                        T.C. Memo. 2008-236



                      UNITED STATES TAX COURT



  WELLPOINT, INC., f.k.a. ANTHEM, INC., SUCCESSOR IN INTEREST TO
ANTHEM INSURANCE COMPANIES, INC., AND SUBSIDIARIES, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 13585-05.             Filed October 27, 2008.



     Philip C. Cook, Michelle M. Henkel, and Nancy B. Pridgen,

for petitioner.

     Ruth M. Spadaro, John M. Altman, Robin L. Herrell, and

Thomas M. Rath, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     KROUPA, Judge:   Respondent determined a $49,075,740

deficiency in petitioner’s Federal income tax for 1999 and a

$2,630,548 deficiency for 2000.   Petitioner is WellPoint, Inc. &
                                  2

Subsidiaries, formerly known as Anthem, Inc. (Anthem), which was

the successor to Anthem Insurance Companies, Inc., and Associated

Insurance Companies, Inc. (both referred to as AICI).   All of

these entities will be referred to as the Blue Cross and Blue

Shield Parent Company or petitioner.

     We are asked to decide two issues.   The first issue is

whether petitioner may deduct under section 162(a)1 three

settlement payments totaling $113,837,500 that it made to resolve

lawsuits brought against it by the attorneys general of Kentucky,

Ohio, and Connecticut (collectively the lawsuits and individually

the Kentucky litigation, the Ohio litigation, and the Connecticut

litigation).   The second issue is whether the legal and

professional expenses that petitioner incurred to defend against

these lawsuits are deductible.2   The parties agree that both

issues are governed by the “origin of the claim” doctrine.      We

hold that both the settlement payments and the legal and

professional expenses are capital expenditures and therefore not

deductible.




     1
      All section references are to the Internal Revenue Code in
effect for the years at issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure, unless otherwise
indicated.
     2
      The parties have resolved all other issues in a stipulation
of settled issues.
                                  3

                          FINDINGS OF FACT

       Some of the facts have been stipulated and are so found.

The stipulation of facts, the accompanying exhibits, and the

stipulation of settled issues are incorporated by this reference.

Petitioner is a mutual insurance company organized under Indiana

law.

       Petitioner is in the business of providing commercial health

insurance through its subsidiaries.    Petitioner and its

predecessors provided healthcare insurance coverage to members in

exchange for premiums, paid claims, and invested reserves and

surplus.

       Many of petitioner’s direct or indirect operating

subsidiaries are licensees of the Blue Cross and Blue Shield

Association.3   Petitioner merged with the largest Kentucky, Ohio,

and Connecticut Blue Cross and Blue Shield (BCBS) plans (the

Settlement Subsidiaries) between 1993 and 1997.

       The attorneys general of Kentucky, Ohio, and Connecticut

began looking into the corporate and legal history of the

Settlement Subsidiaries, ultimately deciding to bring lawsuits,

primarily cy-pres or charitable trust actions, against AICI and




       3
      The Blue Cross and Blue Shield Association, a trade
association formed in 1982 from the merger of the Blue Cross
Association and the Association of Blue Shield Plans, owns the
Blue Cross and Blue Shield trade names and marks. Licensees of
the Blue Cross and Blue Shield Association were required to be
nonprofit organizations until 1994.
                                 4

its subsidiaries.4   Each attorney general separately claimed that

the State’s BCBS entity had a charitable purpose, had received

beneficial treatment under State and Federal law because of that

purpose, and held assets impressed with a charitable trust.5   The

attorneys general asserted that the entities’ charitable purposes

were no longer being met and that the charitable assets that had

accumulated should be taken from petitioner’s control and

redirected to the same or similar charitable purposes.6




     4
      There were multiple lawsuits and multiple claims, but the
predominant claim in each State was the cy-pres claim.
     5
      The Kentucky BCBS subsidiary was formed as a nonprofit
organization with a charitable purpose. Its charter proscribed
private pecuniary profit. The Ohio BCBS subsidiary’s original
Blue Cross predecessors were local hospital service associations
that had formed during the Great Depression with the purpose of
assisting individuals with payment of their medical expenses.
The Connecticut BCBS subsidiary and/or its predecessors were
formed as nonprofit organizations whose purpose was to promote
social welfare. Their charters prohibited private inurement.
They based charges to individuals for medical services on family
income and received discounted physician services and public
subsidies.
     6
      Count I of the Kentucky litigation asserted a cy-pres
claim, and counts II and III asserted unlawful conversion and
unjust enrichment claims. The Ohio Attorney General asserted a
cy-pres claim and alleged that Anthem had breached its fiduciary
duty to hold and apply Blue Cross assets to their charitable
purposes. The Connecticut Attorney General sought to protect
charitable assets and property impressed with a charitable trust
and alleged that Anthem breached fiduciary duties and made
negligent representations. Petitioner repeatedly characterized
the lawsuits as disputes over assets in their financial
statements, their annual reports, and their statements to
shareholders.
                                 5

     Petitioner made settlement payments totaling $113,837,500 in

1999 to resolve pending and potential claims in the Kentucky

litigation, the Ohio litigation, and the Connecticut litigation.

Petitioner agreed to pay $45 million to settle all claims in the

Kentucky litigation, relinquished all possession and ownership of

the funds, and transferred those funds to the Commonwealth of

Kentucky to create a section 501(c)(3) organization that promoted

Kentucky healthcare.   Petitioner agreed to settle the Ohio

litigation for $36 million, reflecting the value of the Blue

Cross assets of the Ohio entity as of October 1, 1987, and that

money was used to establish the Anthem Foundation.7   Petitioner

settled the Connecticut litigation for $40,836,500, which it paid

to a newly formed charitable corporation to serve the health

needs of the citizens of Connecticut.8

     Petitioner filed returns for the taxable years ending

December 31, 1999 and 2000, deducting the $113,837,500 settlement

amount in 1999 and deducting $819,201 in 1999 and $8,394 in 2000

for legal and professional fees incurred




     7
      Petitioner was given an $8 million credit for prior
charitable contributions and, accordingly, was required to pay
only $28 million of the $36 million settlement.
     8
      Some of this litigation is described in Capital Blue Cross
& Subs. v. Commissioner, 122 T.C. 224 (2004), revd. 431 F.3d 117
(3d Cir. 2005). That decision is neither binding on nor
dispositive of this case.
                                  6

in connection with the lawsuits.9     Respondent examined and

disallowed the deductions for settlement payments and legal fees.

Petitioner timely filed a petition.

                             OPINION

     We are asked to decide whether the settlement payments and

legal fees are deductible as ordinary and necessary expenses as

petitioner argues or whether, as respondent argues, petitioner

must capitalize these expenses.10     The parties agree that the

origin of the claim doctrine controls the outcome of this case.

I. Origin of the Claim Doctrine

     Distinguishing between expenses that can be deducted under

section 162 and those that must be capitalized under section 263

requires an examination of all the pertinent facts and events,

and each case “‘turns on its special facts’.”     INDOPCO, Inc. v.

Commissioner, 503 U.S. 79, 86 (1992) (quoting Deputy v. du Pont,

308 U.S. 488, 496 (1940)); Boagni v. Commissioner, 59 T.C. 708

(1973).

     Whether expenses are deductible on the one hand, or subject

to being capitalized on the other hand, may be determined by the

origin of the claim test.   Woodward v. Commissioner, 397 U.S. 572

(1970); United States v. Gilmore, 372 U.S. 39 (1963).     Under this


     9
      The parties already resolved their dispute about other
legal and professional fees in the stipulation of settled issues.
     10
      Respondent argues alternatively that the settlement
payments and legal fees are neither capitalizable nor deductible.
We need not reach that issue because of our holding.
                                 7

test, the substance of the underlying claim or transaction out of

which the expenditure in controversy arose governs whether the

item is a deductible expense or a capital expenditure, regardless

of the motives of the payor making the payment or the

consequences that may result from the failure to defeat the

claim.   See Woodward v. Commissioner, supra at 578; Newark

Morning Ledger Co. v. United States, 539 F.2d 929, 935 (3d Cir.

1976); Clark Oil & Ref. Corp. v. United States, 473 F.2d 1217,

1220 (7th Cir. 1973); Anchor Coupling Co. v. United States, 427

F.2d 429, 433 (7th Cir. 1970).   The origin of the claim test does

not involve a “mechanical search for the first in the chain of

events,” but requires consideration of the issues involved, the

nature and objectives of the litigation, the defenses asserted,

the purpose for which the amounts claimed as deductions were

expended, and all other facts relating to the litigation.     Boagni

v. Commissioner, supra at 713.

     A. Character of the Claim–Settlement Payments

     The predominant claim in each of the lawsuits was the cy-

pres claim.   “Cy-pres” is defined as “a rule for the construction

of instruments in equity, by which the intention of the party is

carried out as near as may be, when it would be impossible or

illegal to give it literal effect.”   Black’s Law Dictionary 387

(6th ed. 1990).   Under the cy-pres doctrine, if property has been

dedicated in trust for a particular “charitable purpose” and that
                                  8

purpose is not being carried out, a State attorney general is

authorized to initiate a cy-pres proceeding to carry out the

charitable purpose in a way that is “as near as” possible to the

original purpose.    4A Scott & Fratcher, The Law of Trusts, secs.

399, 399.2, at 476-484, 489-517 (4th ed. 1989).

       B. Deductibility of Cy-Pres Claim Litigation

       We now focus on whether the payments made by petitioner for

litigation and settlement of the claims under the cy-pres

doctrine are deductible ordinary and necessary expenses under

section 162 or expenses that must be capitalized under section

263.    The costs incurred in litigating title to property are

capital expenditures.    Sec. 1.263(a)-2(c), Income Tax Regs.

Defending or perfecting title to property encompasses not only

disputes over legal title but also disputes over beneficial

interests of trusts, including contests over whether a trust

exists.    See Boagni v. Commissioner, supra; Reed v. Commissioner,

55 T.C. 32 (1970); Stevens v. Commissioner, T.C. Memo. 1999-259;

Barr v. Commissioner, T.C. Memo. 1989-420; Duntley v.

Commissioner, T.C. Memo. 1987-579.    Settlement payments and legal

fees expended to resolve disputes over ownership of assets may be

capital expenses.    See Anchor Coupling Co. v. United States,

supra; Wallace v. Commissioner, 56 T.C. 624 (1971).     Payments

that settle challenges to ownership that are of questionable
                                  9

merit may also be capital.    See Am. Stores Co. v. Commissioner,

114 T.C. 458 (2000); Duntley v. Commissioner, supra.

     A deduction is generally allowed for expenses incurred in

defending a business and its policies from attack.    INDOPCO, Inc.

v. Commissioner, supra at 83; Commissioner v. Tellier, 383 U.S.

687 (1966); Commissioner v. Heininger, 320 U.S. 467 (1943).

II. Parties’ Arguments

     Petitioner argues that the settlement payments are

deductible under section 162(a) as ordinary and necessary

expenses paid or incurred in carrying on its profit-seeking

insurance business and are directly connected to its profit-

seeking activities.   Petitioner argues that the payments cannot

be capitalized because the lawsuits did not challenge title of

specific items of property.   Respondent argues that petitioner

may not deduct the settlement payments because they represent

transfers of assets held in charitable trust.11

III. Analysis

     The record shows that none of the lawsuits in question was

brought to enjoin or change AICI’s business practices, as

     11
      The State attorneys general sought to recover assets from
petitioner that they claimed were never petitioner’s assets.
According to the State attorneys general, petitioner’s
subsidiaries held these assets in trust for a charitable purpose.
Because the subsidiaries, like the parent company, were no longer
operated for charitable purposes, the State attorneys general
sought to recover these assets and return them to their
charitable purpose. Respondent claims that the transfer of these
assets from petitioner to their charitable purpose is a transfer
of title.
                                 10

petitioner argues.   In each case, the origin of the claim was a

dispute over the equitable ownership of assets allegedly

impressed with charitable trust obligations.    In each case, the

settlement provided that the assets AICI relinquished were

transferred to a section 501(c)(3) organization with the same

charitable purpose that the attorneys general claimed the

charitable trust assets benefitted.

     The Kentucky litigation involved a title contest to alleged

charitable assets.   Relying upon its research into legislative

and corporate history, the Kentucky Attorney General’s office

brought suit alleging that predecessors to the Anthem subsidiary

in Kentucky held their assets in charitable trust for the benefit

of public health in the State.   The complaint, the settlement

document, and the parties’ own descriptions of the nature of the

lawsuit convince us that the purpose of the Kentucky litigation

was to determine title to the alleged charitable assets.    The $45

million settlement directly responded to the Kentucky Attorney

General’s allegation that the assets held by petitioner were

committed to a charitable purpose.    The $45 million went to

establishing a section 501(c)(3) organization that addresses

healthcare needs.    There is no evidence that the attorney general

sought to change AICI’s business practices, as petitioner

alleges.
                                11

     The Ohio Attorney General’s office filed a complaint

alleging that certain assets were impressed with a charitable

trust and seeking the return of those assets to their original

charitable purpose because BCBS-Ohio’s merger with AICI

frustrated that purpose.   The claim alleged beneficial ownership

in the public of the Blue Cross entity’s assets because of the

entity’s relationship with charitable hospitals, the tax

exemptions it received, and its own declarations that it was

organized solely for social welfare purposes.

     The Connecticut Attorney General also found a basis for a

charitable trust claim because the BCBS entity was a non-profit

low-cost healthcare provider devoted to public welfare.      The

complaint and the settlement focused on the ownership of trust

assets.   Again, petitioner’s financial statements and annual

reports characterized this lawsuit as a dispute over title to

assets allegedly impressed with a charitable trust.

     Petitioner denies the existence of a charitable trust

obligation and asserts that it settled only to avoid interruption

of business or loss of good will.    We find this argument

irrelevant to our analysis.   A taxpayer’s motive for settling is

not controlling in determining whether a settlement payment is

deductible.   Woodward v. Commissioner, 397 U.S. at 578; Anchor

Coupling Co. v. United States, 472 F.2d at 431.
                                 12

       Petitioner further argues that the attorneys general may

have been confused about whether the Settlement Subsidiaries were

section 501(c)(3) organizations or charities under Federal tax

law.    We decline to relitigate the underlying merits of each

lawsuit, and our analysis of the origin of the claim does not

demand it.    As a result, because the attorneys general brought

suit to recover equitable title to assets they believed were

impressed with charitable trusts, the origins of the claims in

all three lawsuits were disputes over title to assets.

       Petitioner nevertheless contends that the origin of the

lawsuits was a challenge to the manner in which petitioner’s

subsidiaries conducted their profit-seeking health insurance

business.    All the evidence suggests otherwise.   No prayer for

relief demanded a change in business behavior, and none of the

testimony of the attorneys who worked on these cases for the

Kentucky, Ohio, and Connecticut attorneys general suggested that

they sought to change AICI’s business practices or shut them

down.

       Petitioner also relies heavily on the theory that the

settlement payments are per se deductible because they were

necessary to defend its business.     Petitioner relies primarily on

two cases to argue that the settlement payments are per se

deductible, BHA Enters., Inc. v. Commissioner, 74 T.C. 593 (1980)

and A.E. Staley Manufacturing Co. & Subs. v. Commissioner, 119
                                  13

F.3d 482 (7th Cir. 1997), revg. and remanding 105 T.C. 166

(1995).    In BHA, the origin of the claim was grounded in the

taxpayer’s effort to keep the FCC from revoking its broadcasting

licenses, without which the taxpayer could not do business.

There is no evidence in the record, however, that the attorneys

general sought to stop petitioner’s business.     Moreover,

petitioner’s business did not fail despite the attorneys

general’s success in removing many of these assets from

petitioner’s control.     The uncorroborated and self-serving

testimony of petitioner’s witnesses that they could no longer do

business if they lost these suits is unconvincing.

     The facts in A.E. Staley are equally unavailing to

petitioner.     In that case, the Court of Appeals allowed

deductions for certain investment banking and printing costs

incurred by the taxpayer in an unsuccessful effort to defend its

business against a takeover because the costs produced no future

benefit.   A.E. Staley Manufacturing Co. & Subs. v. Commissioner,

supra at 489.    Our case is factually distinguishable because the

future benefits accruing from the defense and settlement of the

cy-pres litigation are manifest, enabling petitioner in effect to

convert the assets from charitable to income-producing purposes.

     We need not address respondent’s alternative theories

because we hold that the settlement payments originated from
                                 14

suits to resolve title to assets and therefore are not

deductible.

IV. Character of Legal and Professional Expenses

     We turn now to the question of whether the legal and

professional expenses petitioner incurred in defending itself

from the lawsuits are deductible.     Legal and professional

expenses, like settlement payments, are analyzed under the origin

of the claim doctrine.    Mosby v. Commissioner, 86 T.C. 190

(1986).   Costs incurred in defending title to property are

capital expenditures.    Sec. 1.263(a)-2(c), Income Tax Regs.

Moreover, legal expenses incurred in defending against claims

challenging a taxpayer’s ownership of assets may be capital

expenditures.   Duntley v. Commissioner, T.C. Memo. 1987-579.

Petitioner’s legal and professional fees arose from defending

against claims that had their origin in equitable ownership of

assets.   Accordingly, these fees are capital expenditures.

V. Conclusion

     Petitioner’s settlement payments and litigation and

professional fees are capital expenditures and not deductible

under section 162(a).

     In reaching our holdings, we have considered all arguments

made, and to the extent not mentioned, we consider them

irrelevant, moot, or without merit.
                          15

To reflect the foregoing and the concessions of the parties,


                                    Decision will be entered

                               under Rule 155.
