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Ex-Qwest Head Nacchio Seeks Tax Refund as His Prison Term Ends

Bloomberg News

By Andrew Zajac

August 20,2013

International Inc. chief Joseph Nacchio, finishing his insider-trading sentence in home confinement, argues that he deserves a refund of almost $18 million for taxes on illegal stock sales.

Judge Mary Ellen Coster Williams of the U.S. Court of Federal Claims in Washington is scheduled today to hear Nacchio’s lawyers argue that $44.6 million he forfeited to the government from tainted stock transactions is deductible because it was used to compensate victims of his fraud.

Under the tax code, “if it’s compensatory, it’s deductible,” Thomas Gentile of Lampf Lipkind Prupis & Petigrow PA, one of Nacchio’s lawyers, said in a telephone interview before the hearing.

Nacchio’s attorneys also are asking Coster Williams to allow a trial on the question of whether Nacchio thought he had an unrestricted right to the money from the illicit stock sales when he reported it on his tax return as income for 2001.

Nacchio, 64, the former chairman and chief executive officer of Denver-based Qwest, was found guilty in 2007 of selling company stock based on warnings, withheld from other investors, that it would miss revenue targets. He’s set for release on Sept. 21, according to the Federal Bureau of Prisons website.

Nacchio and his wife sued the U.S. in January 2012 for a tax refund of $17.97 million in gains from the sale of the shares.

Dismissal Sought

The U.S. asked Coster Williams to throw out the case.

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.

Mark Allison, an attorney with Caplin & Drysdale Chartered, said, “The rule of thumb is that a forfeiture in a criminal case is viewed as punitive and not deductible.”

The U.S. Court of Appeals in New York held in one case that forfeiture used as restitution was deductible, according to Allison, who said that he isn’t familiar with the details of Nacchio’s case.

Nacchio appealed his conviction for three years and ultimately was sentenced to 70 months in prison in June 2010. Besides disgorging his gains, he was fined $19 million.

Risk Known

“Mr. Nacchio knew what the risk was, he could assess the risk” as he sold more than $50 million in Qwest shares in 2001, U.S. District Judge Marcia Krieger said at the sentencing. “The public did not know.”

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.

Ex-WorldCom Inc. CEO Bernard Ebbers, 71, received a 25-year sentence for securities fraud. Ex-Enron CEO Jeffrey Skilling, 59, is due to leave prison in 2017 after winning a reduction in June of his sentence to 14 years from 24 years.

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).

To contact the reporter on this story: Andrew Zajac in Washington at azajac@bloomberg.net.