Fed. Circ. Rejects Convicted Ex-CEO's $18M Tax Refund Suit

Law360, New York (June 10, 2016, 8:15 PM ET) — The Federal Circuit in a precedential opinion on Friday rejected the former CEO of Qwest Communications International Inc.’s bid to recover almost $18 million in taxes after he forfeited millions in proceeds from stock sales as part of a criminal conviction for insider trading.
A three-judge panel reversed the U.S. Court of Federal Claims’ holding that Joseph P. Nacchio could deduct a $44,632,464 forfeiture as a loss to obtain a nearly $18 million income tax credit, a conclusion that the lower court reached over the government’s objections that the forfeiture payment was a nondeductible penalty or fine.
“We find that Nacchio has failed to establish that his criminal forfeiture was not a ‘fine or similar penalty’ and, therefore, reverse the court’s judgment of deductibility under [Internal Revenue Code Section] 165,” the panel wrote.
The panel also affirmed the Court of Federal Claims’ holding that Nacchio is not entitled to deduct the forfeiture as a trade or business expense.
The panel also held that Nacchio cannot pursue special tax relief under a section of the tax code aimed at taxpayers who have to give a third party money that they previously counted as income because they thought they had a so-called unrestricted right to the funds.
That section has a prerequisite demanding the establishment of deductibility under another section of the tax code, the panel said, which has not been satisfied.
The Federal Circuit remanded the case with directions to enter judgment in favor of the federal government.
Nacchio served as Qwest’s CEO from 1997 to 2001 and was also a member of the company’s board of directors.
He was convicted in April 2007 on 19 of 42 insider trading-related counts after federal prosecutors said that he sold $52 million in Qwest stock in 2001 when he knew, but did not disclose publicly, that the company was unlikely to continue to meet its publicly announced earnings targets as that year progressed.
Nacchio later had his initial sentence reduced to a forfeiture of roughly $44.63 million, a $19 million fine and a 70-month stay in prison.
He and his wife submitted an amended tax return for 2007 to the Internal Revenue Service, claiming a nearly $18 million tax credit, but the IRS disallowed the credit.
Nacchio then filed the instant suit and in March 2014, U.S. Court of Federal Claims Judge Mary E. Williams rejected the government’s motion for summary judgment while granting Nacchio’s cross-motion for partial summary judgment, holding that he could deduct the forfeiture as a loss but not as a trade or business expense.
Rather than proceed to trial over whether Nacchio subjectively believed he had an unrestricted right to the stock gain he later forfeited in the criminal case, in April 2015, the federal government stipulated to final judgment in favor of Nacchio but reserved the right to appeal.
Under the stipulation, the court entered judgment in favor of Nacchio for $17,974,832 plus interest.
Representatives for the parties did not immediately respond to requests for comment on Friday.
Nacchio is represented by Thomas A. Gentile of Wilson Elser Moskowitz Edelman & Dicker LLP, and William D. Lipkind of Lampf Lipkind Prupis & Petigrow PC.
The federal government is represented by Jacob Earl Christensen, Caroline D. Ciraolo, Diana L. Erbsen, Gilbert Steven Rothenberg and Richard Farber of the U.S. Department of Justice‘s Tax Division.
The case is Nacchio v. US, case numbers 15-5114 and 15-5115, in the U.S. Court of Appeals for the Federal Circuit.
–Editing by Stephen Berg.

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