medical care of the civil settlement of three hundred eighty five million the i r s allowed deduction of approximately two thirds leaving one hundred twenty seven million before the just record the district court allowed an additional ninety five million dollar deduction resulting in a refund of thirty one million and that is what's on appeal today the section of the internal revenue code that governs the deductibility section one sixty two section one sixty two and he allows the deduction of ordinary necessary business expenses but section one sixty two half provides an exception for any fined or similar penalty paid to a government for the violation of any law once if you have is a codification of prior case law w between what is compensatory instructable or punitive and not to dr paul has always been going back to the earliest cases like ten from gruntal tent truck rental by the supreme court the purpose of the money or another it's what is the intent of the decision maker the primary decision maker is always the legislature if the statute answers the question in koreans if it's compensatory statute it's the doctor if it's punitive it's not the doctor will however certain statutes like the false claims act however statutes where there is a dual purpose and with some of the damages are dual purpose in that case you have to look further along the decisionmaking chain the judge and jury litigated case than to tell you exactly what they have told congress versus local congress a lot of good sure that well the goal of false claims act settlement is to get to a bottom line number that both sides consider fair and it's based on their their conception of the hazards of litigation and as a matter of paper and pencil arithmetic you can get down to that number either by saying here's the number no deduction or negotiating to a higher number and then trying to back down into it through a tax deduction and the parties were to negotiate with the background law the background rules and mine but there's a big difference between paper and pencil arithmetic trying to get back down to it and the real world difference of how you get there first of all civil division attorneys lack tax expertise if they were to start negotiating a problem i mean if they're going to these cases they need to know something about the reason we don't the reason it hartman of justice is policy is not to designate not to describe anything and not to put it label on these amounts that would have tax implications is first of all we would have to call in the i r s they could do that they certainly could call an ira asked but in addition to all the discovery for false claims that case would have to do lots of discovery into the tax items of the taxpayer to try to figure out where this tax payers position in one of the settlement more worry about the tax consequences later which produces litigation of the type of well yes but however you also have to consider that if we're going to start dealing with the tax consequences let's let's let's get through to do talked ability here i have a couple of very specific questions you want your brief in terms of the principal issue really is very heavily indeed almost chain which is with the notion that the intent of the parties is the sorrel controlling factor because even in text reversed prudence generally while i want over and above single damages or it can be compensatory or you're trying to get us to focus on the intent of the of of the parti type of situation whether i'm reading decisions by the supreme court or by this court or or anyone else when in false claims act cases which we're focusing on right here in which tally was about was a false claims act case true  the government is on the other side in both instances the government is on the other side in the fall from the taxpayer in the false claims act aspect and the and he's not going to side want to get to the tax aspect of it now that i am i certainly we're talking about under the under one sixty four hour one sixty two af what we're talking about is what was this payment designed to do that's a statement of intent and of course the first intent is the legislature those are apples and oranges what we have here is a case before the tax court in our case the pardons here pay the tax and then refund in tally they went before the tax court and and and didn't and there you've taken what the judge said and tally and have argued that as a giving that question of what the parties are and how much was compensable and how much was purity to the juror and say you figure it out and they did it well i would have to think about that first of all under tally will you look at the intent of the parties under the residual force the district court wants to push fortunately he really feel of interest but under this approach we would instead if you say what are the parties negotiate would be saying government hand over all your time records hand over all the interest let's figure out if you could be thousands of claims here the interest that each individual won the residual rule could quickly get way out of hand because if there was no more so  what your position is your position would be one hundred percent of the the government would know my position is that the parties under the tally will negotiate to a number they think is reasonable without knowing that it's not realities it also ignores the fact that in this case we don't have to guess at what the parties intended we know what the parties intended because but government and the  to agree the only intent was to leave open the question of the book the ability so to the extent that intent is a relevant consideration in the calculus why shouldn't  primacy because rather rather spend this rather abstract concept that we measure intent only by looking to see whether the government and the taxpayer have agreed whether or not to dock the specific please the court on jimena represent present tense in this case and we think the judge would last decision in this case was absolutely correct in all respects the idea that tax treatment can be dictated by a part agreement is contrary to a century of tax law which says that you look to the economic substance of the transaction and not the words that are used to counsel me let me ask you this  you you were green with the government that tally stands for the proposition the government says no we think that they've overread it tremendously tell you actually has a specific observation in it  that neither party made any effort at all to quantify the government's actual losses in excess of single damages of one point five six here we had a whole trial about that we quantified it in the jury found it within the evidence in addition  entirely there was some suggestion and evidence in the government's documentation that the one point five six was their total losses in that the additional amount was in the government's own words a punishment here we had a whole trial about whether what was punishment and what wasn't punishment if we presented evidence in a trial that where the evidence is taken in the light most favorable to the verdict that interest was important that interest was discussed that the government was actually out the time value of money we quantified it this idea that it's hard to do that is we had a six day trial of half days and we presented all this evidence we took no discovery of what the government did in the investigation it was a tax trial it's just what juries around the country do every day all around saying what did it take to compensate the government we think that tally is distinguishable on the facts because they made no effort to quantify it that if they had made an effort to quantify it the court would have been relegated to say well maybe at least there's an agreement and so that's how it's distinguishable there it's a failure proof case well that may be there is there is obviously some weighing we can tell you that can be you know what what what's troublesome to me i agree with you th telly seems to be it seems to be possible to distinguish telly but i have to confess that least to me the government's reading of telly isn't them on natural reading i think it would look david the same reading when he passed over it yeah you know or just may have realized that he wasn't bound by a big week exactly yes i agree with that and would note of course the tally in deciding who are looking at the double damages and the need for an agreement did not have the guidance of vermont agency which was decided in two thousand and says that double damages which is all the jury awarded here we only got to deduct double damages not triple damages says the double damages are remedial it was decided before cook county where cook county comes out flat out and says interest is something that's important to think about and the compensatory purposes and so whether the parties would a litigator tell it differently and made different arguments and resulted in a different decision in light of the further definition of the purpose of the false claims act you know we can't put ourselves back and do that but because of the way the case was presented and the lack of evidence that was presented on on the government's losses in excess of singles we don't know how the ny circuit would have decided it if they had seen the evidence that we presented but i do acknowledge of course as has the court has noted that there is language that says the agreement controls but there's no other case in the history of tax jurisprudence that says that the subjective intentions of the parties control over economic substance delay need for you wouldn't be happy if we were the second no i would not i don't think it's a good road to go down to i want this or that one of the reasons why the government says oh the false claims act is different is the government was our counterpart in this negotiation the washer mutual case that we cite in our briefs was one where the government was the other side of the equation and with the court in the watch the mutual case said which i think is directly on point here which is tax free treatment at the taxpayer got resulted by operation of the tax code treatment of rights depends not on the agreement of the parties at issue but on the provisions of the those applied to the transactions and they didn't require the taxpayer to have negotiated it put it into a bargain or even said that it was important and then the court goes on to say that one party to this was a governmental entity doesn't depart from the basic principle so the question here is were these compensatory damages or not we presented extensive evidence that they were the us supreme court has defined compensatory damages under the false claims act is including interest the judge would lock it dave the jury god and talking about the make whole purpose of the f c a the make whole purpose of the false claims act come straight out of u s supreme court jurisprudence it's in marcus and has from the bornstein from the seventy's it's in cook county and the cook county court the way that they termed it is a is a is a very good for the jury trial right which is to say the f c a is compensatory up until the point the full compensation is given there's a tipping point that depends on the facts of each case after the tipping point is punitive and that's exactly what judge would lock did here by presenting this question to the jury and to say it's a disputed fact tell us how much was compensation tell us how much was punitive in and it was always in the instructions the burden on us to prove that said that the burden was on us the entire time and we presented extensive evidence on that very subject and the government acknowledged that interest was part of the negotiations miss winkler's testimony on page appendix to twenty four and two to twenty eight actually said that her numbers with the multipliers included interest and the government further testified that the only penalty sought ever were the amounts above three times damages and that there weren't any in the final settlement agreement million dollars that we are trying to deduct and judge would like noted that that's where the sting of punishment came in addition the false claims act says that if you behave badly where you might have a public policy problem there are damages in the form of perc claim penalties that are totally unrelated to the losses to the government here because our conduct was not so egregious and then the negotiation show that on the civil side the government decided not to seek those penalties at all because conduct was not so egregious they only saw damages and then when we settled not only did they only seek damages they did not ask us to pay any more then essentially double damages on that which the government has that is compensatory so i would say that the false claims act case in doctor does have sting were public policy could be implemented or affected if we were allowed to deduct a criminal fine if we were allowed to deduct a ten thousand per claim penalty totally unrelated to it but there is no question also that the false claims act is also designed just to make the government whole when the conduct shows that that's a proper means do it and also just know that note that we settled in our releases the common law causes of action as well we of contract we settled on just in richmond we saw all those things to the government came in to us and said we want x amount of money and some of these are going to be penalties because we don't like your conduct we persuaded them to drop all that and so there's nothing at all that file is public policy here with the ducting purely compensatory payments where we paid one hundred million dollars fine in fact if you look at the stevens case from the second circuit the judge would lock sided there an employee took money or embezzled money from his employer raytheon and the second circuit held there that the criminal fine of course can't be deducted because it's punitive but that the reimbursement that was made even under a criminal conviction was compensatory and so i think that when congress and acted one hundred sixty two sixty one sixty two and said ok well if it's a fine or similar penalty you can't deduct it and the iris adopted regs that said if it's a compensatory payment to the government it's not that we're well within what public policy would encourage to be the case here the question of the jury instructions are raised i don't know if it's something they'll come back up at all or not but you know i court looks at the appendix basically pages four zero nine before fifteen you see the judge would lock did exactly what i think the discussion here today would suggest that he should have which is put the burden on us prove what was not punitive if there that there was some component that was not punitive asked the jury to define what was compensatory and and do exactly that and so we think that judge would locks reasoning in his order and of his instructions are fully consistent with the case law and the idea of course that in every false claims that case the government can win by default by simply not agreeing with us can't possibly be the outcome here we presented evidence actual sworn testimony from both the government and from our own lawyers that  these government lawyers in this case refused to talk to us about tax treatment they put it in their letters to us say we can talk settlement but we won't talk tax treatment and then now the government wants to say that there are controls and we don't think that that's proper or consistent with th let's there through the questions i'll see the remainder of my time thank you your honor i would like to start off by saying the government is not trying to win under all circumstances as i said before the parties will negotiate to a settlement based on the underlying rules if the rule is no deductibility they'll arrive at a lower number rather than a higher number which takes into account the deduction secondly the supreme court has consistently held not that that multiples damages are compensatory have compensatory yes next computer to vast next with the district  when the district court told the jury as you put it to put compensatory floors there was no objection to the jury charge on that basis we i'll answer your question your honor the government asked for repeatedly jury instructions under the tally rule those were denied the objections are in the record no that's true you have the government never r