LAW PROFESSOR BLOGS NETWORK TaxProf Blog Editor: Paul L. Caron Pepperdine University School of Law Monday, March 17, 2014 Court Allows Former Qwest CEOs $44.6 Million Tax Deduction for Forfeited Insider Trading Profits To Go Forward By Paul Caron Nacchio v. United States, No. 1:12-cv-20 (Fed. Cl. Mar. 12, 2014): Plaintiffs Joseph P. Nacchio and Anne M. Esker seek a refund of $17,974,832 in taxes they paid on gain Mr. Nacchio realized in 2001, but forfeited in 2007 when he was convicted for insider trading. This matter comes before the Court on Defendants motion for summary judgment and Plaintiffs cross-motion for partial summary judgment. To qualify for a tax refund under 26 U.S.C. § 1341, Plaintiffs must establish both that Mr. Nacchio believed he had a claim of right to gain included in Plaintiffs 2001 joint return, and that they are entitled to deduct the amount forfeited under a separate section of the Internal Revenue Code. Plaintiffs invoke 26 U.S.C. §§ 162 and 165 to claim the forfeiture is deductible as a business expense or loss. The Government contends that because Mr. Nacchios forfeiture was imposed as punishment for insider trading, permitting a deduction would contravene both public policy and the prohibition in § 162(f) against the deduction of a fine or similar penalty paid to the United States. In addition, the Government submits that Plaintiffs cannot demonstrate that Mr. Nacchio believed that he had a bona fide claim to his 2001 trading gain because he was convicted of willfully violating securities laws. The Court grants Plaintiffs motion in part, finding that Plaintiffs may deduct the amounts forfeited as a loss under § 165. Whether Mr. Nacchio believed he had a claim of right to the trading proceeds in 2001 is a genuine issue of material fact that cannot be resolved on summary judgment. ... Backround. From 1997 to 2001, Mr. Nacchio served as the Chief Executive Officer of Qwest Communications International. In lieu of cash, Mr. Nacchio received a large portion of his compensation as CEO in the form of stock options. In April 2001, when Qwest opened a trading window pursuant to company policy to allow its officers to sell Qwest stock, Mr. Nacchio exercised his options and sold 1,255,000 shares of Qwest stock. On May 16, 2001, Mr. Nacchio entered into an automatic sales plan to sell his Qwest stock and continued to sell his stock until May 29, 2001, when it fell in price. ... Plaintiffs reported $44,632,464.38 in net gain from these stock sales in their 2001 joint tax return and paid $17,974,832 in taxes on this gain. ... The jury convicted Mr. Nacchio on 19 counts of insider trading relating to stock Mr. Nacchio sold between April 26, 2001 and May 29, 2001. ... [T]he District Court resentenced Mr. Nacchio to 70 months in prison, a $19 million fine, and a $44,632,464.38 forfeiture. While the District Court could not order restitution as a matter of law, it directed that the $19 million fine be deposited into the Crime Victims Fund to help fund state and local victims assistance programs. At the conclusion of the resentencing hearing, the prosecution advised the District Court that the Government intended to use Mr. Nacchios forfeiture to compensate victims. ... On or about October 6, 2008, Plaintiffs filed a joint income tax return for the 2007 tax year. Following Mr. Nacchios forfeiture, Plaintiffs amended this tax return in March 2009, claiming a $17,999,030.00 credit pursuant to § 1341. In a letter dated September 3, 2009, the IRS disallowed Plaintiffs credit, stating that § 1341 can be invoked only after a valid deduction is claimed pursuant to another Code section. The IRS further stated that because Mr. Nacchios forfeiture was a penalty for violating the law, it was not remedial in nature and a deduction was not permitted under any section of the Code. Forbes: Former Qwest CEO Could Score $18 Million Tax Refund For Forfeited Insider Trading Profits, by Janet Novack: A federal judge has ruled former Qwest CTX +0.71% Communications International CEO Joseph P. Nacchio can not be barred, on public policy grounds, from claiming a tax deduction for $44.6 million in stock gains he was forced to forfeit after his conviction on insider trading charges. But before he can get the $18 million refund that deduction would produce, he must convince the judge that at the time he originally reported and paid taxes on those gains in 2001, he believed he was entitled to them—in other words, that he didn’t realize he was engaging in insider trading. Nacchio never took the stand at his own 2007 criminal trial. Nacchio lawyer William D. Lipkind, of West Orange, N.J., said Judge Williams’ decision sets an important precedent, establishing that just because a forfeiture is ordered as a result of a criminal conviction, doesn’t mean it can’t ever be deducted. But, he added, “this is clearly not a case that says if someone robs a bank and has to give up the loot, that’s a tax deduction.” That is because a bank robber, embezzler or Ponzi schemer like Bernard Madoff, assuming he even reported his original ill gotten gains, would have a hard time arguing after conviction that he originally thought he was entitled to the income. Williams’ ruling also won’t help the vast majority of white collar criminals who enter into plea deals which require them to admit they knew they took money they weren’t entitled to.
Posted on: Tue, 18 Mar 2014 12:34:26 +0000
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