Nacchio v. United States

• Citation: 824 F.3d 1370
• Decision Date: 10 June 2016
• Docket Number: 2015-5115,2015-5114
• Parties: Joseph P. Nacchio, Anne M. Esker, Plaintiffs–Cross–Appellants v. United States, Defendant–Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals for the Federal Circuit

824 F.3d 1370

Joseph P. Nacchio, Anne M. Esker, Plaintiffs–Cross–Appellants

v.United States, Defendant–Appellant.

2015-5114

2015-5115

United States Court of Appeals, Federal Circuit.

Decided: June 10, 2016

Thomas A. Gentile, Wilson, Elser, Moskowitz, Edelman & Dicker LLP, Florham Park, NJ, argued for plaintiffs-cross-appellants. Also represented by William D. Lipkind, Lampf, Lipkind, Prupis & Petigrow PC, West Orange, NJ

Jacob Earl Christensen, Tax Division, United States Department of Justice, Washington, DC, argued for defendant-appellant. Also represented by Caroline D. Ciraolo, Diana L. Erbsen, Gilbert Steven Rothenberg, Richard Farber.

Before O'Malley, Clevenger, and Bryson, Circuit Judges.

O'Malley, Circuit Judge.

This is a tax case arising out of a criminal conviction for insider trading. Joseph P. Nacchio and Anne M. Esker (“Nacchio”)¹ filed this action in the Court of Federal Claims seeking an income tax credit of $17,974,832 for taxes paid on trading profits of $44,632,464.38, which Nacchio was later ordered to forfeit to the United States following his conviction for insider trading with respect to those profits. The government opposed Nacchio's request, contending that his forfeiture payment was a nondeductible penalty or fine and that he was estopped from seeking tax relief because of his criminal conviction. The parties filed cross-motions for summary judgment.

The Court of Federal Claims denied the government's motion for summary judgment and granted Nacchio's cross-motion for partial summary judgment, holding that: (1) Nacchio may deduct his criminal forfeiture payment under Internal Revenue Code (I.R.C.)

² § 165, but not under I.R.C. § 162 ; and (2) Nacchio is not collaterally estopped from pursuing special tax relief under I.R.C. § 1341. Rather than proceed to trial on Nacchio's claim for special relief under I.R.C. § 1341, the government stipulated to the entry of final judgment in favor of Nacchio, waiving its right to challenge Nacchio's claims under § 1341 on other than deductibility and estoppel grounds; the government expressly reserved its right to appeal the court's adverse rulings on those issues. Nacchio reserved his right to appeal the court's adverse ruling as to deductibility under § 162.

The government filed this appeal on the grounds reserved in the parties' stipulation. Nacchio filed a cross-appeal. 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 § 165

. We affirm the court's judgment of nondeductibility under § 162. Because establishing deductibility under another section of the tax code is a prerequisite to pursuing special relief under § 1341, Nacchio cannot pursue a deduction under § 1341. Judgment must be entered in favor of the government.

Background

A. Nacchio's Insider Trading Conviction

From 1997 to 2001, Nacchio served as Chief Executive Officer (“CEO”) of Qwest Communications International, Inc. (“Qwest”). Nacchio v. United States , 115 Fed.Cl. 195, 197 (Fed. Cl. 2014)

. As part of his compensation for serving as Qwest's CEO, Nacchio received options to purchase shares of Qwest stock. Id. at 197–98

. When Qwest opened a “trading window” in April 2001, Nacchio exercised his options to purchase, and then “sold 1,255,000 shares of Qwest stock.” Id. On May 16, 2001, Nacchio entered into an automatic sales plan to sell his Qwest stock, and he sold his stock until May 29, 2001, the day before the price of Qwest stock fell below $38 per share. Id. Nacchio reported a net gain from these stock sales of $44,632,464.38 in his 2001 joint tax return and paid $17,974,832 in taxes on this gain. Id.

In 2005, a federal grand jury indicted Nacchio on forty-two counts of insider trading. United States v. Nacchio , No. 05–cr–00545–EWN, 2007 WL 2221437, at *1, 2007 U.S. Dist. LEXIS 54655, at *2 (D. Colo. July 27, 2007)

. The indictment alleged that Nacchio “did knowingly and willfully sell ... more than $100 million worth of Qwest common stock” in 2001 “while [he was] aware of and on the basis of material, non-public information,” in violation of 15 U.S.C. §§ 78j, 78ff, and SEC Rules 10b-5 and 10b-5-1 (17 C.F.R. §§ 240.10b-5, 240.10b5-1 ). Government's Mot. Summ. J. Ex. 1, Dkt. 17 at 3-5, Nacchio , 115 Fed.Cl. 195(No. 1:12-cv-00020), ECF No. 17. The indictment also included criminal forfeiture allegations, pursuant to 18 U.S.C. § 981(a)(1)(C) and 28 U.S.C. § 2461(c), which would require Nacchio, if convicted, to forfeit to the United States the proceeds of his insider trading offenses. Joint Appendix (“J.A.”) 41-42.

In April 2007, a jury found Nacchio guilty on nineteen of forty-two counts of insider trading. Nacchio , 2007 WL 2221437, at *1, 2007 U.S. Dist. LEXIS 54655, at *2

. The district court sentenced Nacchio to serve 72 months in prison, pay a 19 million dollar fine, and forfeit the gross income of $52,007,545.47 that Nacchio derived as a result of the insider trading. Id.

On March 17, 2008, a three judge panel of the Tenth Circuit reversed Nacchio's conviction and sentence. United States v. Nacchio , 519 F.3d 1140, 1169 (10th Cir. 2008)

. Specifically, the court held that the district court erred in excluding expert testimony that Nacchio had sought to introduce at trial. Id. at 1149–50. The Tenth Circuit then granted the government's petition for rehearing en banc and reinstated Nacchio's conviction, holding that the expert testimony was properly excluded. See

United States v. Nacchio , 555 F.3d 1234, 1239 (10th Cir. 2009) (en banc). The en banc court remanded the matter to the panel for further proceedings on Nacchio's challenge to his sentence. Id.

On remand, the initial decisional panel upheld most aspects of the original sentence, but concluded that 18 U.S.C. § 981(a)(2)(B)

, rather than 18 U.S.C. § 981(a)(2)(A), applied to calculate the amount that Nacchio was required to forfeit. United States v. Nacchio , 573 F.3d 1062, 1088–90 (10th Cir. 2009). Specifically, the panel held that the district court had “applied the wrong legal framework” when it imposed a forfeiture amount representing the “gross proceeds” from Mr. Nacchio's sales of Qwest stock, rather than a forfeiture amount “that more closely approximates Mr. Nacchio's gain resulting from the offense of insider trading.” Id. at 1087–90 (emphasis in original). The panel remanded the case to the district court for resentencing.

On June 24, 2010, the district court resentenced Nacchio to serve 70 months in prison, pay a 19 million dollar fine, and forfeit the net proceeds from his insider trading—$44,632,464.38. J.A. 140-48. At the conclusion of the resentencing hearing, Nacchio's attorney inquired whether the district court would “direct that the [forfeited] money go to a fund ... set up for distribution to [Nacchio's] victims.” J.A. 494-95. In response, the prosecutor advised the court that “the Government's intention is for ... the forfeiture funds[ ] to be used to compensate victims,” but that the decision would be made by the Asset Forfeiture and Money Laundering Section (“AFMLS”) in Washington pursuant to its regulations. Id.

In January 2011, Nacchio entered into a settlement of a concurrent action against him by the Securities and Exchange Commission. The settlement required that Nacchio disgorge the sum of $44,632,464, less any amounts forfeited and paid to the United States by Nacchio in connection with his criminal case. Nacchio's criminal forfeiture thus satisfied his disgorgement obligation in the SEC civil action. Nacchio's forfeited gain was subject to remission, pursuant to 18 U.S.C. § 981(e)(6)

. Thus, in September of 2011, the remission administrator retained by the Department of Justice (“DOJ”) notified prior participants in private securities class action litigation or SEC civil litigation concerning Qwest stock that they were eligible to receive a remission from Nacchio's forfeiture. J.A. 508. In April of 2012, the Chief of the AFMLS authorized remission of the forfeited funds to eligible victims of Nacchio's fraud. J.A. 251-54.

B. Governing Provisions of the Tax CodeSection 1341

provides special relief to a taxpayer who is required to restore funds to a third party where the taxpayer included the funds in his income in a prior taxable year when it then “appeared that the taxpayer had an unrestricted right” to the funds. I.R.C. § 1341. Thus, a taxpayer must establish that he reasonably believed he had an unrestricted right to the funds at issue at the time he included those funds in his income. See

McKinney v. United States , 574 F.2d 1240, 1243 (5th Cir. 1978). We have said that where a taxpayer knowingly obtains funds by fraudulent means, “it simply cannot appear from the facts known to him at the time that he has a legitimate, unrestricted claim to the money.” Culley v. United States , 222 F.3d 1331, 1335 (Fed. Cir. 2000). As a prerequisite to relief under § 1341, the taxpayer must also establish that he is “entitled to a deduction (in excess of $3,000) under another section of the Internal Revenue Code for the loss.” Culley , 222 F.3d at 1333 ; see also

Griffiths v. United States , 54 Fed.Cl. 198, 202 (Fed. Cl. 2002) (“Section 1341 does not independently create a deduction.”) (citation omitted).

Section 165(a)

provides for the deduction of “any loss sustained during the taxable year and not compensated for by insurance or otherwise.” I.R.C. § 165(c) provides limitations on losses of individuals. Section 165(c)(2) provides for the deduction of “losses incurred in any transaction entered into for profit, though not connected with a trade or business.”

We agree with the parties that § 165

is subject to a “frustration of public policy” doctrine. Under this doctrine, a taxpayer cannot deduct a loss where its allowance “would frustrate sharply defined national or state policies proscribing particular types of conduct, evidenced by some governmental declaration thereof.” Tank Truck Rentals v. Comm'r...