Court Opinion

ID: 9386502
Source: CourtListenerOpinion
Date Created: 2023-04-12 19:01:29.057625+00
Date Added: 2024-06-11T17:18:06.925295
License: Public Domain

United States Tax Court

                          T.C. Memo. 2023-47

              EDWIN L. GAGE AND ELAINE R. GAGE,
                          Petitioners

                                   v.

            COMMISSIONER OF INTERNAL REVENUE,
                        Respondent

                               —————

Docket No. 23874-17.                                Filed April 12, 2023.

                               —————

Pamela K. Wheeler and Jeffery D. Trevillion, Jr., for petitioners.

G. Chad Barton, William F. Castor, and Vassiliki Economides Farrior,
for respondent.

                       MEMORANDUM OPINION

        HOLMES, Judge: The United States, on behalf of the Department
of Housing and Urban Development (HUD), filed a complaint against
Edwin and Elaine Gage. The Gages tentatively settled in December
2012 and gave their lawyer a cashier’s check for the agreed amount
before the end of the year. The government sometimes works slowly, and
the tentative settlement didn’t become final until March 2013. Shortly
after, the Gages’ lawyer delivered the check.

      When the Gages filed their return for 2012, they claimed a
business-loss deduction for the amount of the settlement.

      The questions in this case are:

                            Served 04/12/23
                                             2

[*2]
   •     Is the $875,000 the Gages paid to settle with HUD deductible as
         an ordinary and necessary business expense under section 162 1
         for the tax year 2012?

     •   If it isn’t, do the Gages owe a penalty for claiming the deduction?

                                      Background

I.       Formation of RMG and the Regulatory Agreement with HUD

      In February 1995 Edwin Gage incorporated RM&G, Inc. as an
Oklahoma corporation. In June 1995, he incorporated Heartland Care
Group, Inc., and it became RMG’s parent company. By the time of the
events that led to this case, the Gages jointly owned 30% of both RMG
and Heartland Care.

        RMG paid $7.25 million for Heartland Health Care Center of
Bethany (Center), a nursing home in Bethany, Oklahoma, and for the
leases to nine other Oklahoma nursing homes. In July 1996, a wholly
owned subsidiary of RMG named Heartland of Bethany was itself
incorporated to help win a HUD-insured refinancing of the Center. After
RMG incorporated Heartland of Bethany, RMG transferred the Center
to it though RMG continued to manage the home itself.

       In February 1997 Heartland of Bethany borrowed nearly
$5 million from Harry Mortgage Co. Harry Mortgage secured the loan
with a nonrecourse mortgage. HUD insured the mortgage, but wanted
to protect itself and so required RMG to operate as an identity-of-
interest management agent 2 for the management of the Center. HUD
also got both RMG and Heartland of Bethany to sign regulatory

         1 We are compelled to cite some nontax law in this opinion. When we do so, we
will give full citations. Our “section” references without full citations are to the Internal
Revenue Code in effect for the year in issue, all regulation references are to the Code
of Federal Regulations, Title 26 (Treas. Reg.), in effect for the year in issue, and all
Rule references are to the Tax Court Rules of Practice and Procedure.
        2 An identity-of-interest “is any relationship based on family ties or financial

interests between or among two or more entities involved in a project-related
transaction which reasonably gives rise to a presumption that the entities may not
operate at arms-length.” HUD, Healthcare Mortgage Insurance Program Section 232
of the National Housing Act: A HUD Handbook § I, Ch. 1.6, at 4 (2017),
https://www.hud.gov/sites/documents/42321HSGH.PDF.
                                      3

[*3] agreements with HUD. The Gages themselves did not sign, but the
regulatory agreements designated them as owners.

       These regulatory agreements are central to this case. HUD was
potentially on the hook for the mortgage—a mortgage that the Gages
and the other individual owners of the corporations involved definitely
were not. HUD wants to ensure that the people responsible for the
management of a nursing home don’t take so much money out of the
operation as to send the mortgage into foreclosure. The parties drafted
the regulatory agreement between HUD and Heartland of Bethany to
provide that Heartland of Bethany would not, without HUD’s prior
written approval, transfer or encumber the mortgaged property or
transfer any of the Center’s personal property. It could pay out any
funds only if there was a cash surplus or if the cash went to pay for
reasonable operating expenses and necessary repairs. The Agreement
prohibited Heartland of Bethany from receiving or keeping any assets
or income (except surplus cash) from the Center without HUD’s prior
written approval. The Agreement also made Heartland of Bethany’s
owners 3 personally responsible for retaining funds or otherwise
violating the regulatory agreement.

       The regulatory agreement between HUD and RMG is similar to
the one that HUD had with Heartland of Bethany. It too provided that
HUD had to consent to any sublease or change or transfer in the
management, operation, or control of the Center. RMG also promised to
keep its own books in reasonable condition for proper audit with the
expectation that they would be “subject to examination and inspection
at any reasonable time” by HUD. RMG also promised to keep “copies of
all written contracts or other instruments which affected the mortgaged
property, all or any of which may be subject to inspection and
examination” by HUD.

II.    District Court Litigation

      The deal worked as intended for a few years, but in 2003
Heartland of Bethany defaulted on the mortgage. That same year, Harry
Mortgage assigned the mortgage on the Center to HUD. HUD foreclosed
in 2004 and then sold the Center for just over $600,000. HUD’s loss on
the deal ended up being about $4 million.

       3 The Agreement defined “Owners” to include Heartland of Bethany and its

successors, heirs and assigns.
                                          4

[*4] Years passed. 4 The government wasn’t going to let the loss go,
and in 2010 it sued RMG’s owners in federal district court. See United
States v. Rich, No. 5:10-cv-990 (W.D. Okla. filed Sept. 13, 2010). It
sought double damages, costs, and fees under the National Housing Act,
12 U.S.C. §§ 1701-1750, and the Housing and Community Development
Act of 1987, § 421, Pub. L. No. 100-242, 101 Stat. 1815, 1913 (codified as
amended at 12 U.S.C. § 1715z-4a), for the recovery of Center assets and
income. The government’s complaint alleged that the owners used the
Center’s assets and income in breach of the regulatory agreement terms.
The complaint also included a claim under federal common law for
unjust enrichment.

       Negotiations ensued, and by August 2012 it looked like the case
would settle. The Gages, RMG’s other owners, and counsel for the
United States tentatively agreed to settle for $1.75 million, of which the
Gages would pay $875,000. The deal was expressly conditioned on final
approval by the Department of Justice, but it must have looked pretty
likely that the deal would work out—the magistrate judge who
supervised the settlement talks entered an order in which he noted that
a settlement conference was held and that the settlement was
contingent upon acceptance and approval by the DOJ. The district court
then entered an administrative closing order, which terminated the suit
without prejudice.

      On December 27, 2012, the Gages purchased a cashier’s check in
the amount of $875,000 and delivered it to their lawyer. Their lawyer
emailed the Assistant U.S. Attorney who represented the government to
inform him that the check would soon be delivered. The Assistant U.S.
Attorney, however, explained that the United States did not have
authority to receive the cashier’s check before the settlement was finally
approved. The Gages’ lawyer held onto the check.

       The DOJ reviewed the settlement agreement and finally signed it
in March 2013. The settlement agreement recited that the United States
alleged that the owners had used the Center’s assets and income in
violation of the regulatory agreements. It also recited that the owners

        4 HUD held off on starting litigation because it first wanted to run an audit.

RMG’s owners did not at first provide subpoenaed records. But when the owners
received a draft audit report it prompted more back and forth on what documents
might still exist. After HUD issued its final audit report, RMG’s owners contended that
they had more records, albeit in a storage unit. The HUD auditor then met with a
representative from RMG in the storage locker to sift through disorganized boxes of
documents. This all took a while.
                                      5

[*5] denied any wrongdoing. The settlement agreement expressly stated
that the United States was not agreeing to or in any way representing
how the settlement amount would affect the owners’ tax bill. It instead
stated that “[t]he Parties agree and acknowledge that the United States
has not made a representation, and nothing in this Agreement
constitutes a representation or agreement by the United States,
concerning the characterization of the Settlement Amount or this
Agreement for purposes of the Internal Revenue laws, Title 26 of the
United States Code.”

       The Gages’ attorney then finally delivered the cashier’s check,
dated December 27, 2012, to the United States on March 18, 2013.

III.   Return and Audit

       On their 2012 income tax return the Gages claimed a business
loss of more than $900,000 on Form 4797, Sales of Business Property,
the sum of the $875,000 payment and their legal fees. The Gages
included the payment as a 2012 loss because they delivered the check to
their attorney before the end of that year. The Commissioner disagreed,
and added a substantial-understatement penalty under section 6662.

      The IRS sent the Gages a notice of deficiency. The Commissioner
has, however, conceded that the Gages’ legal fees are deductible. The
Gages have also conceded a minor issue, and the case was distilled into
a single question: Are the Gages entitled to deduct the $875,000 as a
business loss for 2012?

       The Gages lived in Oklahoma when they filed their petition. 5

                                 Discussion

      The parties agreed to submit the case for decision under Rule 122.
The Gages argue that they are entitled to deduct the $875,000
settlement payment under section 162, which allows the deduction of
ordinary and necessary business expenses.

I.     Deductibility of the Settlement

     The Commissioner has two arguments for why the settlement
amount is not deductible for 2012. The first is one of timing—he says

        5 Appellate venue is therefore presumptively in the Tenth Circuit. See

§ 7482(b)(1)(A).
                                          6

[*6] that the Gages’ check was not actually received by the government
until 2013. His second is that, even if the Gages are right about the
timing, they still can’t win because the settlement was one for punitive
damages. Punitive damages are nondeductible under section 162(f). The
Commissioner argues that the case against the Gages featured a plea
for double damages, and that this transforms the government’s recovery
into an award of punitive damages.

       We’ll start with the timing issue. The Gages are cash-method
taxpayers. What this means is that they can take deductions only for
expenses that they actually paid, not that they merely incurred, during
a particular tax year. See Saviano v. Commissioner, 80 T.C. 955, 964
(1983) (“It is clear that a cash basis taxpayer cannot deduct an expense
incurred unless it has been paid during the taxable year”) (citing Treas.
Reg. § 1.461-1(a)(1)), aff’d, 765 F.2d 643 (7th Cir. 1985); see also § 446(a);
Treas. Reg. § 1.446-1(c)(1)(i) (“Expenditures [by cash-method taxpayers]
are to be deducted for the taxable year in which actually made.”) There’s
a rule for payments by check as well—tax law treats a payment by check
as made when the check is delivered. See Guy v. Commissioner, 105
T.C.M. (CCH) 1626, 1628 (2013). If a check is dated in one year but
cashed in the next year, the deduction will not be allowed absent proof
of delivery in the year of the deduction. See Reynolds v. Commissioner,
79 T.C.M. (CCH) 1376, 1383 (2000), aff’d, 296 F.3d 607 (7th Cir. 2002). 6

       The Gages did not themselves deliver the check to the
government at the end of 2012. They instead gave it to their lawyer to
deliver to the government when the settlement was finally approved.
(And one might, though the parties don’t, question whether the Gages
owed anything under the settlement at all before it was finally
approved.) Their lawyer delivered the check to the United States only
on March 18, 2013. A copy of the United States’s payment record
confirms that this is the date that the check was received. That check
was not cashed by the United States (i.e., actually paid) until March 22,
2013—after the DOJ reviewed and approved the agreement. The record
includes a copy of the check, dated December 27, 2012, and a copy of the
United States’s payment record, showing that the United States
received the Gages’ cashier’s check on March 18, 2013, and cashed it on

        6 There is an important exception for people who wait till the end of the year

to make their charitable contributions. Those count in the year that the mailbox slot
slams shut. See Treas. Reg. § 1.170A-1(b).
                                         7

[*7] March 22, 2013. The payment record proves that the delivery was
made in 2013, not in 2012.

       That would seem to end the matter. But the Gages argue that
under Oklahoma law a payment is made when there is a tender of
payment. They purchased a cashier’s check and delivered it to their
attorney in the case who then offered to give it to the Assistant U.S.
Attorney who worked the case. He said that he could not hold the check
since the settlement agreement had not been approved. The Gages argue
that under Oklahoma law, this uncontested sequence of events is a
tender of payment.

       We don’t need to review Oklahoma law because what constitutes
delivery of a check made in settlement of a federal lawsuit brought by
the federal government is, we hold, a matter of federal, not state, law.
There are a few reasons. The first is that the litigation here was between
an agency of the federal government and a taxpayer. See Trout v.
Commissioner, 131 T.C. 239, 251 (2008) (citing Boyle v. United Techs.
Corp., 487 U.S. 500, 504 (1988)) (finding that litigation between the
federal government agency and a taxpayer is a factor that weighs in
favor of using federal common law). This may not be decisive, but it
weighs in favor of using federal law. Id.

        The second reason is that settlements are contracts, and this
contract was entered into under federal law. It was between a federal
government agency and the Gages, and it was brought under a federal
statute to protect a federal financial interest by the DOJ under its own
procedures for approval of settlements. The federal government settles
cases all over this broad land, and caselaw tells us that this means there
is a strong interest in nationwide uniformity and therefore a need to use
federal common law to develop and maintain a uniform law of
settlements. See id. at 251 (first citing Boyle, 487 U.S. at 504; and then
citing United States v. Kimbell Foods, Inc., 440 U.S. 715, 726, 728
(1979)) (“[A] federal government agency as litigant, contracts entered
into under federal law, and the need for nationwide uniformity in
administration, all point us to the federal common law of contracts as
our source of rules.”). All of these factors point toward using federal law
to decide when the Gages paid the settlement. 7

        7 We do note some lack of clarity in Tenth Circuit caselaw about whether

federal common law or state law generally governs the interpretation of a settlement
agreement where the United States is a party. In United States v. McCall, 235 F.3d
                                           8

[*8] Because we disallowed the deduction on timing alone, we do not
need to decide whether the settlement was for punitive or compensatory
damages.

II.     Penalty

      All that remains is the question of whether the Gages owe an
accuracy-related penalty under section 6662(a).

        Section 6662(a) imposes a 20% penalty for underpayments due to
“any substantial understatement of income tax.” See § 6662(b)(2).
Whether the Commissioner met his burden of production in this case is
a simple math problem. An understatement of tax is “substantial” if it
exceeds the greater of $5,000 or “10 percent of the tax required to be
shown on the return.” § 6662(d)(1)(A). The tax required to be shown on
the return is about $180,000, and 10% of that is about $18,000. This
means that the understatement is way more than 10%, and we find that
the Gages did substantially understate their income tax liability for
2012. 8

      The Gages argue, however, that they claimed the deduction
reasonably and in good faith, which is a defense to a section 6662(a)
penalty. See § 6664(c)(1). The regulation tells us to look at all the
relevant facts and circumstances. See Treas. Reg. § 1.6664-4(b)(1). One
circumstance that indicates reasonable cause and good faith is an honest
misunderstanding of fact or law that is reasonable in light of all of the
facts and circumstances, including the experience, knowledge, and
education of the taxpayer. Id. An important factor for us to look for is

1211, 1215 (10th Cir. 2000), that court held that state law governed the interpretation
of an agreement that settled a federal claim. In an earlier case, however, the same
court held that “[f]ederal common law governs the enforcement and interpretation of
[Title VII claims] because the ‘rights of the litigants and the operative legal policies
derive from a federal source.’” Snider v. Circle K Corp., 923 F.2d 1404, 1407 (10th Cir.
1991) (quoting Fulgence v. J. Ray McDermott & Co., 662 F.2d 1207, 1209 (5th Cir.
1981)), superseded by statute on other grounds, Civil Rights Act of 1991, Pub. L. No.
102-166, 105 Stat. 1071. This possible lack of clarity doesn’t bother us too much here,
because not only did the Gages’ settlement settle a federal claim; it settled a federal
claim of the federal government. This means that all the factors that courts have
identified as directing the use of federal common law point in one direction.
        8 The Commissioner also bears the burden of proving that he complied with

section 6751. See Chai v. Commissioner, 851 F.3d 190, 221 (2d Cir. 2017), aff’g in part,
rev’g in part T.C. Memo 2015-42; see also Graev v. Commissioner, 149 T.C. 485, 493
(2017), supplementing and overruling in part 147 T.C. 460 (2016). The parties
stipulated that he did so.
                                           9

[*9] the extent of the taxpayer’s efforts to figure out his proper tax
liability. Higbee v. Commissioner, 116 T.C. 438, 448–49 (2001).

      We therefore must look at whether the Gages had reasonable
cause and good faith on two distinct issues:

    •   claiming the deduction for 2012 instead of for 2013; and

    •   taking the position that the settlement payment was an ordinary
        and necessary business expense.

        A.      Timing

      The Gages paid for the cashier’s check on December 27, 2012.
They argue that the funds effectively left their control as soon as they
bought it.

        The record we have shows the Gages are competent, skilled
business people able to organize and operate two different corporations,
but that they are not learned in tax law. We do find it more likely than
not that they delivered the check to their attorney with the intent of
fulfilling the terms of the settlement agreement. From their perspective
they were out the $875,000 when they bought the check and gave it to
their lawyer. We think their reporting position on the timing issue was
reasonable under the circumstances, and that they acted in good faith
in thinking they’d made the payment in 2012. 9

        B.      Ordinary and Necessary Business Expense

       That’s not the end of the penalty analysis, because the
Commissioner says they were wrong not only about the year they
claimed the deduction but in thinking they had a right to claim it at all.
To figure this out, we have to give a bit of background on the legal issue
involved. Section 162(a) allows taxpayers to deduct all ordinary and
necessary business expenses. There is an exception, however, in section
162(f) which states that “[n]o deduction shall be allowed under
subsection (a) for any fine or similar penalty paid to a government for
the violation of any law.” (Emphasis added.) Treasury Regulation
§ 1.162-21(b)(1)(ii) and (iii) defines the phrase “fine or similar penalty”
for the purposes of section 162(f) as including an amount paid as a civil

        9 In their briefs they also mentioned, albeit in passing, that their CPA saw that

a check had been issued and reasonably assumed it had been delivered. Since this fact
was not stipulated, we cannot consider it in our analysis.
                                    10

[*10] penalty imposed by federal, state, or local law and an amount paid
in settlement of the taxpayer’s actual or potential liability for a fine or
penalty (civil or criminal). Treasury Regulation § 1.162-21(b)(2), on the
other hand, provides that “[c]ompensatory damages . . . paid to a
government do not constitute a fine or penalty.” The Commissioner
argues that the settlement payment is a “fine or similar penalty” while
the Gages argue it was “compensatory.”

       We have held that civil penalties “imposed for purposes of
enforcing the law and as punishment for the violation thereof” are
“similar” to penalties under section 162(f). Huff v. Commissioner, 80 T.C.
804, 824 (1983) (quoting S. Pac. Trans. Co. v. Commissioner, 75 T.C. 497,
652 (1980), supplemented by 82 T.C. 122 (1984)). On the other hand, we
have held that some civil payments, although labeled “penalties”,
remain deductible if “imposed to encourage prompt compliance with a
requirement of the law, or as a remedial measure to compensate another
party.” Id.; see also Middle Atl. Distribs., Inc. v. Commissioner, 72 T.C.
1136, 1143 (1979) (finding the purpose of a fine or similar penalty under
section 162(f) to “punish and/or deter”).

        Our characterization of a payment under section 162(f) depends
on the origin of the liability giving rise to it. Waldman v. Commissioner,
88 T.C. 1384, 1389 (1987) (first citing Bailey v. Commissioner, 756 F.2d
44, 47 (6th Cir. 1985); and then citing Middle Atl. Distribs., 72 T.C. at
1144–45), aff’d per order, 850 F.2d 611 (9th Cir. 1988). If the origin of
the liability is a law designed to compensate an injured party for its
damages, then section 162(f) is likely inapplicable. See, e.g., Mason &
Dixon Lines, Inc. v. United States, 708 F.2d 1043, 1047–48 (6th Cir.
1983) (liquidated damages for violating state truck-weight limits
compensatory). If the origin of the liability is a law designed to punish
or deter conduct committed by the taxpayer, then the payment is likely
nondeductible under section 162(f). See, e.g., True v. United States, 894
F.2d 1197, 1205 (10th Cir. 1990) (“on balance” Federal Water Pollution
Control Act damages are a penalty because they serve “a deterrent and
retributive function similar to a criminal fine”); Huff, 80 T.C. at 824
(civil penalty punitive because statute designed to penalize).

      The relevant law here is the National Housing Act, 12
U.S.C. §§ 1701–1750, and section 421 of the Housing and Community
Development Act of 1987, 12 U.S.C. § 1715z-4a. It allows the United
States to recover double damages, costs, and fees for breach of a
regulatory agreement with HUD. The United States also sought in its
                                        11

[*11] complaint recovery under federal common-law theories of unjust
enrichment, fraud, disgorgement of profits, recoupment, and restitution.

       The caselaw is unclear about what purpose the recovery of double
damages might serve. The Second Circuit has held that that “[t]he
purpose underlying the equity[-]skimming statue[10]was to provide the
government with a greater deterrent by affording it an additional
remedy beyond the traditional remedies of foreclosure and suit for
breach of contract.” Livecchi, 771 F.3d at 352 (emphasis added) (quoting
United States v. Livecchi, No. 03-CV-6451P, 2005 WL 2420350, at *7
(W.D.N.Y. Sept. 30, 2005)). The First Circuit, however, limits recovery
of double damages to only a subset of cases brought under the statute.
In United States v. Cofield, 215 F.3d 164, 171 (1st Cir. 2000), it explained
that “[d]ouble damages for the government on a deterrence rational
make sense primarily where the defendant is guilty of substantial or
repeated fault.” A district court in that circuit acknowledged that the
attorney general may, not must, recover double the value of the assets
and income of the property, and whether to award double damages in
any potential case is ultimately left to the discretion of the trial court.
See United States v. Giordano, 898 F. Supp. 2d 440, 468 (D.R.I. 2012).

      We conclude from this that the double-damages provision under
which the government sued the Gages may serve both to compensate the
government and to punish. We also conclude that is not clear from the
text of the statute or the caselaw construing it which purpose was
present in the Gage’s settlement.

        And the terms of the settlement itself don’t help us much either.
The agreement specified that the Gages in conjunction with other
owners were responsible for paying the United States $1.75 million by
certified check on the effective date of the agreement. 11 It promised to
release the Gages from any civil or administrative monetary claim once
they fully paid. But there ends any help it might give us in
characterizing the settlement.

       We have one last place to look. When a settlement agreement is
silent on the character of the payment, we have looked for other evidence

       1012 U.S.C. § 1715z-4a has been described as an equity-skimming statute. See
United States v. Livecchi, 711 F.3d 345, 352 (2d Cir. 2013).
         11 The settlement agreement was entered into between the United States and

the owners of the Center. The agreement required the Gages and one other couple to
collectively satisfy the $1.75 million settlement amount.
                                   12

[*12] of the parties’ intent. See Ziroli v. Commissioner, T.C. Memo.
2022-75, at *10. We have looked in other cases at documents sent
between the parties that describe settlement negotiations, or relied on
parties’ testimony about their negotiations. But we have none of that
here: This case was submitted under Rule 122. There is no
documentation of the parties’ negotiations included in the exhibits, and
we don’t even know if any exists.

      We do have one bit of proof about that intent. As the Gages
emphasize, the amount they paid in settlement of the claim was far less
than the actual damages claimed, and much less than double those
damages.

       In Hawronsky v. Commissioner, 105 T.C. 94, 96 (1995), aff’d
without published opinion, 98 F.3d 1338 (5th Cir. 1996), a taxpayer paid
over $275,000 to the Department of Health and Human Services for an
alleged violation of 42 U.S.C. § 254l(f)(1)(B)(iv). Of that amount, around
$126,000 was trebled principal and around $145,000 was trebled
interest. Hawronsky, 105 T.C. at 96. We held in Hawronsky that “the
treble damages penalty . . . serves a deterrent and a retributive function
similar to a criminal fine” because the damages “amount has no
demonstrated relationship to the cost imposed on the Government of
replacing petitioner’s services.” Id.

       Here we think, in contrast, that there was such a “demonstrated
relationship.” Since HUD’s loss was more than $4 million while the
Gages with the other owners settled for only $1.75 million, we think it
was reasonable for the Gages to have thought their payment more
compensatory than punitive. This might not be enough if we had to
figure out whether the Gages were entitled to deduct the settlement. But
that’s not the question we’re asking here. We are asking only whether
the Gages’ claiming the deduction was reasonable. And here the proof—
at least proof of the ambiguity of the situation—weighs strongly in their
favor. When the text of the statute creating a cause of action is
ambiguous, when the specific text of the parties’ settlement specifically
avoids giving us an answer, and when even the amount of the settlement
could be read both ways, we can find it more likely than not that the
Gages’ return position was at least reasonable and taken in good faith.

      We are not drawing a bright line that holds treble damages are
always punitive and double damages never are. We couldn’t. The
Supreme Court explained in United States v. Bornstein, 423 U.S. 303,
316 (1976), a case under the False Claims Act, that “the Government’s
                                    13

[*13] actual damages are to be doubled before any subtractions are
made for compensatory payments previously received by the
Government from any source. “This method of computation, which
maximizes the deterrent impact of the double-damages provision and
fixes the relative rights and liabilities of the respective parties with
maximum precision, best comports in our view with the language and
purpose of the Act.” Id. at 316–17.

       That kind of statutory precision isn’t present here. The settlement
amount here was only $1.75 million while HUD’s loss was about
$4 million. And here there was no mention in the settlement that actual
damages were being “doubled before any subtractions [were] made.” Id.
at 316. That means that the facts here show that it is a close legal
question, and we therefore find that the Gages were reasonable to report
the settlement as they did, and that they also acted in good faith in doing
so.

      They win on the penalty.

      Decision will be entered under Rule 155.