United States Court of Appeals 

for the Federal Circuit ______________________ 

JOSEPH P. NACCHIO, ANNE M. ESKER,

Plaintiffs-Cross-Appellants

v.

UNITED STATES,

Defendant-Appellant

______________________ 

2015-5114, 2015-5115

______________________ 

Appeals from the United States Court of Federal 

Claims in No. 1:12-cv-00020-MCW, Judge Mary Ellen 

Coster Williams.

______________________ 

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. 

______________________ 
2 NACCHIO v. US

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 

 

1 We refer to Joseph Nacchio alone as the “taxpayer” for purposes of this appeal. Anne Esker, Nacchio’s 

spouse, is a party to this case by virtue of having filed a 

joint income tax return with Nacchio for tax year 2007. 

She does not, however, have a separate or independent 

interest in the refund claim at issue. 

2 The Internal Revenue Code is codified at Title 26 

of the United States Code. 
NACCHIO v. US 3

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 crossappeal. 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. 
4 NACCHIO v. US

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 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 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. 
NACCHIO v. US 5

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 
6 NACCHIO v. US

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 Code

Section 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.” 
NACCHIO v. US 7

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, 356 U.S. 30, 33-36 (1958) (citing Comm’r v. 

Heininger, 320 U.S. 467, 473-74 (1943)). In Tank Truck 

Rentals, the Supreme Court upheld the disallowance of a 

deduction for fines paid by a trucking company for violations of state maximum weight laws, observing that 

“[w]here a taxpayer has violated a federal or a state 

statute and incurred a fine or penalty he has not been 

permitted a tax deduction for its payment.” Id. at 34. We 

agree with the government, moreover, that prior to 1969, 

the deduction of trade or business expenses under § 

162(a) was limited by the same public policy doctrine that 

precluded loss deductions under § 165 when their allowance would frustrate sharply defined public policies. 

Section 162(a) provides for deductions of “ordinary and 

necessary expenses paid or incurred . . . in carrying on 

any trade or business.” 

In 1969, Congress codified the “frustration of public 

policy” doctrine as part of the Tax Reform Act of 1969, 

Pub. L. No. 91-172, § 902(a), 83 Stat. 487, 710, in the form 

of I.R.C. § 162(f). Section 162(f) provides: “FINES AND 

PENALTIES.—No deduction shall be allowed under 

subsection (a) for any fine or similar penalty paid to a 

government for the violation of any law.” I.R.C. § 162(f) 

(emphases added). Although the amendments to § 162 

did not explicitly affect § 165, the “frustration of public 

policy” doctrine has continuing vitality with respect to 

§ 165. See Stephens v. Comm’r, 905 F.2d 667, 671 (2d Cir. 

1990) (“Although Tellier and Tank Truck Rentals were 

both decided pursuant to Tax Code provisions relating to 

business expenses, the test for nondeductibility enunciated in those opinions is applicable to loss deductions under 
8 NACCHIO v. US

Section 165.”). See also Wood v. United States, 863 F.2d 

417, 421 (5th Cir. 1989) (holding that “it is easy to sustain 

a public policy rationale for denying a loss deduction” 

sought under § 165); Medeiros v. Comm’r, 77 T.C. 1255, 

1261 n.7 (1981) (“we cannot ascribe to Congress the 

intent, in enacting section 162(f), to disallow the deduction of this penalty under section 162(a) but to allow it as 

a loss deduction under section 165(a)”); Treas. Reg. (26 

C.F.R.) § 1.165-1(a) (loss deductions under § 165(a) are 

“subject to any provision of the internal revenue laws 

which prohibits or limits the amount of the deduction”). 

The Stephens Court, thus, looked to § 162(f) when interpreting the scope of permissible loss deductions under

§ 165. We do the same.

C. Nacchio’s Tax Credit Claim

In 2009, following Nacchio’s forfeiture, Nacchio

amended his 2007 tax return, claiming a $17,999,030 

credit pursuant to I.R.C. § 1341. This amount represented the amount of tax Nacchio and his wife had paid on the 

profits attributable to Nacchio’s exercise of Qwest options. 

In a letter dated September 3, 2009, the Internal Revenue 

Service (“IRS”) disallowed Nacchio’s credit, explaining

that § 1341 may be invoked only after the right to claim a 

deduction is established elsewhere in the tax code. The 

IRS found, however, that Nacchio’s forfeiture was “the 

payment of a penalty for a violation of the law and, unlike 

restitution, is not remedial in nature,” so a deduction was 

not permitted under any section of the tax code, including 

I.R.C. § 165(c)(2). J.A. 552. Nacchio’s counsel appealed 

this decision within the IRS, but Nacchio was again

denied a refund. 

On January 10, 2012, Nacchio commenced this action 

before the Court of Federal Claims, seeking a credit of 
NACCHIO v. US 9

$17,974,8323 pursuant to I.R.C. § 1341. Appellees and 

the United States agreed to litigate cross-motions for 

summary judgment prior to discovery. The government 

argued that: (1) § 162(f) barred any deduction under 

either § 165 or § 162, and (2) even if the loss caused by the 

forfeiture was a deductible loss under § 165 or § 162, 

Nacchio was estopped from seeking the special tax relief 

authorized by § 1341 because his criminal conviction was 

conclusive with respect to his state of mind. Nacchio 

argued that his loss was deductible under both § 165 and 

§ 162 and that the question of whether it appeared that

he had an unrestricted right to his trading profits in 2001 

was not actually litigated in his criminal trial. 

The Court of Federal Claims denied the government’s 

motion for summary judgment and granted-in-part 

Nacchio’s motion for partial summary judgment. The 

court held that Nacchio’s forfeiture payment was deductible under I.R.C. § 165. Nacchio, 115 Fed. Cl. at 203. 

First, it noted that the government did not dispute that 

Nacchio’s forfeiture is a loss under § 165. Second, it 

found that the public policy against insider trading did

not prevent the deduction of the amount forfeited here. 

Specifically, the court compared Nacchio’s case to Stephens and reasoned that “[d]isallowing the deduction 

would result in a ‘double sting’ by requiring taxpayers to 

 

3 When Appellees filed their amended return for the 

2007 tax year, they erroneously calculated the amount of 

tax that they had previously paid on Mr. Nacchio’s gain

from his exercise of Qwest stock options (and sales of 

corresponding shares), by failing to deduct from the 

amount of Mr. Nacchio’s gain $60,081.00 in brokerage

fees. As a result, the amended return for the 2007 tax 

year claimed a refund of $17,999,030.00, when the correct 

amount was $17,974,832.00. Appellee Br. 12 n.3. 
10 NACCHIO v. US

both make restitution and pay taxes on income they did 

not retain.” Nacchio, 115 Fed. Cl. at 202. 

The court expressly rejected the government’s argument that deduction of the forfeiture was barred by I.R.C. 

§ 162(f), which prohibits deductions “for any fine or similar penalty paid to the government for the violation of any 

law.” Id. The court’s rationale was that, unlike the 19 

million dollar fine, which was clearly punitive and was 

paid from assets unrelated to insider trading, the forfeiture “exclusively represented the disgorgement of Mr. 

Nacchio’s illicit net gain from insider trading.” Id. at 203. 

In addition, the court found that “Nacchio’s forfeiture was 

used for a compensatory purpose” because, even if not 

characterized as restitution, the amounts paid ultimately 

were returned to victims of Nacchio’s crimes through 

remission. Id. In a footnote, the court rejected Nacchio’s 

attempt to deduct his forfeiture under § 162 as an “ordinary and necessary business expense.” Id. at 203 n.7.

The court then rejected the government’s argument 

that Nacchio was collaterally estopped from pursuing 

special relief under § 1341. Relying on Culley, the government argued that, because fraudulent intent is a 

necessary element of the crime of which Nacchio was 

convicted, Nacchio could not now argue that he lacked 

such intent, or that he somehow could have both subjectively believed he had an unrestricted right to the funds 

and fraudulently engaged in trades to obtain them. 

Nacchio contended that the precise issue arising under 

§ 1341 was not presented to the jury. He also asserted 

that he had not had a full and fair opportunity to litigate 

the question of his intent because certain evidentiary 

rulings in the criminal action prevented him from doing 

so. On both of these grounds, Nacchio argued that collateral estoppel should not apply. The Court of Federal 

Claims agreed with Nacchio, finding that “[t]he precise 

issue of whether Mr. Nacchio himself subjectively believed 

he had an unrestricted right to the funds he received from 
NACCHIO v. US 11

trading in 2001 was not adjudicated in the criminal 

proceeding.” Id. at 204. The court concluded that the 

question of whether Nacchio acted with the mistaken 

belief required by § 1341 was a factual one to be decided 

at trial. 

The government moved for reconsideration of the 

court’s decision, but the court denied the motion. Rather 

than proceed to trial on the issue of Nacchio’s subjective 

belief under § 1341, the government stipulated to the 

entry of a final judgment in favor of Nacchio, reserving its 

right to appeal the court’s adverse rulings on the applicability of § 162(f) and estoppel. In the stipulation, Nacchio 

also reserved the right to appeal the Court of Federal 

Claims’s determination that the forfeited funds were not 

deductible as a business expense under § 162. 

The government appealed and Nacchio crossappealed. We have jurisdiction under 28 U.S.C. 

§ 1295(a)(3). 

DISCUSSION

We review the Court of Federal Claims’s grant of 

Nacchio’s motion for partial summary judgment de novo. 

Culley, 222 F.3d at 1333. Whether Nacchio is entitled to 

an income tax deduction for the amount he forfeited to the 

government as part of his sentence for insider trading is a 

question of law, reviewable de novo. The question presented is, in essence, whether Nacchio must forfeit his 

insider trading gains to the government using after-tax 

dollars. 

A. I.R.C. § 165(c)(2) 

To begin with, it is questionable whether § 165(c)(2) is

even applicable where, as here, the “loss” sustained arose

from a mandatory forfeiture of profit pursuant to a criminal conviction. Instead, the “losses” that § 165(c)(2) 

generally seems to contemplate are losses in the value of 

assets purchased for investment that failed to bear fruit. 
12 NACCHIO v. US

See, e.g., Nathel v. Comm’r, 615 F.3d 83, 94 (2d Cir. 2010)

(involving deductibility of capital contributions allegedly

made to obtain releases from loan guarantees); Chen v. 

Comm’r, No. 12982-12S, 2014 Tax Ct. Summary LEXIS 6, 

at *11 (T.C. 2014) (involving deductibility of allegedly 

abandoned investment property); Seed v. Comm’r, 52 T.C. 

880, 884-85 (1969) (involving deductibility of financial 

contributions to an abandoned venture). 

In any event, the government conceded before the 

Court of Federal Claims that Nacchio’s forfeiture was a 

“loss” under § 165(c)(2), and we do not revisit that question on appeal. Nacchio, 115 Fed. Cl. at 201. Instead, the 

government argues that, despite being a “loss,” the forfeiture is not deductible under § 165 because allowing the 

deduction would contravene public policy, as codified in 

§ 162(f). The relevant question for resolving this appeal, 

accordingly, is whether Nacchio’s criminal forfeiture is a 

“fine or similar penalty” under § 162(f), or if allowing a 

deduction in these circumstances would otherwise frustrate public policy. 

We recognize that, as a general matter, we must use a 

flexible standard to “accommodate both the congressional 

intent to tax only net income, and the presumption 

against congressional intent to encourage violation of 

declared public policy.” Tank Truck Rentals, 356 U.S. at

35. And “[i]ncome from a criminal enterprise is taxed at a 

rate no higher and no lower than income from more 

conventional sources.” Comm’r v. Tellier, 383 U.S. 687, 

691 (1966). We further understand Nacchio’s argument 

that not being allowed to deduct his forfeited income from 

his taxes would result in a sort of “double sting”: both 

giving up his ill-gotten gains and paying taxes on them. 

But in this case, the relevant statutes, regulations, and 

body of relevant case law lead us to conclude that 

Nacchio’s criminal forfeiture must be paid with after-tax 

dollars, just as fines are paid with after-tax dollars. 

Specifically, as explained below, the government has 
NACCHIO v. US 13

demonstrated that Nacchio’s criminal forfeiture is a “fine 

or similar penalty” within the meaning of § 162(f). 

First, the plain language of the statutory provision 

under which the amount Nacchio forfeited was calculated 

supports the view that Congress intended the forfeiture to 

be paid with after-tax dollars. The Tenth Circuit held on 

remand that Nacchio’s forfeiture should be calculated in 

accordance with § 981(a)(2)(B), not § 981(a)(2)(A). 

Nacchio, 573 F.3d at 1090. Section 981(a)(2)(B) states 

that: 

[T]he term “proceeds” means the amount of money 

acquired through the illegal transactions resulting 

in the forfeiture, less the direct costs incurred in 

providing the goods or services. . . . The direct 

costs shall not include . . . any part of the income 

taxes paid by the entity.

18 U.S.C. § 981(a)(2)(B) (emphases added). Thus, the 

language of the statute suggests that—by design—the 

forfeiture amount does not account for taxes paid on the 

amount of money acquired through the illegal transactions. 

Next, Treasury Regulation § 1.162-21(b)(1) defines 

“fine or similar penalty” for the purposes of § 162(f) as 

including, inter alia, “an amount—(i) Paid pursuant to 

conviction or a plea of guilty or nolo contendere for a crime 

(felony or misdemeanor) in a criminal proceeding.” 26 

C.F.R. § 1.162-21. In Colt Industries, Inc. v. United 

States, we looked to the Treasury Regulation’s definition 

of a “fine or similar penalty” in denying deductions a 

taxpayer sought under § 162(a) for civil penalties it had 

paid to the state for violations of the Clean Water Act and 

the Clean Air Act. 880 F.2d 1311, 1313 (Fed. Cir. 1989)

(“If there were any doubt about the meaning of the phrase 

‘fine or similar penalty’, it is readily removed by reference 

to Treasury regulations promulgated in interpretation of 

the provision.”). 
14 NACCHIO v. US

Similarly, in this case, Nacchio’s criminal forfeiture 

meets the definition of a “fine or similar penalty” under 

Treasury Regulation § 1.162-21(b)(1). Nacchio’s criminal 

forfeiture was imposed pursuant to 18 U.S.C. 

§ 981(a)(1)(C) and 28 U.S.C. § 2461(c), as part of his 

sentence in a criminal case. Section 981(a)(1)(C), as 

amended by the Civil Asset Forfeiture Reform Act of 

2000, Pub. L. No. 106-185, § 20, 114 Stat. 202, 224, authorizes the forfeiture of “proceeds” traceable to numerous 

felony offenses, including any offense constituting “specified unlawful activity” as defined by 18 U.S.C. 

§ 1956(c)(7)(A). Section 1956(c)(7)(A), in turn, defines 

“specified unlawful activity” as any act or activity constituting an offense under 18 U.S.C. § 1961(1)(D), which 

includes “any offense involving . . . fraud in the sale of 

securities.” 

28 U.S.C. § 2461(c) requires forfeiture whenever a defendant in a criminal case “is convicted of the offense 

giving rise to the forfeiture,” in which case the court “shall

order the forfeiture of the property as part of the sentence 

in the criminal case.” This forfeiture is mandatory when 

the relevant prerequisites are met. See United States v. 

Blackman, 746 F.3d 137, 143 (4th Cir. 2014) (“Notably, 

§ 2461(c) (in conjunction with § 981) provides that the 

district court ‘shall order’ forfeiture in the amount of the 

criminal proceeds. As the Supreme Court remarked in a 

related context, ‘Congress could not have chosen stronger 

words to express its intent that forfeiture be mandatory in 

cases where the statute applied.’”) (quoting United States 

v. Monsanto, 491 U.S. 600, 607 (1989)). 

Though we have not considered the precise question 

posed here, other courts of appeals have done so, repeatedly concluding that forfeitures of property to the government similar to the one at issue are not deductible 

because they are punitive. See King v. United States, 152

F.3d 1200, 1202 (9th Cir. 1998) (“on this matter of national tax policy there is something to be said for uniformity 
NACCHIO v. US 15

among the circuits”). For example, in Wood, the Fifth 

Circuit denied a loss deduction under § 165 for the civil 

forfeiture of proceeds from the taxpayer’s drug trafficking 

activities. 863 F.2d at 418. The appellant pled guilty to a 

criminal offense, conspiracy to import marijuana and 

importation of marijuana, and was sentenced to serve 

four years in prison and pay a $30,000 fine. Id. The 

appellant argued, inter alia, that, because he already paid 

his criminal debt by means of imprisonment and the 

$30,000 fine, he should not have to pay taxes on proceeds 

he forfeited to the government. Id. at 421. The court, 

nevertheless, found that his drug proceeds were taxable 

income and that “[f]orfeiture cannot seriously be considered anything other than an economic penalty for drug 

trafficking.” Id. See also Fuller v. Comm’r, 213 F.2d 102, 

105-06 (10th Cir. 1954) (disallowing business loss deduction under the precursor of § 165 for the cost of whiskey 

confiscated by law enforcement agencies of a “dry” state);

King, 152 F.3d at 1201-02 (no loss deduction under 

§ 165(a) for voluntary disclosure and forfeiture of hidden 

drug trafficking profits). 

In non-tax cases, our sister courts of appeals have 

confirmed that, while restitution is compensatory, criminal forfeiture under § 2461(c) serves a distinct, punitive

purpose. The Eleventh Circuit held in United States v. 

Joseph that a convicted criminal could not offset his 

restitution by the amount he forfeited under 18 U.S.C. 

§ 981 and 28 U.S.C. § 2461. 743 F.3d 1350, 1354 (11th 

Cir. 2014). The court held that, “[w]hile restitution seeks 

to make victims whole by reimbursing them for their 

losses, forfeiture is meant to punish the defendant by 

transferring his ill-gotten gains to the United States 

Department of Justice (DOJ).” Id. In Blackman, the 

Fourth Circuit reversed the trial court’s ruling that it did 

not need to order criminal forfeiture under 28 U.S.C. 

§ 2461(c) when it had ordered restitution in the same 

amount for a different offense than the one at issue in the
16 NACCHIO v. US

case. In so doing, the court stated that, restitution and 

forfeiture serve “distinct purposes: restitution functions to 

compensate the victim, whereas forfeiture acts to punish 

the wrongdoer.” Blackman, 746 F.3d at 143. 

In United States v. Venturella, defendants who were 

convicted of mail fraud argued that “imposing restitution 

and forfeiture for the same crime is an improper double 

payment, which constitutes double jeopardy.” 585 F.3d 

1013, 1019 (7th Cir. 2009). The Seventh Circuit disagreed, stating that “forfeiture seeks to punish a defendant 

for his ill-gotten gains by transferring those gains . . . to 

the United States Department of Justice . . . while restitution seeks to make the victim whole.” Id. at 1019-20 

(quoting United States v. Emerson, 128 F.3d 557, 567 (7th 

Cir. 1997) (internal quotation marks omitted)); see also 

United States v. Taylor, 582 F.3d 558, 567 (5th Cir. 2009)

(“Courts have also declined to offset restitution based on 

the distinct purposes served by restitution and forfeiture.”). 

Like the trial court, Nacchio cites to Stephens to argue

that not all payments ordered by a court pursuant to a 

criminal conviction are non-deductible losses. The taxpayer in Stephens, like Nacchio, was convicted of white 

collar crimes. At sentencing, the prosecutor recommended that Stephens pay restitution to the company whose 

funds he had embezzled. Stephens, 905 F.2d at 668. 

Stephens was then sentenced to several years in prison 

and fines, but part of the prison term was suspended “on 

the condition that he make restitution to Raytheon” in the 

amount he embezzled plus interest. Id. The Second 

Circuit held that the restitution was “a remedial measure 

to compensate another party, not a ‘fine or similar penalty.’” Id. at 672-73. It thus found the restitution deductible under § 165. 

Stephens is distinguishable. Unlike Nacchio’s case, 

the Stephens case involved court-ordered restitution—
NACCHIO v. US 17

imposed as a condition of his partially suspended sentence—which was clearly remedial, as it restored the 

embezzled funds to the injured party. The court noted 

that the payment was so “Raytheon [would] get its money 

back” and that “Stephens’ payment was made to Raytheon and not ‘to a government.’” Id. at 673. Thus, allowing 

the restitution to be deducted comported with those cases

explaining the difference between restitution orders and 

forfeiture orders. In Nacchio’s case, by contrast, forfeiture, not restitution, is at issue. The court’s amended 

judgment specifically provided that the amount of restitution owed was “$0.00” and that restitution was “not 

applicable.” J.A. 143, 148. At the resentencing hearing, 

the district court judge described Nacchio’s sentence of 

imprisonment, fine, and disgorgement as “three forms of 

penalty.” J.A. 486. The judge further found that “the goal 

of restitution, sadly [ ] is not applicable here” because 

“there is no provision in the law for restitution.” Id. 

Instead, the district court directed that the fine of 19 

million dollars “be deposited to the Crime Victims’ Fund” 

to “help fund state and local victims’ assistance programs[,] . . . And the forfeiture money can be used to 

assist victims within limitations under the law.” Id.

(emphasis added). 

Nacchio clings to this last point—the fact that the forfeited funds made their way to the victims of the crimes. 

He argues that the remission process by which the funds 

were distributed to the victims is governed by the Civil 

Asset Forfeiture Reform Act of 2000, which has a compensatory purpose: to restore forfeited assets to victims of the 

offense giving rise to the forfeiture. He also points out 

that the remission payments were made to identifiable 

persons who would have a civil cause of action against Mr.

Nacchio to recover those funds. He insists that the forfeiture was tantamount to restitution. 

The Attorney General’s post-hoc decision to use the 

forfeited funds for remission did not transform the char-
18 NACCHIO v. US

acter of the forfeiture so that it was no longer a “fine or 

similar penalty” under § 162(f). The decision to use the 

forfeited funds to compensate the victims was discretionary. Section 981(e) authorizes the Attorney General to 

“retain property forfeited pursuant to this section, or to 

transfer such property on such terms and conditions as he 

may determine” “(6) as restoration to any victim of the 

offense giving rise to the forfeiture.” 18 U.S.C. § 981

(emphases added). In addition, 21 U.S.C. § 853(i), which 

describes criminal forfeiture procedures applicable to 

§ 2461(c), empowers the Attorney General to “grant 

petitions for . . . remission of forfeiture . . . or take any 

other action to protect the rights of innocent persons” with 

respect to forfeited property. 21 U.S.C. § 853(i) (emphases 

added). 

Consistent with these statutes, the prosecutor stated 

at resentencing that the decision as to whether Nacchio’s 

forfeiture would be used to compensate victims would be 

made by the AFMLS in Washington. J.A. 494-95. The 

Attorney General has delegated the authority to grant 

petitions for remission to the Chief of the AFMLS. J.A. 

252.

Allowing Nacchio to deduct his forfeiture because the 

AFMLS decided to distribute it to victims through remission would mean that whether two people convicted of the 

same crimes could deduct their criminal forfeiture would 

turn not on their actions, or the statutes governing their 

sentencings, but on the after-the-fact discretionary decisions of a third party. This is not the law. Instead, “[t]he 

characterization of a payment for purposes of § 162(f) 

turns on the origin of the liability giving rise to it.” Bailey 

v. Comm’r, 756 F.2d 44, 47 (6th Cir. 1985) (citing Middle 

Atl. Distribs. v. Comm’r, 72 T.C. 1136, 1145 (1979); Uhlenbrock v. Comm’r, 67 T.C. 818, 823 (1977)). We think 

Congress could not have intended to create a scheme in 

which the applicability of § 162(f) would depend upon how 
NACCHIO v. US 19

the government, in its discretion, later decided to use the 

funds generated by a fine or similar penalty. 

Second, although the forfeited funds wended their 

way to Nacchio’s victims, the forfeited amount is unrelated to the amount of losses suffered by the victims. While 

Nacchio forfeited his criminal “proceeds”—about 44 

million dollars—the victims claim to have suffered almost 

12 billion dollars in cumulative losses. J.A. 513. Though 

not dispositive, the fact that Nacchio’s forfeiture was 

pegged to his profits and not to the victims’ losses weighs 

against a conclusion that Nacchio’s forfeiture was restitution to those victims. Nacchio cites Fresenius Medical

Care Holdings, Inc. v. United States, 763 F.3d 64 (1st Cir. 

2014), for the proposition that this court must look to the 

“economic reality,” rather than the form, of the particular 

transaction at issue when deciding proper tax treatment. 

Here, the economic reality is that Nacchio was punished 

through forfeiture, not that Nacchio’s victims were fully 

compensated. Even when a fine subsequently is applied 

as restitution, deduction of the fine is disallowed. Bailey,

756 F.2d at 47. 

For all of these reasons, we hold that the trial court 

erred in ruling that Nacchio may deduct his forfeiture 

under § 165. 

B. I.R.C. § 162(a) 

We briefly address Nacchio’s cross-appeal, in which he 

argues that the Court of Federal Claims erred in holding 

that the forfeited funds are not deductible under I.R.C. 

§ 162. Nacchio, 115 Fed. Cl. at 203 n.7. It is necessary to 

address this cross-appeal in light of our holding of nondeductibility under § 165 because Nacchio contends that

§ 162 provides an alternative basis for him to deduct the 
20 NACCHIO v. US

forfeiture.4 Section 162(a) allows “as a deduction all the 

ordinary and necessary expenses paid or incurred during 

the taxable year in carrying on any trade or business.” 

Nacchio argues that his criminal forfeiture was an “ordinary and necessary expense paid or incurred in carrying 

on his trade or business” because he was required to

forfeit funds that Qwest, through the mechanism of

options, had given to him as compensation in the course of 

his employment as Qwest’s CEO. 

Because § 162(f) also applies to loss deductions under 

§ 162(a), we affirm the trial court’s ruling that Nacchio 

cannot deduct his forfeiture under § 162 for the reasons 

articulated in Section A. above. 

C. I.R.C. § 165(c)(1) 

Nacchio also argues that the Court of Federal Claims

did not specify in its holding whether the deduction was 

allowed under § 165(c)(2) or § 165(c)(1). Therefore, 

Nacchio argues, for the first time on appeal, that his

forfeiture payment is deductible under either provision. 

Thus, his position is that the forfeiture is alternatively 

deductible under § 165(c)(1) as a “loss” incurred in a

“trade or business.” We generally do not consider issues 

that were not clearly raised in the proceeding below. 

Mass. Mut. Life Ins. Co. v. United States, 782 F.3d 1354, 

1369 (Fed. Cir. 2015) (citing Hormel v. Helvering, 312 

U.S. 552, 556 (1941) and San Carlos Apache Tribe v. 

United States, 639 F.3d 1346, 1354-55 (Fed. Cir. 2011)). 

We think it is clear that the Court of Federal Claims only 

considered deductibility under (c)(2) and not (c)(1) of 

 

4 Because Nacchio’s argument is really one that 

urges an alternative ground in support of the trial court’s 

judgment, that argument is not properly raised as a crossappeal. No matter the procedural posture, we conclude 

that the argument is not well taken. 
NACCHIO v. US 21

§ 165. See Nacchio, 115 Fed. Cl. at 201. In any event, 

Nacchio’s new argument is meritless. Nacchio’s forfeiture 

is not deductible under either provision of § 165(c) because it is a fine or similar penalty. 

CONCLUSION

For the foregoing reasons, we reverse the trial court’s

holding that Nacchio may deduct his forfeiture as a loss 

under § 165 and affirm its holding that Nacchio may not 

deduct his forfeiture as a loss under § 162. Because the 

parties do not dispute that deductibility under another 

provision of the tax code is a prerequisite to deductibility 

under § 1341, we further hold that Nacchio also may not 

seek special tax relief under § 1341. We, thus, do not 

reach the government’s contention that Nacchio is estopped by his criminal conviction from seeking tax relief 

under § 1341. We affirm-in-part, reverse-in-part, and 

remand for entry of judgment in favor of the government. 

AFFIRMED-IN-PART, REVERSED-IN-PART, AND 

REMANDED

COSTS

Each side to bear their own costs.