United States Court of Appeals
                       For the First Circuit

No. 13-2144

               FRESENIUS MEDICAL CARE HOLDINGS, INC.,

                        Plaintiff, Appellee,

                                 v.

                      UNITED STATES OF AMERICA,

                        Defendant, Appellant.


            APPEAL FROM THE UNITED STATES DISTRICT COURT

                  FOR THE DISTRICT OF MASSACHUSETTS

           [Hon. Douglas P. Woodlock, U.S. District Judge]


                               Before

                    Thompson, Baldock* and Selya,
                           Circuit Judges.


     Anthony T. Sheehan, Attorney, Tax Division, United States
Department of Justice, with whom Kathryn Keneally, Assistant
Attorney General, Tamara W. Ashford, Principal Deputy Assistant
Attorney General, Carmen M. Ortiz, United States Attorney, Gilbert
S. Rothenberg, Attorney, Tax Division, and Bruce R. Ellisen,
Attorney, Tax Division, United States Department of Justice, were
on brief, for appellant.
     James F. Bennett, with whom William H. Kettlewell, Maria R.
Durant, Megan S. Heinsz, Collora LLP, and Dowd Bennett LLP were on
brief, for appellee.


                           August 13, 2014



     *
         Of the Tenth Circuit, sitting by designation.
            SELYA,   Circuit   Judge.       This     tax-refund    litigation

requires us to explore the uncertain terrain surrounding the tax

treatment of settlement payments made under the False Claims Act

(FCA), 31 U.S.C. §§ 3729-3733.            We hold, as a matter of first

impression in this circuit, that in determining the tax treatment

of an FCA civil settlement, a court may consider factors beyond the

mere presence or absence of a tax characterization agreement

between the government and the settling party.           While this holding

may be at odds with the decision in Talley Industries Inc. v.

Commissioner, 

(9th Cir. 1997), we are convinced that

generally accepted principles of tax law compel us to part company

with the Ninth Circuit.

            The case before us involves the tax treatment of roughly

$127,000,000 paid to the government in partial settlement of a

kaleidoscopic array of claims.       The district court concluded that

where, as here, the parties had eschewed any tax characterization,

the critical consideration in determining deductibility was the

extent to which the disputed payment was compensatory as opposed to

punitive.    At trial, the court's jury instructions embodied this

conclusion and directed the jury's focus to the economic realities

of the situation.     The jury split the baby and found that a large

chunk of the money ($95,000,000) was deductible.               Accepting this

finding,    the   court   ordered   tax    refunds    which,    with   accrued

interest, totaled more than $50,000,000.


                                    -2-
             The government appeals.      We take note of the district

court's skillful handling of this complicated litigation, and we

affirm.

I.   BACKGROUND

             Fresenius Medical Care Holdings, Inc. is a major operator

of dialysis centers in the United States and around the world.

Between 1993 and 1997, whistleblowers brought a series of civil

actions against Fresenius1 under the FCA.        The government paid heed

and, in 1995, a number of government agencies opened civil and

criminal investigations into Fresenius's dealings with various

federally funded health-care programs.           Because the FCA was in

play, Fresenius faced potential liability for treble damages.             See

31 U.S.C. § 3729(a).

             In 2000, Fresenius entered into a complex of criminal

plea and civil settlement agreements with the government.             These

agreements     called   for   Fresenius   to   pay,   in    the   aggregate,

$486,334,232, $101,186,898 of which was earmarked as criminal

fines.    The     remainder   —   $385,147,334   —    was   the   price   for

Fresenius's absolution from civil liability.

             The civil settlement agreements released a gallimaufry of

claims against Fresenius (including claims under the FCA).                Of



      1
       These actions were originally brought against National
Medical Care, Inc. (NMC), which thereafter was acquired by
Fresenius. For ease in exposition, we refer to Fresenius, NMC, and
NMC's subsidiaries, jointly and severally, as Fresenius.

                                    -3-
paramount      pertinence    for   present     purposes,     these   agreements

eschewed any commitment as to how the payments were to be treated

for tax purposes.

              Despite the global nature of the settlement, a new

dispute soon enveloped the parties.            This dispute centered on the

tax treatment of the sums paid.           Over time, the parties pared the

scope of their dispute: they agreed that the amounts paid as

criminal fines, totaling $101,186,898, were not deductible; and

that,   out    of    the   payments   required    by   the   civil   settlement

agreements, an amount equal to single damages under the FCA

($192,550,517) was deductible.            They could not agree to the tax

treatment of the balance of the civil settlements ($192,596,817).

              Acting under protest, Fresenius filed amended tax returns

that    took    no    deduction    for     this   balance.      Following    an

administrative appeal, the government conceded that a further

figure equal to the amount owed to the FCA whistleblowers as qui

tam relators ($65,800,555), see 

was deductible.

Fresenius then commenced a tax-refund action in the United States

District Court for the District of Massachusetts for the purpose of

determining the deductibility of the amount still in dispute

($126,796,262).       See 26 U.S.C. § 7422.

              After some preliminary skirmishing, the district court

convened a jury trial.        At the close of all the evidence, the court

reserved decision on the government's Rule 50 motion for judgment


                                         -4-
as a matter of law and submitted the tax characterization question

to the jury.     The jury found that $95,000,000 was deductible.         The

court then denied the reserved motion.

           In    the   aftermath   of   the   jury   verdict,   the   parties

stipulated to the verdict's tax effects.             Thereafter, the court

entered judgment for Fresenius in the amount of $50,420,512.34, see

Fresenius Med. Care Holdings, Inc. v. United States, No. 08-12118,

, at *1 (D. Mass. May 9, 2013), and denied the

government's renewed motion for judgment as a matter of law.            This

timely appeal followed.

II.   ANALYSIS

           In this venue, the government advances two claims of

error.   Its first claim of error challenges the district court's

denial of its motions for judgment as a matter of law and,

therefore, engenders de novo review.          See Palmquist v. Shinseki,

, 70 (1st Cir. 2012).              Its second claim of error

challenges the district court's jury instructions and, as framed,

likewise engenders de novo review. See DeCaro v. Hasbro, Inc., 

, 61 (1st Cir. 2009) (explaining that de novo review obtains

when a claim of instructional error contends that jury instructions

failed to "capture the essence of the applicable law"). We address

these claims of error sequentially.




                                    -5-
                   A.    Judgment as a Matter of Law.

           The government moved for judgment as a matter of law at

the close of all the evidence and renewed its motion following the

verdict.   See Fed. R. Civ. P. 50(b).        Each time, the district court

rejected the government's motion.        The government now challenges

these rulings.

           When the denial of a Rule 50(b) motion is appealed, a

reviewing court must view the evidence in the light most flattering

to the verdict and must draw all reasonable inferences therefrom in

favor of the verdict. See Casillas-Díaz v. Palau, 

, 80-

81 (1st Cir. 2006).      The challenge will succeed only if reasonable

minds, viewing the evidence in this light, "could not help but

reach an outcome at odds with the verdict."                 Mandel v. Bos.

Phoenix,   Inc.,   

,   208    (1st   Cir.   2006)   (internal

quotation mark omitted).

           As a working principle, a motion for judgment as a matter

of law ordinarily falls into one of two generic categories.               The

first (and most common) type of motion challenges evidentiary

sufficiency; that is, whether the evidence of record, when taken

most favorably to the nonmoving party, is adequate to prove a case

under an uncontroversial legal regime.           See, e.g., Cook v. R.I.

Dep't of Mental Health, Retardation, & Hosps., 

, 21 (1st

Cir. 1993).   The second type of motion tests the applicable law;

its focus is less on the evidence and more on whether the verdict,


                                   -6-
as rendered, depends on an incorrect legal regime.                   See, e.g.,

Grande v. St. Paul Fire & Marine Ins. Co., 

, 280-81

(1st Cir. 2006).

             This case is of the latter stripe.                  The government

concedes (or, at least, does not contest) that the verdict is based

on a sufficient evidentiary foundation under the legal regime

explicated by the district court.              It argues, however, that this

legal regime is faulty and that, under a correct legal regime, the

evidence is insufficient to sustain the verdict. We turn, then, to

the applicable law.

             The foundational elements of the relevant tax law are

easily summarized.       The Internal Revenue Code allows a business to

deduct all of its "ordinary and necessary expenses paid or incurred

during the taxable year."             26 U.S.C. § 162(a).          Because tax

deductions "are matters of legislative grace[,] the taxpayer bears

the burden of proving entitlement to any deduction."                    MedChem

(P.R.), Inc. v. Comm'r, 

, 123 (1st Cir. 2002) (citing

INDOPCO, Inc. v. Comm'r, 

, 84 (1992)).

             Congress has ordained that no deduction may be made "for

any fine or similar penalty paid to a government for the violation

of any law." 26 U.S.C. § 162(f). Implementing regulations provide

that   the    universe     of    nondeductible      fines    includes    "civil

penalt[ies]"     as   well      as   amounts    "[p]aid     in   settlement   of

. . . potential liability" for any nondeductible fine or penalty.


                                       -7-
26    C.F.R.    §   1.162-21(b).        Withal,      "[c]ompensatory      damages

. . . paid to a government do not constitute a fine or penalty."

a critical distinction exists between items such as

fines or penalties (which are nondeductible) and items such as

compensatory damages (which are deductible).

            This     taxonomy     interfaces     awkwardly      with    the    FCA's

provision for treble damages.           See 31 U.S.C. § 3729(a).              Single

damages are plainly compensatory and, thus, plainly deductible.

See   26   C.F.R.    §    1.162-21(c)    (providing,      in    example       1,   for

deductibility       of   actual   damages     recovered   under    an   analogous

statute).      But that is not the end of the matter; some amounts in

excess of single damages generally are regarded as compensatory,

see Cook Cnty. v. United States ex rel. Chandler, 

,

130-31 (2003), and therefore deductible.             This makes good economic

sense: an enforcement action following a fraud brings new costs and

delays and requires a recovery of more than single damages to make

the   government     whole.       See   id.;   see   also      United   States      v.

Bornstein, 

, 315 (1976) (describing FCA multiple

damages as "necessary to compensate the Government completely for

the costs, delays, and inconveniences occasioned by fraudulent

claims").      Such additional costs may include — but are not limited

to — the expenses of prosecuting the action and the time-value of

the delayed receipt of single damages (generally represented by an




                                        -8-
imputation of interest). See, e.g., 

; see

also Fresenius, 

, at *5-6.

          While   these   legal   principles   are   uncontroversial,

plotting the sometimes hazy line that separates the compensatory

from the punitive can be tricky business.      See 

(acknowledging that "the tipping point between payback and

punishment defies general formulation").        That difficult line-

drawing exercise is central to the case at hand.

          At trial, Fresenius exhibited its recognition of the

dichotomy between compensatory and punitive payments. To this end,

it introduced evidence of the compensatory nature of the disputed

sums. The district court also recognized this dichotomy. It began

its appraisal by confirming that the civil settlement agreements

"unambiguously decline to address the punitive or compensatory

nature of the settlement payments for [tax] purposes."    Fresenius,

, at *7.    In the absence of any agreement by the

parties, the court tasked the jury with determining "what amount

[was] necessary to put the government in the position it would have

been in had Fresenius not" engaged in the underlying misconduct.

In essence, the court — after placing the burden of proof on

Fresenius — asked the jury to measure deductibility in terms of the

economic realities of make-whole remediation.

          The government takes umbrage with this approach.        It

asseverates that the absence of an agreement between the parties as


                                  -9-
to whether the payments will be deductible defeats Fresenius's

claim of deductibility.         In advancing this asseveration, the

government assigns talismanic significance to the presence or

absence of a tax characterization agreement between the settling

parties.

             The government's position is founded almost exclusively

on the decision in Talley. Like this case, Talley involved the tax

treatment of an FCA settlement.         See 

.

The Ninth Circuit started from the common understanding that FCA

multiple     damages   can   serve    either   compensatory   or   punitive

purposes.2    See 

   To the extent that the settlement sum

exceeded single damages, the court reasoned, the case presented a

question "as to the characterization and the purpose of" that

portion of the settlement.      

settlement agreement

failed to provide clarity, the court remanded to the Tax Court and

directed that this question be answered by examining "whether the

parties intended the payment to compensate the government . . . or

to punish" the taxpayer.      

process, the court stressed

that the taxpayer bore the burden of proving eligibility for

deductions and, therefore, would suffer the consequences of any

lack of evidence as to the parties' intent.         See 

     2
       At the time      material to the Talley decision, the FCA
provided for double      damages rather than treble damages.     See

. We agree with the parties and the
district court that,    for present purposes, this distinction makes
no difference.

                                     -10-
             The government argues that the Talley court's analytic

approach creates a rule requiring that any FCA civil settlement

sums in excess of single damages (except, perhaps, whistleblowers'

fees) be treated as punitive fines (and, thus, nondeductible)

unless the parties have manifested a contrary intention.                   As the

government reads Talley, that manifested intent can be proven only

by showing a tax characterization agreement between the government

and the taxpayer.        In its view, Talley suggests that economic

reality     has   no   bearing.     Building    on   this    foundation,       the

government argues that the court below should have entered judgment

in its favor as a matter of law once it found that the parties had

abjured any tax characterization agreement.

             We cannot accept the government's rationale. A rule that

requires a tax characterization agreement as a precondition to

deductibility      focuses    too    single-mindedly        on    the     parties'

manifested intent in determining the tax treatment of a particular

payment.    Such an exclusive focus would give the government a whip

hand   of     unprecedented       ferocity:    it    could       always    defeat

deductibility by the simple expedient of refusing to agree — no

matter how arbitrarily — to the tax characterization of a payment.

             Moreover, an exclusive focus on manifested intent, such

as the government proposes, would be an anomaly in tax law.                  When

mulling transactions between private parties, courts that are

required to make tax characterizations typically look to substance


                                     -11-
— that is, the economic reality of the particular transaction,

objectively viewed — rather than to the form chosen by the parties.

See, e.g., United States v. Eurodif S.A., 

, 317-18

(2009); Boulware v. United States, 

, 429-30 (2008);

Neb. Dep't of Revenue v. Loewenstein, 

, 134 (1994);

Frank   Lyon   Co.    v.   United   States,   

,   573   (1978);

Helvering v. F. & R. Lazarus & Co., 

, 255 (1939);

Palmer v. Bender, 

, 555-56 (1933). Logic suggests that

this approach ought to apply equally to the tax treatment of

settlement payments.        See, e.g., Francisco v. United States, 

, 321-22 (3d Cir. 2001); Delaney v. Comm'r, 

, 23-

24 (1st Cir. 1996). In that context, too, "court[s have] the right

— indeed, the duty — to look beyond the language subscribed to by

the parties."        Rozpad v. Comm'r, 

, 4 (1st Cir. 1998)

(internal quotation marks omitted).           Substance matters.

           This is not to say that the intent of the settling

parties is immaterial.       It is not.      See 

(explaining that the "intent of the payor" of a settlement, though

not dispositive, is often "the most persuasive evidence of the

nature of claims settled").          If the government and a defendant

settle an FCA claim and specifically agree as to how the settlement

will be treated for tax purposes, it is hard to envision any reason

why a reviewing court should not honor that agreement.




                                      -12-
               But that is not this case.          Here, the parties did not

agree on the tax characterization of the civil settlement payments

(indeed, during the negotiations leading to the settlement, the

government      apparently       refused   to    discuss    tax     consequences).

Rather,    the        parties'     manifested     intent     with     respect   to

deductibility was expressed as an agreement not to agree; they

intentionally left the question open.                  Under generally accepted

principles of tax law, a court's inquiry should then shift to the

economic realities of the transaction.

               The    government    resists     this    common-sense     approach.

Relying solely on Talley, it argues that the FCA settlement context

is special and that economic reality is irrelevant.3                   It insists

that the only pertinent inquiry is one that seeks to determine

whether    a    tax    characterization       agreement    exists     between   the

government and the settling party.              We disagree.

               Talley offers an indistinct beacon by which to steer.

The case is distinguishable on its facts and its message is

unclear.       If Talley stands for the proposition asserted by the




     3
       One reason that the FCA context is special, the government
suggests, is that the government is a party both to the settlement
agreement and to the tax dispute. But the tax treatment of a
transaction is determined by the provisions of the Internal Revenue
Code, and the fact that one party to a transaction is the
government itself does not alter this truism. See Wash. Mut. Inc.
v. United States, 

, 1221 (9th Cir. 2011).

                                       -13-
government,4   then   Talley   is   incorrectly   decided   and    does   not

deserve our allegiance.

          The government's proposed rule is also in serious tension

with yet another fundamental tenet of tax law.         This tenet holds

that amounts paid or received in settlement should receive the same

tax treatment, to the extent practicable, as would have applied had

the dispute been litigated and reduced to judgment.               See, e.g.,

Lyeth v. Hoey, 

, 196 (1938); Freda v. Comm'r, 

, 574 (7th Cir. 2011); Alexander v. IRS, 

, 942 (1st

Cir. 1995).    The government's position here inters that tenet in

the graveyard of forgotten canons.

          When an FCA claim is tried rather than settled, there

will perforce be no characterization agreement available to guide

the tax treatment of awarded damages.       Nevertheless, some portion

of the award beyond single damages may subsequently be found to

have a compensatory purpose.        See 

-31;

.     Hence, that portion of the award will



     4
       It is debatable whether Talley actually stands for this
proposition. Although the government's reading is not an unnatural
one, it may be seeing more in Talley than the decision portends.
On remand following the Ninth Circuit's decision in Talley, the Tax
Court appeared open to considering the economic substance of the
settlement, but was unable to go down that path because the parties
had not developed an appropriate factual record. See Talley Indus.
Inc. v. Comm'r, 

, 2196 (1999) (noting that
"[n]either party made a serious effort to quantify the Government's
actual losses in excess of its 'singles' damages"), aff'd, 18 F.
App'x 661 (9th Cir. 2001). In contrast, Fresenius meticulously
developed just such a record.

                                    -14-
be deductible.     See 26 C.F.R. § 1.162-21(b).           The same result

logically should obtain in the settlement context.           Thus, a rule

that requires a tax characterization agreement as a precondition to

deductibility would produce an infelicitous asymmetry.

           We are not insensitive to the government's fear that

refusing to require a tax characterization agreement not only makes

the eventual deductibility of settlement payments difficult to

predict but also may create perverse incentives.5         But such policy

considerations    cannot   trump   either   the   clear    statutory    and

regulatory language conferring deductibility upon compensatory

payments or the case law's sensible emphasis on economic reality.

           The government also predicts that if we reject its

proffered rule, the result will be the frustration of public

policy.   This is so, it says, because those who violate the FCA

should, when brought to book, be made to feel the sting of

punishment.   This prediction overlooks the provenance of section

162(f),   which   expressly   disallows     deductions    for   fines   and

penalties.    That statute represents Congress's codification of

earlier precedent that was concerned with exactly the same policy



     5
       The government conjures up a parade of horribles suggesting,
for example, that corporations may stall settlement negotiations in
order to build up imputed interest.            Despite these glum
predictions, we are confident that the world will remain firmly on
its axis. Viewed in real-world terms, we think that — if we may
borrow a phrase — the government's "[p]resent fears [a]re less than
horrible imaginings." William Shakespeare, Macbeth, act 1, sc. 3
(circa 1606).

                                   -15-
considerations that the government now seeks to invoke.                           See

Stephens v. Comm'r, 

, 672 (2d Cir. 1990) (limning

background to passage of amendments to section 162); see also Tank

Truck Rentals, Inc. v. Comm'r, 

, 35 (1958) (prohibiting

deductibility,        before      passage    of   section   162(f),      where    such

treatment would severely frustrate sharply defined governmental

interest).       Because Congress has calibrated this balance, we

decline the government's invitation that we recalibrate it by

judicial fiat.

             To say more about this matter would be to paint the lily.

We hold that, in determining the tax treatment of an FCA civil

settlement, a court may consider factors beyond the mere presence

or    absence   of     a   tax    characterization       agreement      between   the

government and the settling party.                   Because the district court

charged the jury in accordance with this legal regime and the

government      has    not     argued     that    the   evidence   of    record    is

insufficient     to    support      the     jury's   verdict,   the   government's

motions for judgment as a matter of law were appropriately denied.

                             B.    Jury Instructions.

             The government's remaining claim of error need not detain

us.    This claim of error implicates the district court's jury

instructions.         For the most part, this claim rests on the same

argument that we considered and rejected in Part II. 

.

Those arguments are no more persuasive in the context of jury


                                          -16-
instructions and, to the extent that they are repeated, we reject

the claim of instructional error out of hand.

             The   government     does,    however,       offer   one      additional

remonstrance: it calumnizes what it calls the district court's

"residual    approach"     to   the   question      of     deductibility.       This

approach is exemplified, the government says, by the court's

instruction that payments can only be considered punitive if they

are "above what is necessary" to compensate the government.

             Before us, the government faults this rationale, arguing

that there is no basis to assume either that settlement payments

must   be   applied   to    compensatory         damages    first     or    that,    in

settlement negotiations, the government is conceding punitive

dollars first.      Settlement negotiations, after all, require some

level of compromise, with parties seeking agreement on a mutually

acceptable    discount     from   the     face    value    of   the   claim.        The

government suggests that it would make more sense to apply this

settlement discount evenly across the deductible and nondeductible

portions of the underlying claim.

             The government's argument has a patina of plausibility.

When multi-faceted claims are settled, courts sometimes have upheld

tax allocations that apply the settlement discount pari passu

across the deductible and nondeductible portions of the original

claim.   See, e.g., 

; 

; 

.


                                        -17-
             Delaney provides an apt illustration of this praxis.

There, the taxpayer won a tort judgment of $287,000, out of which

$175,000 (61%) was excludable from taxable income as personal

injury damages.    See 

.   The remainder of the

judgment constituted taxable income (prejudgment interest).        See

appeal was pending, the parties settled for $250,000.

See 

Revenue Service prorated the settlement along

the lines indicated by the judgment and determined that only 61%

was excludable from taxable income.       See 

that

proration.    See 

             We need not — and do not — reach the merits of this

argument. Though it has some plausibility, it comes too late. The

government did not clearly articulate this argument in the district

court and, in all events, did not raise it in its post-charge

objections to the jury instructions.6    See Fed. R. Civ. P. 51.    We

have held, with a regularity bordering on the monotonous, that

claims of instructional error not seasonably advanced in the trial



     6
       At oral argument, the government asserted that its request
to have the district court instruct the jury in line with its
version of the Talley rule, see 

, encompassed this point.
But Talley does not support the point. Moreover, we have carefully
reviewed both the government's proffered instructions and its
objections to the district court's charge; and we find nothing in
them that resembles the "priority" argument that the government
makes on appeal. The fact that acceptance of the Talley rule would
have rendered the question of priority moot does not excuse either
the government's failure to request the instruction or its failure
to object to the instruction's omission from the charge as given.
See Romano v. U-Haul Int'l, 

, 662-63 (1st Cir. 2000).

                                  -18-
court are waived and cannot be broached for the first time on

appeal.      See, e.g., Ji v. Bose Corp., 

, 125 (1st Cir.

2010); Muñiz v. Rovira, 

, 6-7 (1st Cir. 2004); Davis v.

Rennie, 

, 100 (1st Cir. 2001); Wells Real Estate, Inc.

v. Greater Lowell Bd. of Realtors, 

, 809 (1st Cir.

1988).      So it is here.7

III.       CONCLUSION

               We need go no further. For the reasons elucidated above,

the judgment of the district court is



Affirmed.




       7
       To be sure, we have some highly circumscribed discretion to
reach out for and review unpreserved claims of instructional error.
See 

. But this discretion is reserved for
exceptional cases and must be exercised sparingly.        See id.;
Toscano v. Chandris, S.A., 

, 385 (1st Cir. 1991). The
case at hand falls within the general waiver rule, not within the
long-odds exception to it.

                                   -19-