Altria Grp., Inc. v. United States
| Decision Date | 19 January 2022 |
| Docket Number | Civil Action No. 3:19-cv-910 |
| Citation | 580 F.Supp.3d 298 |
| Parties | ALTRIA GROUP, INC., Plaintiff, v. UNITED STATES of America, Defendant. |
| Court | U.S. District Court — Eastern District of Virginia |
Todd Douglass Kelly, Jennifer Zoe Gindin, Pro Hac Vice, Royce Leon Tidwell, Pro Hac Vice, Sanessa Griffiths, Pro Hac Vice, Skadden, Arps, Slate, Meagher & Flom, Washington, DC, for Plaintiff.
Richard Jeremy Hagerman, Pro Hac Vice, Elisabeth Michaelle Dale Bruce, US Department of Justice, Washington, DC, Robert P. McIntosh, United States Attorney's Office, Richmond, VA, for Defendant.
This matter is before the Court for resolution on the merits based on the stipulated factual record. See ORDER, ECF No. 23; see also JOINT STATUS REP., ECF No. 22.
The issue here presented is whether 26 U.S.C. § 162(f) foreclosed Altria Group, Inc. ("Altria") from claiming as an ordinary and necessary business expense deduction on its 2012 federal income tax return, the portion of a punitive damage award that was paid to the State of Oregon pursuant to Oregon's so-called "split recovery statute" ( Or. Rev. Stat. § 31.735 ). The resolution of that issue turns on whether the portion of a punitive damage award that was paid to Oregon under that state statute "constituted ‘any fine or similar penalty paid to a government for the violation of any law.’ " JOINT STATUS REP. 2, ECF No. 22 (quoting 26 U.S.C. § 162(f) (2012) ). The issue was fully briefed, and the parties agreed to submit the case for decision on the basis of the briefing and the stipulated record. Thereafter, the Court asked for oral argument (ECF No. 37), and, on December 16, 2021, the parties presented arguments and visual presentations in aid thereof. Based on the stipulated record, the briefs, the oral arguments, and the related visual presentations, the Court finds that the payment made to Oregon by Altria pursuant to Oregon's split recovery statute is a deductible business expenses within the meaning of Section 162(f).
To understand the issue under the federal tax law here in dispute, Section 162(f), it is necessary briefly to outline: (a) the case that gave rise to the punitive damage award ( Williams v. Philip Morris Inc. );1 and (b) the Oregon split recovery statute under which Oregon took a part of that award. It is also necessary to understand (c) a related case brought by the State of Oregon ( State v. Philip Morris ) and (d) its aftermath as to both Philip Morris and the Williams Estate.2 Lastly, and before discussing the resolution of the issues presented for decision, it is important to understand: (e) the federal tax statutes at issue; (f) Altria's 2012 tax return; and (g) Oregon's substantive punitive damage statutes. Each will be discussed briefly before turning to the tax issue.
In 1997, the estate of Jesse Williams sued Philip Morris alleging that Williams' death from lung cancer
was the result of negligence and fraud on the part of Philip Morris. Williams v. Philip Morris Inc., 340 Or. 35, 127 P.3d 1165, 1167-68 (2006). Williams' Estate prevailed on its misrepresentation claim on which the jury awarded economic damages ($21,485.80), non-economic damages ($800,000.00), and punitive damages ($79,500,000.00). Id. at 1171. Williams' Estate also prevailed on its negligence claim on which the jury awarded the same sums for economic and noneconomic damages and found that Williams and Philip Morris were equally negligent. The jury awarded no punitive damages on the negligence claim. Id.
Philip Morris appealed the jury verdict, including the award of punitive damages. The punitive damages award was vacated as a result of the decision of the Supreme Court of the United States in Philip Morris USA v. Williams, 549 U.S. 346, 127 S.Ct. 1057, 166 L.Ed.2d 940 (2007). On remand, the Oregon Supreme Court affirmed the punitive award for other reasons. Williams v. Philip Morris Inc., 344 Or. 45, 176 P.3d 1255 (2008), cert. dismissed as improvidently granted.
Part of the punitive damage award in Williams v. Philip Morris Inc. was paid to Oregon pursuant to the State's split recovery statute, so it is appropriate to pause here to understand the nature of a split recovery statute generally, and to understand Oregon's version of that legislative genre. Generally speaking:
Split Recovery Statutes, The Sedona Conference 1 (2011) https://thesedonaconference.org/sites/default/files/commentary_drafts/DistributionSplit%2520Recovery%2520Statutes.pdf (emphasis added).
Not all such statutes operate in the same way. The pertinent part of Oregon's version is as follows:
The general, purpose of Or. Rev. Stat. ch. 147 () is, as its title states, to help "Victims of Crime and Mass Destruction." That purpose is accomplished by funding provided by the State and by taking funds from perpetrators of crimes and from punitive damage awards made in the state courts and depositing them in the Criminal Injuries Compensation Account. That account provides money, medical treatment, counseling, and a host of other services required to help victims of crime deal with or recover from the crimes of which they are victims.
Also, in 1997, Oregon sued several United States cigarette manufacturers, including Philip Morris, alleging, inter alia, unfair trade practices and violations of Oregon's Racketeer Influenced and Corrupt Organizations Act ("RICO") statute. State v. Am. Tobacco Co., Inc., et al., No. 9706-04457, 1997 WL 33633043 (Or. 1997), (but the case is generally known as State v. Philip Morris )6 . There, Oregon claimed that "it had incurred hundreds of millions of dollars in increased Medicaid expenses for medical care for low-income Oregon residents and increased health insurance premiums for public employees as a result of the tobacco companies' unlawful conduct." Williams v. RJ Reynolds Tobacco Co., 271 P.3d at 105-06.
In 1998, Oregon settled its claims in the State's Case as part of a multi-state Master Settlement Agreement ("MSA") between 46 states and several tobacco companies including Philip Morris. Id. at 106. As part of the MSA, the settling states "agreed to release the tobacco companies from past and future claims relating to the manufacturing of, sale of, and exposure to tobacco products, as well as claims relating to research statements or warnings regarding tobacco products." Id. (footnote omitted). The MSA was signed in November 1998. Id.
In April 1999, and as a result of the MSA, Philip Morris sent a letter to the Oregon Attorney General stating that, notwithstanding Oregon's split recovery statute, no portion of the punitive damage award from Williams v. Philip Morris Inc. was due to Oregon. Williams v. RJ Reynolds Tobacco Co., 271 P.3d at 106. That, according to Philip Morris, was because, when Oregon executed the MSA, Oregon had released its claim under the split recovery statute to the 60 percent of the punitive damages in Williams v. Philip Morris Inc. Id. Oregon then moved in State v. Philip Morris for declaratory relief respecting whether, under the split recovery statute, the State was entitled to part of the punitive damages under the split recovery statute made in Williams v. Philip Morris Inc., notwithstanding the release in the MSA. See Williams v. RJ Reynolds Tobacco Co., 351 Or. 368, 271 P.3d 103, 106-07 (2011).
The trial court stayed further proceedings in Williams v. Philip Morris Inc. while Philip Morris' appeal was pending. Id. Once the Williams v. Philip Morris Inc. award was affirmed, the trial court lifted the stay, consolidated Williams v. Philip Morris Inc. and State v. Philip Morris, and recommenced proceedings on Oregon's declaratory judgment action. Williams v. RJ Reynolds Tobacco Co., 271 P.3d at 106. The trial court ultimately ruled in favor of Philip Morris, holding that, by virtue of the MSA, Oregon had released any right to be paid under the split recovery statute Id.
Oregon then appealed directly to the Oregon Supreme Court, id. at 108, which reversed the trial court, finding that the "MSA's definitions of ‘Claims’ or ‘Released Claims’ " did not "encompass the State's interest in an allocation of the Williams punitive damages award." Id. at 109-13. Therefore, by virtue of the split recovery statute, Oregon was in fact due a portion of the punitive...
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