deductibility may be determined by economic substance beyond an express characterization agreement.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether deductibility of FCA settlement payments can be guided by economic reality rather than a characterization agreement	Fresenius argues for economic-reality approach; absence of agreement should not prevent deductibility	United States urges Talley rule requiring a tax-characterization agreement	Yes; deductibility can reflect economic reality even without an agreement
Whether the district court erred by the jury instructions and the residual approach to deductibility	Fresenius supports the district court's approach aligning with economic reality	United States contends the residual approach improperly assigns deductibility	No reversible error; instructional concerns waived; approach sustained

Talley Indus. Inc. v. Comm'r, 116 F.3d 382 (9th Cir. 1997) (tax characterization disputes in FCA settlements; party intent matters)
Chandler v. United States, 538 U.S. 130 (U.S. 2003) (distinguishing compensatory vs. punitive damages in tax context)
Bornstein v. United States, 423 U.S. 303 (U.S. 1976) (damages beyond single damages may be compensatory)
Lyeth v. Hoey, 305 U.S. 188 (U.S. 1938) (settlement tax treatment consistent with litigation outcomes)
United States v. Eurodif S.A., 555 U.S. 305 (U.S. 2009) (look to substance over form in tax characterization)
Frank Lyon Co. v. United States, 435 U.S. 561 (U.S. 1978) (partnership of tax and economic substance principles)
Helvering v. F. & R. Lazarus & Co., 308 U.S. 252 (U.S. 1939) (statutory framework governing tax deductions and penalties)
Neb. Dep't of Revenue v. Loewenstein, 513 U.S. 123 (U.S. 1994) (principles of tax evaluation in enforcement contexts)
Delaney v. Comm'r, 99 F.3d 20 (1st Cir. 1996) (allocation and exclusion of settlement-related income)