Ex-Qwest Communications International Inc. chief Joseph Nacchio shouldn’t be allowed an income tax deduction for the $44.6 million he forfeited after his conviction for insider trading because it would undercut his punishment, a government lawyer said.
“If we would give you a deduction for that it would reduce the sting of the penalty,” Jacob Christensen, a Justice Department lawyer, told Judge Mary Ellen Coster Williams of the U.S. Court of Federal Claims in Washington during a hearing today on Nacchio’s lawsuit seeking a tax refund.
The forfeiture was part of a package of penalties imposed on Nacchio that also included 70 months in prison and a $19 million fine, Christensen said.
The forfeited money was the gain from Nacchio’s sale of Qwest stock based on warnings, withheld from other investors, that the company would miss revenue targets.
Thomas Gentile, an attorney for Nacchio, said the forfeited funds are tax deductible because they ultimately were used as restitution to victims of the executive’s fraud, thus different from a criminal fine.
“The government’s intention was for those funds to be used to compensate victims,” said Gentile, of Lampf Lipkind Prupis & Petigrow PA.
Christensen countered that Nacchio’s sentencing papers list the disgorged funds as forfeiture while a section covering restitution is blank.
“Labels aren’t important here,” Gentile said. “It doesn’t matter if it’s called restitution or not.” The point is that the money went to Qwest shareholders harmed by Nacchio’s actions, he said.
Nacchio and his wife sued the U.S. in January 2012 for a refund of $17.97 million in taxes paid on gains from the illicit sale of the shares.
The hearing today was on a government bid to throw out the case and on Nacchio’s request for a ruling that the forfeiture is deductible.
Nacchio also asked Coster Williams to allow a trial on the question of whether he thought in good faith that he was entitled to the money from the stock sales that led to his conviction when he reported it on his tax return for 2001.
The case requires “some more digging and analysis,” Coster Williams said, adding that a ruling won’t come quickly,
Nacchio, 64, the former chairman and chief executive officer of Denver-based Qwest, was found guilty in 2007. He appealed his conviction for three years and was sentenced in June 2010.
He is set for release on Sept. 21, according to the Federal Bureau of Prisons website. Nacchio said in a court proceeding on May 4, 2010, that in prison he was serving as a Catholic Eucharistic minister.
The government argued that forfeiture in a criminal case is intended as punishment, no matter what’s done with the money.
The fact the U.S. attorney general “subsequently exercised his discretion to use Nacchio’s forfeiture to compensate victims of Nacchio’s fraud does not magically convert the criminal forfeiture into a compensatory fine,” the government said in court papers.
“Because Nacchio’s insider-trading violations were intentional, it could not have appeared to plaintiffs that they had an unrestricted right to the illicit proceeds generated from those offenses,” government lawyers wrote.
The U.S. Court of Appeals in New York held in one case that forfeiture used as restitution was deductible, according to Mark Allison, a tax lawyer with Caplin & Drysdale Chartered. Allison said he isn’t familiar with the details of Nacchio’s case.
In 2011, Nacchio sued the defense lawyers in his criminal case, accusing them of malpractice and overbilling him. A New Jersey state court judge dismissed the malpractice count in September. The overbilling allegations are being contested, according to court records.
Nacchio was one of several high-profile former corporate chiefs sentenced to prison in a wave of prosecutions that began after Enron Corp. collapsed in 2001.
Nacchio, of Mendham, New Jersey, was transferred from a prison into a New York-area halfway house in March and into home confinement, under Federal Bureau of Prisons supervision, in May, according to Chris Burke, a bureau spokesman.
CenturyLink Inc. (CTL:US), a telecommunications company based in Monroe, Louisiana, bought Qwest in 2011 for $24 billion.
The case is Nacchio v. U.S., 12-00020, U.S. Court of Federal Claims (Washington).
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