Opinion ID: 741981
Heading Depth: 2
Heading Rank: 2

Heading: Characterization and Purpose of the $940,000

Text: 27 The Commissioner argues the government's actual loss, resulting from Stencel's fraudulent conduct from 1979 to 1984, was $1.56 million and the remaining portion ($940,000) of the $2.5 million settlement constitutes a payment of double damages under the FCA. The Commissioner argues a payment of double damages under the FCA is a fine or similar penalty under section 162(f) and, thus, nondeductible. Talley argues the disputed portion was intended to compensate the government for its actual losses and was not paid in compromise of the government's statutory right to double damages under the FCA. Alternatively, if intended as a payment of double damages, Talley argues the payment was intended only to compensate the government and was not intended as a punishment or deterrent. 28 Stencel faced potential liability under the FCA, the TINA, and for breach of contract. The parties agree that Stencel's liability under the TINA and for breach of contract would have been limited to compensating the government for its actual losses. 29 Stencel, however, faced liability exceeding the government's actual losses under the FCA. During the relevant period, Stencel faced a combined liability of a civil penalty of $2,000, an amount equal to 2 times the amount of damages the Government sustains because of the act of that person, and costs of the civil action if Stencel knowingly presented a false statement for payment. 31 U.S.C. § 3729 (1983). 30 The parties presented conflicting evidence as to the nature of the contested $940,000. The Commissioner presented the affidavit of William Kilberg, counsel for Talley during the settlement negotiations. In this affidavit, Kilberg states he advised Talley to settle the action on the assumption that the government's actual losses were $1.56 million and Talley agreed to settle. He states he informed Talley that the settlement would not be limited to the $1.56 million as the estimated amount of the Government's actual losses because, if the case went to trial, the government would be entitled under the FCA to automatically recover double the amount of its actual damages and because the government would have to immediately pay Stencel's outstanding invoices. In Talley's subsequent letter offering $2 million in settlement, Kilberg stated: 31 All that Stencel seeks, thus, is assurance that its payment of $2,000,000.00 will in fact secure a release for all possible labor mischarging occurring during that period. Any other result would render the settlement incomplete and expose the Company to the threat of added liability for the same events over and above the double damages that the proposed payment is designed to represent. (Emphasis added). 32 The Commissioner also presented the declaration of Joyce Branda, counsel for the government during the settlement negotiations. In her declaration, Branda explains that Talley, in early settlement negotiations, agreed to pay double damages under the FCA. Branda states that, during settlement negotiations, the core obligation was that Stencel would pay double the losses determined by audit to be owing.... She explains: 33 I believed the $2.5 million should be accepted by the government in that the government was receiving its single damages of an estimated $1.56 million, plus $940,000 as a penalty or additional amount for the company's double damage liability. 34 In Branda's memorandum to her supervisor requesting approval of the settlement, she states: 35 Thus, we think that the single[ ] figure of $1.56 million adequately compensates the government for its losses based upon a fair and defensible projection. We also believe that here, where Stencel has pled guilty to related criminal charges and where civil proceedings have not begun, it is premature to accept only an estimate and that assessment of a penalty (as a portion of our double damages and/or forfeitures) is appropriate. A settlement of $2--2.5 million represents compensation for an estimate of losses plus assessment of a penalty. 36 Talley, however, argues the $940,000 was intended to compensate the government for any unknown losses. Talley points to Branda's statement in her memorandum that the estimate of actual loss for 1984 is not exhaustive of all damages which may have been caused in 1984 and the 1984 figure was used to calculate the $1.56 million amount. In his affidavit, Kilberg also states that he believed the $1.56 million amount may not reflect all of the government's actual damages. 37 Based on this conflicting proof, there is a genuine issue of material fact as to the nature of the contested portion. If the $940,000 represents compensation to the government for its losses, the sum is deductible. If, however, the $940,000 represents a payment of double damages, it may not be deductible. If the $940,000 represents a payment of double damages, a further genuine issue of fact exists as to whether the parties intended the payment to compensate the government for its losses (deductible) or to punish or deter Talley and Stencel (nondeductible). See Waldman, 88 T.C. at 1387. 38 The double damage provision of the FCA has both compensatory and deterrence purposes. See United States v. McLeod, 721 F.2d 282, 285 (9th Cir.1983); see also Mortgages, Inc. v. United States Dist. Court, 934 F.2d 209, 213 (9th Cir.1991); United States v. Northrop Corp., 59 F.3d 953, 965 (9th Cir.1995). [T]he double damages provision of the [FCA] is meant not only to compensate the government fully but also to deter fraudulent claims from being filed against it. McLeod, 721 F.2d at 285. Congress chose the double damage provision  'to make sure that the government would be made completely whole.'  Id. (quoting United States v. Hess, 317 U.S. 537, 551-52, 63 S.Ct. 379, 388, 87 L.Ed. 443 (1943)). At the same time, however, the double damage provision  'maximizes the deterrent impact....'  McLeod, 721 F.2d at 285 (quoting United States v. Bornstein, 423 U.S. 303, 317, 96 S.Ct. 523, 531, 46 L.Ed.2d 514 (1976)). 39 Because the double damage provision has both compensatory and deterrence purposes, whether the portion is deductible depends upon the purpose the [$940,000] payment was designed to serve. Waldman, 88 T.C. at 1387. As reflected by the evidence discussed above, the purpose of this payment is unclear at this stage of the proceedings. 40 Neither the characterization nor purpose of the payment is clarified by the settlement agreement. That agreement is ambiguous. The ambiguity may be resolved, however, by determining the intent of the parties. That intent presents a factual issue for the trier-of-fact. See Laborers Health and Welfare Trust Fund v. Kaufman & Broad, 707 F.2d 412, 418 (9th Cir.1983). Thus, a genuine issue of material fact exists as to the characterization and the purpose of the $940,000 portion of the settlement. 41 The tax court reasoned that the $940,000 portion was paid for compensatory purposes because (1) during settlement negotiations, the government never suggested that it was attempting to exact a civil penalty from Stencel; and (2) the settlement sum of $2.5 million was significantly lower than double the estimated amount of actual damages of $1.56 million. These reasons are not determinative. 42 The tax court's first reason assumes the government was required to characterize the payment. The government does not have this burden. The taxpayer has the burden to demonstrate entitlement to a particular deduction. Norgaard v. Commissioner, 939 F.2d 874, 877 (9th Cir.1991). If evidence to establish a deduction is lacking, the taxpayer, not the government, suffers the consequence. 43 Also, the fact that the contested portion is less than double the amount of actual damages does not necessarily mean it is a payment for compensatory purposes. Because the parties settled the action, the government may not have received the maximum amount of damages it conceivably could have recovered had it gone to trial. The government also was interested in quickly settling the case so that Stencel could continue to manufacture and repair the ejection seats. 44 The tax court also erred in relying on a double jeopardy analysis to support its conclusion that the $940,000 portion of the settlement was deductible as compensation. The tax court reasoned that because the payment would not be punishment in the context of double jeopardy, it had to be compensation and not a fine or similar penalty under section 162(f). This does not necessarily follow. 45 Under the Double Jeopardy Clause, civil penalties generally are considered to do no more than make the Government whole.... United States v. Halper, 490 U.S. 435, 449, 109 S.Ct. 1892, 1902, 104 L.Ed.2d 487 (1989); see also Hess, 317 U.S. at 551-52, 63 S.Ct. at 388 (double damages were chosen to make sure that the government would be made completely whole). A civil penalty may constitute a second punishment if the penalty bears no rational relation to the goal of compensating the Government for its loss.... Halper, 490 U.S. at 449, 109 S.Ct. at 1892. 46 The standards that govern whether imposition of a civil penalty violates the Double Jeopardy Clause are not the same as the standards for determining whether an amount paid to a government is a fine or similar penalty, the deduction of which is barred by section 162(f). Section 162(f) reflects an entirely different policy--to prohibit the deduction of expenses the allowance of which would frustrate a sharply defined public policy proscribing a particular type of conduct. See Tank Truck Rentals v. Commissioner, 356 U.S. 30, 33-34, 78 S.Ct. 507, 509-10, 2 L.Ed.2d 562 (1958); True, 894 F.2d at 1202-03. That the double damages portion of the penalty imposed by the FCA does not constitute criminal punishment within the meaning of the Double Jeopardy Clause of the Constitution does not mean that such damages are not within the ambit of section 162(f). In short, whether a payment is deemed compensatory for double jeopardy purposes does not determine whether the payment is deductible under the Tax Code. Cf. In re Commonwealth Cos., 913 F.2d 518, 526 (8th Cir.1990) (concluding Court in Halper did not invalidate holdings that FCA serves both compensatory and deterrent purposes).