Joseph Nacchio

In 2007, Joseph Nacchio, former CEO of Qwest Communications, was convicted on 19 counts of insider trading and, in addition to receiving a 70-month prison sentence, was forced to forfeit over $44 million of ill-gotten gains. Of course, Nacchio had already paid income taxes on that $44 million back in 2001, so in 2007, he filed for an $18 million tax refund.

Did he get it? In short – no. But several interesting issues did come up as the case made its way through the system. His lawyers tried to argue that his payment was considered restitution and not a forfeiture, which is barred as deductible under §162(f). And although he was convicted of insider trading, he never admitted guilt or took the stand at trial, so they tried to claim he was unaware of his ill-gotten gains, which would allow a deduction under §1341.

In the end, the Court of Appeals essentially admitted that enforcing forfeiture with after-tax money is a double slap in the face, but as a matter of public policy, they were ok with it.

Josh Norris