## In the



# U n ited S ta tes Co urt o f Ap p ea ls

F o rth eS e v e n th C ir cu it
N o. 09

- 3163 W ELL P OI NT, I NC ., Pet i t i one r -Appe l l ant, v. C OM MIS S IONEROF I NTERNAL R EV EN UE,R espo nd ent-A pp ellee

.

Appeal from the United States Tax Court. No . 13585- 05

—Di ane L . Kroup a, Judge .
A RG UE D F EB RU AR Y 9, 2010

— D ECI DE D M AR CH 23, 2010

Befo re P OSNER, R OV NER, a nd S YKES, C ircu it Judges . P OSNER, Cir cu i tJudg e . The peti ti oner, W el l Poi nt ( succ es so r to A nthem , Inc. ) , i s a f or - profi t s el l ero fheal th i nsuran c e poli ci es thro ugh subsi diar i es that i ncl ud e a num bero fBl ue Cro ss Blue Shi el d i nsurance com p an i es (l icens ees of the B lue C ross an d Blu e Shield A ssocia tion). I n th e 19 9 0 s , th e p e t i t i o n e r, w h e n i tw a s s t i l lA n th e m, acqui re d thre e s uch com pan ies , o ne ea ch i n Connecti cut, K entucky, and Ohi o. Both the acqui ring and th e a c q uir ed2 N o. 09

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com panie s were at the t i m e m utual i nsurance com panie s, so the m ergers ha d no tax cons eq ue nc es; th e m em bers ofA nthem and ofthe thre e ac quir ed com panie s v ote d to m er ge and the m er ger s m ade t h em a l lm em ber s o f A nthem , now W el l Poi nt. The a cqui r ed co m pan i es ha d b ee n form ed m an y y ea r s earli era s no npr o fi t en ti ti es de di ca te d t o pr o vi di ng heal th- re l ate d b enefi ts on a chari tabl e basi s, an d that wa s th e i r s t a t u s w h e n th e y w e r e a c q u i r e d

. B u ts o me t i me afterthe acqui si ti ons, the att or neys gener alo f the thr ee st at es o fthe acqui r ed co m pan i es e ac h s ue d W el l Po i nt charg i ng tha t i t was usi ng the acquir ed ass ets to m ake p ro fits , in vio lat ion of th e re st ric tio n s t h at t h e ch ar ita b le st atus ofthe a cqui r ed co m pan i es ha d pl ac ed o n the use o fthei r ass ets
. The cas es w er e e ventual ly set tl ed byW el l Po i nt ’ s pay i ng$ 11 3, 83 7, 50 0 to the s ta te s. The I nter nalReve nue Se rv i ce r efused to al l ow W el l Poi nt to ded uct fro m i ts taxabl e incom e e i thertha t am ount, o r the l ega lexpenses thati t had i ncurr ed ( anothe r $827, 595) in the l i ti gat i on, as “o rdi naryand neces sar y” busi ness ex pen se s. 26 U. S
. C. § 1 62 ( a)
. W el l Po i ntc ha l l en g ed th e rul i ng i n the Tax Court a n d lo st . The c ourthel d that W ellP oin t’s se tt lem en t p ay m en ts w er e c ap ita l ex p e n d itu r es an d so co ul d no t be deduc te d as o r di na r y a nd necess ar y b usi ness expenses. The parti es disa gr ee about the s cope o fappel l ate r evi ew of s u c h a ru lin g. W ellP oin t a rg u e s t h at rev iew sh ou ld be p lenary

— w e s houl d gi ve no defer ence to th e Tax C o u r t ’ s d e t e r mi n a t i o n . T h e g o v e r n me n ta r g u es th a twe sh ou ld d efe r to th e ru lin g u n les s c on vin c ed th at it is cl ear l y e rr oneo us.N o. 09

- 3163 3 Ruli ngs o n pure i ssues o f la w , such a s the m eani ng o f “or dinar y a nd nece ssa rybusi ness expense” or“ca pit al ex p en d itu re ,” ar e s u bj ec t t o p len ar y r e vie w , w h ile fi nd i ngs o ff act ar e r evi ew ed j ust forc l earer ro r. Contr over sy persi sts ove r the proper sco pe of appell at e revi ew of the a p p lic a t ion of a legal stan d ard to the facts of a par ti cul arc as e ( su chr uli ng s a r e o fte n r efer r ed to c o nfusi ngl y a s “ ult i m ate fi nd i ngs o ffa c t” o r re soluti ons of

“ mi x e d qu e s t i o n s o fl a w a n d f a c t ” )
. T h e b e t t e r v i e w, we (an d oth er s) h av e s aid in p re vio u s c as es , e.g., U nited Sta te s v . Fre der ick, 182 F.3d 496 , 499 (7th C ir. 1999); Har t f or d Ac ci de nt& Indem nity Co. v. Su l l i van , 84 6 F
. 2d 37 7, 38 4 (7 th C ir. 19 88 ); Wr ig h t v . U nited Sta tes , 80 9 F
. 2d 4 25 , 428 (7t h C ir. 19 87 ); Wrigh t v. C o m m ission er, 57 1 F
. 3d 21 5, 21 9 (2 d C ir. 20 09 ); ASA Inves t e r i ngs Par t ne rs hip v . C o m m ission er, 2 0 1 F
. 3 d 5 0 5 , 5 1 1 ( D. C. Ci r . 2 0 0 0 ) , i s that th e clear-errorstan d ard shou ld govern the review of a deci si on that a pp l i es a l ega lst andard to particu lar f acts
. The di str i ct c ourt( or, a s in thi s ca se, the Tax Court, th e d e c i s i o ns o fwh i c h a r e r e v i e we d “ i n th e s a me m anne r a nd t o the s ame e xt en t as d eci si o ns o fthe dist ri ct c ourt s in ci vi lact i ons tr i ed w i thout a j u ry, ” 2 6 U .S.C . § 74 82 (a)( 1); se e, e.g ., A SA Invester ings P artn ership v. C o m m ission er, sup ra , 20 1 F
. 3d at 511) h as a g re ate r i mm e r s i on i n the f a c t s o fa c a s e tha n the c o ur to fa ppeal s. A l so, wh en a deci si on is f act- speci fi c, pl enar y r evi ew i s no t r equi re d i n or der t o m ai ntai n unifor m i ty ofl ega l p rinciples th roug hou t the circuit. A n ap p ell ate cou rt’s “mai n r es po ns ibi l i tyi s to mai nt ain the uni f o r m i tya nd co he r en ce o fthe l aw, a r es po ns ibi l i tynot e ng ag ed i fthe only ques ti o n i s th e l eg als i g ni fi ca nc e o fa pa r ti cul ara nd4 N o. 09

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nonre curr i ng se t o fhi sto ri calev ents
. ” M ucha v
. Ki ng, 792 F.2d 602 , 605-06 (7th C ir. 1986). T his an alysis im p li es th at th e clear-errorstan d ard shoul d gove rn the r evi ew o fa rulin g th at a par ti cul ar ex p en d iture w as or w a s not an ordina ry and nec essary busin es s expense a s di stinct fro m a capi talexpenditure. An d s o we h e l d i n R eyn o lds v . Co m m ission er, 29 6 F
. 3d 607, 61 2- 15 ( 7th C ir
. 2 00 2)
. Butwe ha ve t o r ec k o n wi ththe Suprem e Court’ s sta tem ent that “the gener alchar acte ri zati on o fa tr ansact i on f orta x purposes i s a q u es tio n ofl aw subj ect to re vi ew , ” Fra nkL yo n C o . v. U nited Sta tes , 435 U
. S. 561, 58 1 n. 16 ( 1978 ). (B y “r evi ew ” the Courtm ust hav e m eant plen a ryr evi ew , since f actfi nd i ngs are s ubj ect to re vie w , albe it jus t fo r c lea r er ro r.) N atural l y thi s for m ula, gi ven i ts sponsor, has been re c ite d in s u b se q u en t c as es . E .g., Wello ns v . C o m m ission er, 31 F.3 d 56 9, 57 0 (7th C ir. 1 9 9 4 ) ; D ow Che m i ca l Co. v. U nited Sta tes , 4 35 F
. 3d 59 4, 5 99 n. 8 ( 6th C ir. 2 00 6)
. But whatdo es “ g en er alc ha r ac te r i zati on” mean ? Cl as si fy i ng a par ti cul are xpe ndi tu r e as a n e xpe ns e o n the o ne hand oras a capi talexp en d itu re on the o theri s a pp l yi ng a l ega lst andard to f acts
. The D ow o pini on inter prete d “ge nera lchar acte ri zati on” to i ncl ud e s uch cl ass i fi cati ons. W e a re dubio us. A j ud ge as ked i n a b ench tr i al to deci de w hetherthe defe nd ant was neg l i gent appli es a l ega lst andard (th e negl i gence st andard) to the f acts o f the c ase

— an d ap p ella te rev iew is d ef e r e n tia l, Thom as v. Gen e r al M ot ors Acc ept anc eCorp. , 28 8 F
. 3d 305, 30 7- 08 (7t h C ir. 20 02 ); D o w n s v. U nited Sta tes , 52 2 F
. 2d 990, 99 9 ( 6th Ci r. 19 75) ; se e g ener al l y St
. M a ry’s M e di ca l Ce nt e rofN o. 09

- 3163 5 E vansvill e, Inc. v. D is co Alum inum Produ cts Co
. , Inc. , 96 9 F. 2d 585, 58 8- 89 ( 7th C i r. 1992) , as i t s houl d be a ccor ding to ou r an aly sis . W e d on ’t s ee h ow a n eg lige n c e c as e d iffer s in thi s r espectfro m thi s t ax cas e. W e nee dn ’ t wade deeper into thi s m ire , however

. Fo r th is i s no t a ca se i n whi chthe s ta nda r d o fr ev i ew de te rmi n e s th e o u t c o me

— a ca se in w h ich w e w ou ld affirm if th e stan d ard w ere clear error an d reverse ifit w ere mer e e r r o r . We wo ul d a ffi r m un de r e i the r s t a nd a r d. W e’ l lbeg i n our analy si s byexpl ai ni ng the di ffer ence be twe en a c api ta l e xpe ndi tu r e an d a n o r di na r y a nd necess ar y b usi ness expense, with the ai d ofexam ple s. T he c o sto fb uy i nga b ui l di ngi s a ca pi ta le xpe ndi tu re b ec au se a b u ild in g h a s “ a u se fu l life su b st an tia lly beyo nd the taxabl e yea r, ” Treas
. Reg. § 1. 263( a)

- 2( a) , wh i ch i s the gener alundersta nd i ng o f“ca pit alexpenditure. ” S ee, e.g ., U .S. Freigh t w a y s C o rp. v. C o m m ission er, 27 0 F
. 3d 1137, 11 43 -44 (7t h C ir. 20 01 ); C rosley C o rp. v. U nited Sta tes , 22 9 F .2d 37 6, 3 7 9 (6 th C ir. 19 56 ); B run s v. C o m m ission er, T. C. M em o 2009

- 168, 20 09 W L 20308 86, a t * 9. A capi tal expend i tu re i s no t deductibl e a s a busi ness expense inth e y ea r inw h ich it is m ad e; in st ea d it m u st be d ep re c iate d overi ts usefu l life , and the am ount o fdepreci ati on ea c h ye ar is all th at is d e d u c tib le th at ye ar . E .g., C rosley C o rp. v. U nited Sta tes , sup ra , 22 9 F .2d a t 37 9. In thi s way, cos t i s m atched t em pora l l y with re venue, wh i ch is a d e s i d e r a t u m o ft a x l a w. T h e p u rc h as e p ric e o f a c ap ita l as se t is n otth e o n ly e x a m p le of a ca p ita l ex p en d itu re . Anyex p en d itu re is c ap ita l if its “u tilit y . . . su rv ive s th e a c c ou n tin g p er iod ” in6 N o. 09

- 3163

w h ich it is m ad e. Se ars O i l Co. v. Com m i s s i oner, 359 F. 2d 191, 197 ( 2d Cir
. 19 66) ; se e a l so Clark Oil & Re f i ni ng Corp
. v. U nited Sta tes , 473 F. 2d 1217, 12 19- 20 ( 7th C i r. 19 73)
. S o an expense incurr ed to enh an c e the va l ue o fa capi tal as se t m us t b e ca pi ta l i ze d, a nd thus a m o r ti ze d o ve r the ass et’ s r em ai ni ng l i fe. I n con tr ast, busi ness expenses i ncurr ed i n day- to- day oper ati ons ar e deem ed or dinar y b usi ness expenses and so ( i ftheyal so ar e n ec es sar y, wh i ch i n thi s co ntext j ust m eans “appropriate and hel pful, ” Com m i s s i one rv. Heinin ger, 320 U .S. 46 7, 47 1 (1 94 3); We l ch v. He l ve r i ng, 290 U
. S. 111, 11 3- 14 ( 1933 ) ( Cardozo , J
. ) ) theyar e deductible from th e b u s i n es s’s ta x ab le in c om e in th e y ea r in w hi ch theyar e incurr ed. Thus re pai rs to a b u i l ding, w hich p reserve but do not en ha nc e th e b u il d ing’s val ue, can be e xpensed, w hi l e im p rovem ents i ntended t o i nc r e a s e the b ui l di ng ’ s v a l ue h ave t o b e c a pi t a l i z e d. M o ss v. C o m m ission er, 831 F.2d 833 , 8 3 5 ( 9th Cir. 1987 ) ( “expen ditures f orper m anent i m prove m ents or b etter m ents m ade to i ncre ase the val ue o fany proper ty m us t be cap itali zed and de p reciated over the u seful l ife of th e im p ro ve m en t” ); C o nn a llyR eal ty C o . v. Co m m ission er, 81 F.2d 22 1 , 2 21 -22 (5t h C ir. 19 36 ); D if co Laboratori es, Inc. v . C o m m ission er, 10 T .C . 660 , 667(19 48 ); Appe al of Il l i nois M e r ch ants Tr us tCo. , 4 B.T. A
. 103, 106 ( 1926 ) ; Tre as. Reg. §§ 1. 162- 4, 1. 263( a)

- 1( a) , (b)

. A s furtherexpl ai ned in the C onna llyo pi ni o n, “ Re pa i r s t o a b ui l di nga r e n e c e ssa ry , an d reg ar d ed as ord in a r y a lth ou gh oc c as ion ed in u n u sualdegr ee by sto rm , fl oo d, orthe l i ke. But th is b u ild in g fe ll int o n o d isr ep air , no r w as it p h ys ica lly i nj ured i n any w ay re quir i ng re sto ra ti on. The ci ty al ter ed i ts s tr ee t wi thde tr i m en t to the de si r ab i l i tyo fpo r ti o nsN o. 09

- 3163 7

o fthe b ui l di ngf o r r en t, b ut, s o f ara s app ears , wi th o ut tou ch ing th e bu il d ing. T he ou tlay w as m ad e in an ef fort to adapt the b u ild i ng to change d surr oundings , but not to re pai r any physi caldam age to i t. ” 8 1 F
. 2d at 221. J ust a s r epai rs pre vent a bui ld in g fro m co l l apsi ng, so expend i ture s t o defe nd ti tl e t o the b uil ding ( m aybe so m eo ne i s se ek i ngs pec i fi c per f o r m an ce o fwhathe cl ai m s, a nd y o u de ny, i s y o ura g r ee m en t to s el lhi m the bui l ding) ar e incurr ed to p ro tect the bui l ding aga i nst w hat fro m the own er ’ s s tandpoin t m i ght b e a l oss equi val ent t o i ts col l apsi ng. But such expenditures , because i ncurr ed to defend (o r ass er t) t h e own er shi p ofa capi tal a s s e t, c a nn o tb e e xp e ns e d. The dis ti ncti on m ay see m te nuous, but i t i s we ll e stabl i shed. S ee La rk S a les C o . v. Co m m ission er, 43 7 F
. 2d 1067, 10 77 ( 7th Ci r. 19 70) ( expenses “i ncurr ed f orthe pu rpos e ofdefending and prote cti ng the M edd s’ ti tl e o r proper ty ri ghts i n the D airy Queen t ra de nam e a nd a tr ade phrase o r i g i n a t e d b y th e Me d d s . . . we r e c a p i t a l i n n a t u r e an d n otd ed u c tib le a s a bu sin es s e x p en se ”); Bur ch v. U ni t ed Sta tes , 698 F.2d 57 5, 57 9 (2 d C ir . 1 98 3); R edw o o d E m pire Sa vin gs & Lo a n A ss’n v . Co m m i s s io ner, 62 8 F
. 2d 516, 52 0- 21 (9t h C ir. 19 80 ); M elch er v. C o m m ission er, T. C. M em o. 20 09- 210, 20 09 W L 29508 20, at*4-5 ; Treas
. Reg. § 1. 212- 1( k) ( “e xpe ns es pa i d o r i nc ur r ed i n de fen di ngo r per fec ting ti tl e t o proper ty, in r ecover i ng pro perty( othe r than in ve st m en t p ro p er ty a n d am ou n ts of in c om e w h ich , i f a n d w he n recov ered , m us t be includ ed i n gross inc om e), or i n d evelop ing or i m p roving p rop erty, con stitut e a pa rt o fthe c o sto fthe pr o per tya nd a r e no t ded uc tible e xp en ses”); T reas. Reg. § 1.263(a)- 2(c).8 N o. 09

- 3163 T he pa rticular exp en ses involved i n th is case w ere i ncurr ed i n defe nd i ng a l aw sui t. A busi ness that i s s ued f orunpaid ta xes, sa y, or u n pai d rent, i s a l l owed to ded uct i ts expenses i n def ending the sui t a s “ or dinar y” b u sin es s e x p en se s. Tr u s t Un d e r t h e Wi l l o f B i n h am v . C o mm issio n e r, 32 5 U.S
. 36 5, 37 6 ( 1945 ) ; se e a l so C o m m ission er v. Tellier, 38 3 U .S. 68 7, 68 9-9 0 (1 96 6); Com m i s s i one rv. Heinin ger, sup ra , 32 0 U .S. at 47 1-7 2; A .E . Stal ey M fg. C o . & Sub s i di ar i e s v. Com m i s s i oner, 1 19 F. 3d 482, 48 7- 91 ( 7th C ir. 19 97 ) ; Ha ug e v. C o m m ission er, T. C. M em o 2005

- 276, 2005 W L 32145 81 at * 5- 6. They a re the sor t o fexpense that i s incurr ed to pre ser ve the o perat i on a nd pro fitabi l i ty ofthe busi ness ra therth an t o acqui re o r re tain or im p rove a sp ecifi c cap ital asset, an d th us a r e “ ord inary and necess ar y” eve n though they ar e no t a s r egular and predic tabl e a s co sts ofl aborand m ate ri al s. W el l Poi nt cl ai m s that the co st ofthe set tl em ent, and ( w hat need not be disc ussed separ ate l y) the l ega lex p en ses that i t incurr ed i n the l i ti gat i on, wer e “or dinar y” because i t wa s d e fe n d i n ga g a i n s tc l a i ms th a ti twa s u s i ng i ts proper ty

— the asse ts ofthe acqui re d BC BS co m pani es

— i m proper l y. On thi s v i ew , W el l Poi nt wa s li ke a l andlo rd wh o i s s ue d f orvi ol ating the bui l ding code by f ai l i ng to m ai ntai n hi s bui l ding proper l y. But the gov er nm ent ar gues that W el l Poi nt was defending i ts ti tl e t o the a cquir ed ass ets , a n d w e s ai d that e xpenses incurr ed i n d e fe n d i n g t i t l e t o a c a p i t a l a s s e t a r e n o t o r d i n a r y e xpenses. W el l Poi nt r ip ost es that the a tto rney s g ener al neverquesti oned i ts ti tl e but m er ely i ts use o fthe ass ets f orpro fi t- m aking r atherthan chari tabl e purpose s. Such di sputes o verchar acte ri za tio n ar e r eso l ved by a p p l i c a t i o n o fw h a ti s c a l l e d th e “ o r i g i n o fth e c l a i m”N o. 09

- 3163 9 d oc tr i n e: co st s in c u rre d in d efe n d in g a law su it a re cla ss ifi ed as e xpe ns es o r a s ca pi ta le xpe ndi tu r es de pen di ng o n the na tu r e o fthe c l ai m tha t g av e ri se to th e l i ti g at i o n. U nited Sta tes v. G ilm o re, 372 U .S. 3 9 , 48 -49 (19 63 ); D o w er v . U nited Sta tes , 66 8 F
. 2d 264, 26 6 ( 7th Ci r. 19 81); C la rk O il & R efinin g C o rp. v. U nited Sta tes , sup ra , 473 F
. 2d at 1219

- 21 ; cf. A .E . Stal ey M

f g . C o . & Su bsid ia ries v. C o m m ission er, sup ra , 1 1 9 F
. 3 d a t 4 8 9
. I n o ur hy po the t i c a lbu i l di ng - c o de case the l andlo rd’ s l i ti ga tion expenses w er e in l i eu o fpr o permai nt en an ce , so they a r e tr ea te d l i k e th e r epa i r e xpe ns es f o r which th eya r e a su bs ti tu te , a nd th us can be exp en sed

. B u t i f th e land lord w ere d efend ing against a suit for sp ecifi c p erform an ce of a co n t r a c tt o s e l lth e b u i l d i n g, h e wo u l d b e d e f en di ng the o w ners hi p ofhi s ca pit alassetand so the or i gi n of the c l ai m would be a di spute o verti tl e. I n e ac h of the thr ee s ui ts o uto fwhi chthe pr es en t d ispu te ar is es W ell Poin t had acq uired assets th at w ere hel d i n a c hari tabl e t rust
. Tw o ofthe sui ts asked that th e ass et s be ta ke n ou t of W ellP oin t’s h an d s e n tir ely an d pl ac ed i n c ha r i tabl e en ti ti es wi thwhi chW el l Po i nt w oul d have no thi ng to do. The thi rd, the Ohio sui t, as k ed th atthe a ss et s be pl ac ed i n a ch ar i tabl e trus t but l eft o penthe po ss ibi l i tythat W ell Po i ntmightb e th e tr ust e e . Bu twh e the r the o r i g i n o fa c l a i m i s a di spute ove r a ca pit alas setor ove r the day- to- day o perat i ons of th e b u s i n e s s i s n o t t o b e d e c i d e d b y r e fe r e n ce t o t he o u t c om e o f th e s u it. U nited Sta tes v. G ilm o re, sup ra , 37 2 U .S. at 4 8-4 9; M cK eag ue v . U nited Sta tes , 12 Cl

. C t. 671, 674 (19 87 ), affirm ed , 852 F.2d 12 94 (Fe d

. C ir. 19 88 ); Colv i n v . C o m m ission er, T. C. M em o. 2004- 67, 2004 W L 51619 5, at* 4- 5.10 N o. 09

- 3163 Otherwise , as the Supre m e C ourtexpl ai ned i n the G ilm o re c as e, “if t w o t ax p ay er s a re ea c h su ed for a n au to m ob ile ac c id en t w h ile d riv in g for p le a s u r e , d ed u c tib ility of th eir l i ti g at i o n c o st s woul d tur n o n the mer e ci r cumst an ce ofthe chara ctero fthe ass ets ea ch happened to poss ess , thati s, w hetherthe j ud gm ents aga i nst them st oo d to be s ati sfi ed o u to fi n c o me - o r n o n i n c o me - p r o d u c i n gp r o p e r t y . We shoul d be s low t o attr ibute t o Congre ss a purpose pro ducings uchune qua lt r ea tmenta m ong t ax pay er s, r es ting on no ra ti onalf oundati on. ” 3 72 U
. S. at48
. The re m edy that the p ar ti es to a l aw sui t s eek, o btain, o r agr ee on i ftheyse ttl e the cas e wil lso m eti m es be unr el at ed to the na tu r e o fthe c lai m o uto fwhi chthe su i t ar o se , a s i n B a rr v. C o m m ission er, T. C. M em o 1989

- 420, 1989 W L 90207; se e a l so Lu ca s v. C o m m ission er, 38 8 F
. 2d 47 2, 47 6 (1 st C ir. 19 67 ); Ya tes Ind ustries, Inc. v. C o m m ission er, 58 T. C. 9 61 , 9 71

- 72 ( 19 72 ) ; Tr ea s. Re g . § 1
. 21 2- 1( m )
. I m ag i ne a sui t to est abl i sh the pla i nti ff’ s own er shi p of a buil ding, an d the par ti es a g r ee i n s et tl i ngthe s ui t th atthe defe nd ant ca n re tain the bui l ding but t h e pl ai nti ffwil lbe al l o wed t o oc cu p y i t as a t en an t. The o r i g i n o fthe c laim w ou ld be a d isp u te ov er a c a p i t a l a ss et, na m ely own er shi p ofan a sse t that has a u seful l i fe o fm or e than a y e a r, e v e n th o u g h th e r e me d y wo u l d b e wh a t o ne m i g hte xpe cti n a di spu te b etwee n a l an dl o r d a nd a t en an t ove r the t er m s o fthe l eas e. The part i es’ l i ti gat i on e xpenses w ou ld h av e b ee n inc u rre d to se c u re o r d efe n d ow n er sh ip ofa capi talas set, wh ate verthe ter m s o fthe set tl em ent. St i l l, the r em edy so ught o r or dered o r agr eed to can be a c lu e t o th e n at u re of th e c laim

. La ng e v. C o m m ission er,N o. 09

- 3163 11 T .C . M em o. 19 98 -16 1, 19 98 W L 2 17 89 2, at *3; Est at eof B lo ckv. C o m m is sio ner, T. C. M em o. 19 88- 159, 19 88 W L 33528 ; c f. B o agn i v . Co m m ission er, 59 T. C. 708, 71 3 ( 1973 )
. A nd that m i g hts ee m to be th e ca se he r e, a t l ea stwi thr es pec t to the set t l e men t i n the Oh i o s ui t
. W e l l Po i nt s a y s i t s ho ws that the a tto rneyge nera lwas j ust t ry i ng to p re vent a m i suse of the a cquir ed ass ets
. But thi s m i sse s the dist i ncti on be tw een l eg ala nd b en efi ci alo wner sh i p. A trus te e ha s ti tl e to the asset s of th e trus t, bu t t he b en efi ciaries are th e real ow ne rs because theya re enti tl ed to the i ncom e o r othe r benefi ts thatthe a ss et s o fthe t r us t y i el d, min us o nl y the t r ustee’s re as on ab le fee for m an ag in g t h e a ss et s. Ha tch er v. So uth ern B a pti st Theo lo gic a l Sem ina ry, 63 2 S
. W
. 2d 251, 25 2 ( K y. 19 82) ( “w hen proper ty i s hel d i n tr ust the trustee hol ds the l ega l ti tl e a nd the benefi ci ar y o r beneficiari es ar e co nsi dered to b e ow n er s of th e e q u ita b le t itle ”); G uitn er v. M cE o w en , 12 4 N .E .2d 74 4, 74 7 (O h io A p p . 195 4); Res t at e m e nt( Thir d) of Trus ts § 2 a nd co m m ents d, f( 2003 ) ; George Gle aso n B og er t, G eo rg e T ay lor B og er t & A m y M or ris H es s, The Law o f Trusts a nd Trustees § 1 (3 d ed. 20 09)
. The at torneys ge n er al w er e try in g to st rip W ellP oin t of it s e q u ita b le o w n e r sh ip

— i t s r i g htt o u s e the a c qu i r e d a s s e t s f o r p r o fi t. W h et h er W ellP oin t re m ain ed th e t ru st ee w as a d et ail. M or eov er, al though the state offi ci al s sett l ed f orm oney, th eyd i d no t cl ai m tha t W el l Po i ntha d ( y et ) c au se d a ny harm to anyo ne byo perat i ng the acqui re d BC BSs for p ro fit

— th a ti tha d c h a r g e d h i g h e r i n s u r a n c e p r e mi u ms or prov id ed l ess cov erage or treated clai m s less generousl y. T he $113 m i l l i on that the at torneys gener alr ecei ved ( an d ha nde d o ve r t o c ha r i tabl e en ti ti es to ho l d a nd manag e) was no t damag es ; i t was i n l i eu ofthe i r r ec o ve r i ngthe acqui re d asse ts.12 N o. 09

- 3163 A not e o fco nfusi on has bee n i nj ecte d by the pla i nti ff s’ chara cter i zi ng thei r cl ai m s as “cy pres” cl ai m s. The cypre s (“as nea r as”) doc trine all o w s a c o u rt to al ter a cha rity’ s obj ecti ve i fthe or i gi nalobj ecti ve can no l ong er be achi eve d. The Earlof C ra ven

— havi ng i n “m i nd the sad an d l ament ab l e vi si ta ti o n o fAl m i g hty Go d upo n the ki ngdom , but m or e especi al l y up on the Citi es of London an d W es tm in st er , in th e y ea r 16 65 an d 16 66 , by t h e p es til ence and gre at m or tal i ty, and the gr eatnece ssi ty that th er e was f o r pr o vi di nga pe stho us e f o r the s i ck, and buryi ng - pl a c e f o r the de a d”

— ha d e s t ab l i s he d a t r us tf or the m ai ntenance ofa pest house and p l ague pit
. But w hen the Bl ack Pl ague no l onge r ra vage d the poo r re si dents o f St
. M ar ti n’s

- i n-the- Fi el ds, the tr ust was per m i tt ed to use som e of its ass ets to hel p tr eatper sons w i th o therco ntagi ous di sea ses . A t t o r n ey-G enera l v. E a rl of C rav en , 21 Beavan 39 2, 52 Eng. Rep. 91 0, 91 2, 91 8- 19 ( Ch

. 18 56) ; se e al so National Found ation v. First National B an ko f C ataw ba C ounty, 28 8 F
. 2d 831, 83 4- 36 ( 4th C ir. 19 61)
. But the tr ust w oul d not ha ve b een al l owed to subst i tute, f ori ts pest house and pla gu e p i t, a shel terand bury i ng pl ace f or hom el ess tabby cats , since that obj ecti ve w oul d not have been neari ts or i gi naland now un att ai nabl e o ne. The doctr i ne has no app l i cati on to thi s ca se. The di spute i s r emot e fr o m the s ta nda r d c y pr es c as e, i n whi chthe i ss ue i s whethe r cha ritabl e as se ts c anb e k epto uto fthe hand s o fthe re si du ar y l ega tee s ev en tho ugh the or i gi nal obj ecti ve ofthe chari table beques t ca n no l onge r be ac h iev ed

. R ice v. Sta nley, 327N .E .2d 77 4, 78 4-8 5 (O h io 19 75 ); M i ni s t e rs & M i s s i o na r i e s Be ne f i tBoar d of

Am e r i ca nN o. 09

- 3163 13 B a pt i s tConve nt i on v. M e r i de n Tr us t& Sa f eD epos i tCo. , 94 A .2d 91 7 (C on n . 195 3); Cit ize ns Fid e l i ty B ank & Tr us tCo. v. Is aacW
. B e r nhe i m Fo und at i on , 205 S. W
. 2d 1003 , 1007

- 08 ( K y. 19 47 ); R es tate m ent( Third) of Trusts § 6 7 ( 20 03)
. The or igin al c h ar ita b le ob j ec tiv e o f th e a c q u i re d en titi es

— nam el y the pro vi si on o fheal th i nsurance

— i s no t una tt ainabl e. W ha t ha s ha ppen ed r athe r i s th atthe a s s e t s de v o t e d t o i t s a t t a i nme nt ha v e b e e n ( a c c o r ding to the s uit s) unl aw fully use d to provi de h ea l th i nsurance f o r pr o fi t; i t’ s as i fthe a ss et s ha d b ee n s to l en . Befo re co ncl ud i ng we need to co nsi der the al tern ati ve gr ound fo r affi rm ance

— o r pu rpor ted gr ound fo r affi rm ance

— ad van ce d b y the g o ve r nm en t i n i ts b r i efa nd str ongl y ur ged by i ts l aw yer at ar gum ent. M or e pr eci sel y, w e need to consi der whether w e ca n cons ider th e alterna t i v e g r o un d. The gr ound is t h at the set tl em ent with W el l Poi nt was i n effect a p ar ti alr est or ati on o fthe acqui re d asse ts to th ei r r i g ht fulo wner s an d tha t l i k e an y othe r r epa y m en t of m one y i t w as no t a cap ital ex p en d iture an d therefore sh o ul d have n o t ax c o ns eque nc es a t al l

. Al th o ug h the g o ve r nm en t as k s us t o a ffi r m the T ax C o ur t’ s j udg m en t ra therthan to m odi fy i t, were w e t o accept the a l ternati ve grou nd this w ou ld am ou nt to repu d iating th e cou rt’s hold ing that the cos ts incu rred by W ell Poin t w ere c ap ita l ex p en d itu re s, an d w ou ld p lac e a clo u d ov er W ellPoi nt’ s s eek i ng to deduct the c osti n the fu tu re as a ca pi ta le xpe ndi tu r e to b e amor ti ze d o ve r the l i fe o fthe acqui re d asse ts that W ellPo int r eta i ns byvi rtue o f havi ng co ughed up $1 13 m i l l i on to ke ep them

. Li ti gat i on14 N o. 09

- 3163 expe ns es des i g ne d to o bt ain o r pr o te ct a ca pi ta l as set are adde d t o the b as is ( es se nt i al l y, the c o st ) o fthe a ss eta nd thus i ncre ase the am ount o fdepreci ati on that the o w ner of th e a ss et ca n ta ke as a d ed u c tio nfrom ta x ab le in c om e o ve r its re m ain in g l ife. 26 U .S.C . § 10 16 ; Wo o dw a rd v. C o m m ission er, 397U .S. 57 2, 57 4-7 9 (1 97 0); Lan gev. C o m m ission er, sup ra , at *3 ; N o el v. C o m m ission er, T
. C
. Me mo 19 97

- 11 3, 1 99 7 W L 9 33 10 , a t * 7- 9. Tha t’ s W el l Po int’s f al lb a c kp o s i t i o n, s ho ul d we r ul e ( a s we h a v e r ul e d) that i t is no t e nti tl ed to deduct the s ett l em ent a nd as soc i ate d l ega lfees as o rdi naryand neces sar y b usi ness expenses. H ad the g ove rnm ent wan te d u s to m odi fy the Tax Court’ s j udg m e nt, it w ou ld h av e h ad to file a c ro ss -ap p ea l. E .g ., E l Paso N atural G as Co. v. Nezts osie, 52 6 U.S
. 47 3, 47 9 (19 99 ); M or l ey Cons t r uc t i on Co. v. M aryl and Casu al ty Co. , 30 0 U .S. 18 5, 19 0-9 2 ( 1 9 3 7 ) ( C ar d oz o, J.); Dol l v . Brown , 75 F.3 d 12 00 , 120 7 (7 th C ir. 1 99 6); c f. E u ge n e G re ss m an etal., Suprem e C ourt P ract ice4 89

- 94 ( 9th e d. 2 00 7)
. An ap p ell an t i s per m i tte d to fi l e a r epl y b ri ef a fter the appel l ee fi l es hi s br i ef, a nd s o a n a ppel l ee who i s al so a n a ppel l an t

— that is, w ho is also seeking rel iefagainst th e low er cou rt’s j udg m en t

— shoul d h av e th e s am e r i ght t o re spond to hi s o ppo ne nt ’ s br i ef, a nd he inv o k es that righ t byfi l i ng hi s o w n appeal, cal l ed a c ro ss- appeal

. The fi l i ng o fa cro ssappeal al so se rv es t o al er t the co urt to the dualr ol e o f th e p ar tie s in th e a p p ea l. Bu t the go ver nm ent i s no t s eek i ng r el i efag ai nst the Tax Cou r t’ s j udg m en t

— though thi s c onclusi on depends on pr ec i se l y w hat th e “j udg m en t” i n a c as e i s. The j udg m en t is not the cou rt’s opini o n o r r eason ing; it i s the cou rt’sN o. 09

- 3163 15 bot tom lin e, w hi ch i n thi s ca se i s the deni alo fthe ded ucti o n s o ug htb y W el l Po i nti n the ta x y ea r s i n que st i o n. The gov er nm ent a sks u s to m odi fy the r eas oni ng o fthe Tax Court so that i n so m e future tussl e with the I nter nal Revenue S er vi ce W el l Poi nt wil ln ot be al l owed to ded uct depreci ati on o fthe set tl em ent a nd l iti gat i on expenses. Butthi s j us t i l l us tr at es “tha t th e appe l l ee may, wi th o ut ta k i nga c r o ss - appe al, ur g e in suppor t o fa de cr ee a ny m a tt er ap p ea rin g in th e re c or d , al t hough h i s argumentm ay i nvol vean at t ac k u pon t here as oni ng of thel owerc our toran ins is te n ceupon m atte r overl ook ed orignore d by i t
. ” U nited St at e s v. Am e r i ca n Rai l way Expre s s Co. , 265 U
. S. 425, 435 ( 1924 ) ( Brandei s, J
. ) ( em phasi s a dd ed); se e a l so U nited State s v. Ne w York Tel ephon eCo. , 43 4 U .S. 15 9, 16 6 n. 8 (19 77 ); Rut h v
. Tr i um ph Part ne rs hips , 577 F. 3d 790, 79 6 ( 7th C ir. 20 09 ); M os s v. Kopp , 55 9 F
. 3d 115 5, 11 61 n. 6 ( 10th Cir
. 20 09)
. To rule o ther w i se w oul d l ead to endl ess di sp u te s o ve r w h et h er arg u m en ts by an ap p e l l ee os te n sib ly defe nd i ng the j ud gm ent were pl an tin g ti m e bo m bs und erthe appell ant. The cr oss -ap p ealr ule i s no t s o vi tal that i t j usti fi es haggl i ng o verbo rder l i ne cas es. Doubts sh o ul d the r efo r e be r es o l ve d a g ains t fi ndi ngtha t th e appe l l ee ’ s f ai l ure to fi l e a cr o ss - appe alf o r fei te d hi s r i g ht to ar gue a n alt ernati ve gr ound. Se e 1 5A Charl es A l an W rig h t, A rt h u r R . M iller & E d w ar d H . C oo p e r, Fe de r al P rac tice an d P roc edu re § 3904, pp . 198- 209 ( 2d ed. 19 92) ; se e al so P ea rl v. KeystoneCo nsoli dated Industr ie s, Inc. , 88 4 F.2 d 10 47, 105 2-5 3 (7 th C ir. 19 89 ); Jo rda n v . D u f f & P help s, Inc. , 81 5 F
. 2d 429, 43 9 ( 7th Ci r. 19 87)
. O th erw i se cour ts16 N o. 09

- 3163

w i l lbe sucked into i nc onclusi ve debates o verwh ether som ethi ng sa i d i n a di str i ct c ourto pini on, tho ugh not precl usi ve by op er atio n ofr es j ud i cata o r col l ate ra l es to ppel( o r s ta r e dec i si s, b ec au se di st r i ctcou r t dec i si o ns d o n oth av e th e for c e of p re c ed en t, e.g ., B o yd v. O w en , 48 1 F.3 d 52 0, 52 7 (7 th C ir. 20 07 ); C olby v. J
. C
. Penney Co
. , Inc. , 81 1 F .2d 11 19 , 112 4 (7 th C i r. 19 87 ); NASD D i s put eRe s ol uti on, Inc. v. Judicial C ouncil , 4 8 8 F
. 3d 1065, 1069 (9th C ir. 2007 ) ) , neve rthel ess affects the ri ghts ofthe appell ee. U n ited St ates ex re l. Stachulak v. Co ughlin , 5 2 0 F
. 2 d 9 31, 93 7 ( 7th Ci r . 1 975) , i s a ca se tha t i l l ustrates whenthe filin g of a cr os s-a p p ea l is r equi re d. The appell ee, co nfined i n the psychi atr i c wa rd o fa sta te pri son, br ought a fede r alhabe as c o r pus pr o ce edingt o g ain h i s fr ee do m . The d is t r i c t co u rtfou n d m er it inh is c as e a n d ord er ed h im re lea se d from th e p ris on u n l es s t h e s ta te ga ve h im an oth er c o m m itm en t proc eed ing (in w hich the sta te’s bur deno fpr o o f woul d be g r ea te r ) wi th i n 6 0 day s. W i th o ut cro ss- appeal i ng, the ap p ell ee ar gued that the s tatute und er w hi ch he w as confi ned w as unconsti tuti on al root an d b r an ch

. W e hel d tha t he c o ul d no t m ak e th i s ar g um en t w ith ou t f i l in g a cr os s-a p p ea l be c au se if h is ar gum ent w er e a ccepted i t would r equi re hi s i m m edi ate r el ea se a nd pr ec l ude a furthe r c o m m i tmenthe ar i ng an d t hus change the j ud gm ent fro m co nd i ti onalr el eas e in60 d ay s t o u n c o n d i t i o n al re lea se im m ed iat ely . In th is case , i n contr ast, the j ud gm ent doe s no t r equi re that W ellP oint be perm i tte d to tr eati ts set tl em ent a nd l i ti gat i o n e x p e n s e s a s a d e p r e c i ab l e ( a n d th e r e f o r e o v e r t i me a deduc tibl e) c api ta le xpe ndi tu r e, a nd s o the g o ve r n-N o. 09

- 3163 17

m ent’ s a rgum ent that they sh oul dn ’ t be so tr eat ed does no t ch al l en g e th e j udg m en t, a s di st i nc t fr o m rea so ni ng by th e Ta x C ou rt that m ight infl ue nc e d ecision in a fut ure c as e b u t w ou ld req u ire n o a lte ra tio n in th e jud gm en t in the pr ese nt o ne. The s tr o ng es t ca se th at we’ ve f o und ( th o ug h n o t st r o ng enough) f orr equi ring the appel l ee to fi l e a cr oss - appeal ev en th ou gh h e is n ’t s e e kin g t o a lte r th e jud gm en t is EE O C v. Chi cago Cl ub , 8 6 F
. 3d 14 23 ( 7th Ci r . 1 99 6)
. The defe nd ant pr evai l ed i n the dist ric t c ou rtand on a pp eal ar gue d a n a l te r na ti ve g r o und fo r a ffi r m ance w i th o ut havi ng fi l ed a c ro ss- appeal

. W e r ej ecte d the al tern ativ e gr ound becau se the a pp el l ee did nothave st anding to r ai se i t, a nd the n remar k ed th at“ th e f ac t th atthe [ appell ee] di d not fi l e a cr oss-ap pealwould al so co m pl i ca te o urabi l i tyt o r es o l ve [ the ] i m po r ta nti ss ue [ ra i sed by the appell ee] eve n i fst anding w er e pr ese nt. ” Id

. a t1 4 3 1

- 3 2
. T h i s wa s a d i ct um tha t e v e n o n i t s o wn ter m s di d not g o so f aras to st ate thatthe appell ee w as required to file a c ro ss -ap p ea l. A nd so we c an a d dress , atl ast, the m er i ts ofthe gov ernm en t’ s al te r na ti ve g r o und. W e ca n b e br i ef, a s th e gr ou n d is

— gr oundles s. I t i s t rue that i fyo u re cei ve m oney as a loa n an d rep ay it, th e re p ay m en t is n otd ed u c tib le fro m yo ur t axabl e incom e, bec ause you neve r cl ai m ed to ow n th e m o n ey you h ad bo rro w ed

. C om m is si oner v. Tufts , 46 1 U .S. 30 0, 30 7 (1 98 3); Vuk a sov ich , Inc. v. C o m m i s sio ner, 79 0 F .2d 14 09 , 141 3 (9 th C ir. 19 86 ); B renn er v. C o m m ission er, 62 T .C
. 8 7 8, 88 3 (1 97 5). B u t W ellP oin t a lw ay s c laim ed (it sti l lcl ai m s) to have e q u ita bl e t i tl e t o the a sse ts i t a c-18 N o. 09

- 3163 qui r ed. The e xpe ns es th at i t r ea so nabl y i nc ur r ed to de fen d th at cla im

— the cl ai m to own the a sse ts fre e a nd cl ear

— are capi talexpenditures , notr epaym ents. A FFI RMED .

3- 23- 10