[00:00:29] Speaker 02:
Okay, the last case before the court today is an appeal from the Court of Federal Claims, case number 155114.

[00:00:35] Speaker 02:
Mr. Christensen, do you pronounce that nachio or nachio?

[00:00:43] Speaker 02:
I believe it is nachio.

[00:00:44] Speaker 05:
Nachio.

[00:00:45] Speaker 02:
Nachio versus the United States.

[00:00:47] Speaker 02:
Mr. Christensen, you want three minutes for rebuttal?

[00:00:50] Speaker 05:
Yes, please.

[00:00:51] Speaker 02:
Okay.

[00:00:51] Speaker 02:
You may begin.

[00:00:52] Speaker 05:
Thank you, and may it please the court

[00:00:56] Speaker 05:
The court below aired in two respects.

[00:00:58] Speaker 05:
First, in holding that Mr. Nascio was entitled to a tax deduction for a criminal forfeiture payment he made to the United States as part of the sentence for insider trading.

[00:01:10] Speaker 05:
Second, the court aired in holding that his criminal conviction did not collaterally stop him from seeking to establish in this case that it appeared to him that he had an unrestricted right to the proceeds of his insider trading offenses.

[00:01:26] Speaker 02:
Do we need to decide the first question if we decide the second question in your favor?

[00:01:31] Speaker 02:
Yes, Your Honor.

[00:01:32] Speaker 05:
If the court rules that Mr. Nashew is not entitled to a deduction, then he is not entitled to recover any refund whatsoever.

[00:01:41] Speaker 05:
If the court, however, rules that he is collaterally stopped from the benefits of Section 1341, then he would be entitled to a small refund in the amount of $6,000 or so.

[00:01:52] Speaker 05:
So the first issue, however, would be dispositive, and the court would not necessarily need to reach the second issue.

[00:01:58] Speaker 04:
He gets a small refund, and then that amount of his refund depends upon whether or not we agree with his so-called cross appeal in that period?

[00:02:07] Speaker 05:
Yes, there's a potential that that amount could vary depending on whether the court agreed that this was a business expense.

[00:02:13] Speaker 04:
I assume that we decided in your favor on the second issue of collateral estoppel.

[00:02:21] Speaker 04:
Can we just leave the first issue hanging or do we have an obligation to respond to what people described as a cross appeal because it does make a difference to the dollars?

[00:02:34] Speaker 04:
According to your stipulated settlement, the amount of money that the federal government is going to allow a return of taxes paid, I guess, is what it is.

[00:02:45] Speaker 04:
depends upon whether or not the deduction was under 162 or 165, and if under 162, which section?

[00:02:53] Speaker 04:
Right?

[00:02:54] Speaker 05:
Right.

[00:02:54] Speaker 05:
So, regardless, if the court only held for the government with respect to the second issue, then Mr. Nasho would be entitled to some refund, whether it's $6,000, based on a deduction under section 165 or a little higher.

[00:03:10] Speaker 04:
The court file claim has already decided that he's got a 162, what is it,

[00:03:16] Speaker 04:
Deduction?

[00:03:17] Speaker 04:
A 165, C2.

[00:03:18] Speaker 04:
165, C2, right?

[00:03:22] Speaker 04:
And he's arguing for a 165-1 or a 162, right?

[00:03:26] Speaker 05:
That's correct.

[00:03:27] Speaker 05:
So either way, if the court only reached the second issue, he would be entitled to a

[00:03:36] Speaker 04:
an amount of a refund, but if the court holds a favor... I'm trying to get at it simply if we decide in your favor on collateral stop-all and say he's collaterally a stop so he gets no relief under that particular statute, right?

[00:03:50] Speaker 04:
That's right.

[00:03:50] Speaker 04:
We've still got dangling the question of whether or not he was entitled to a deduction.

[00:03:53] Speaker 05:
That's right.

[00:03:55] Speaker 04:
And if so, under which section?

[00:03:57] Speaker 04:
Because the lower court held he had an entitlement to 165C2.

[00:04:02] Speaker 04:
Yes.

[00:04:03] Speaker 05:
Yes, that is correct, Your Honor.

[00:04:04] Speaker 04:
Do we have to adjudicate that issue?

[00:04:06] Speaker 05:
If the court holds that Mr. Nacho is not entitled to a deduction at all, because it's barred by Section 162F or public policy, then there would be no refund.

[00:04:20] Speaker 04:
I understand that.

[00:04:21] Speaker 05:
Yes, Your Honor.

[00:04:23] Speaker 05:
So Section 162F provides that in the context of a trade or business, no deduction shall be allowed

[00:04:32] Speaker 05:
for any fine or similar penalty paid to a government for the violation of any law.

[00:04:39] Speaker 05:
The court below agreed and the parties do not dispute on appeal that a deduction that would be barred by section 162 would also be precluded under section 165 on public policy grounds.

[00:04:51] Speaker 05:
The court here held that section 162F did not bar a deduction, particularly because the court held that

[00:04:58] Speaker 05:
Nachos forfeiture was not a fine or similar penalty.

[00:05:02] Speaker 05:
Because it was restitution.

[00:05:04] Speaker 05:
That's what the court concluded that it was restitution.

[00:05:06] Speaker 02:
Is that really what the court concluded?

[00:05:08] Speaker 02:
Because I really read the lower court's decision to be based more on the notion that this was a disgorgement of profits, regardless of where it went.

[00:05:19] Speaker 05:
Yes, Your Honor, the forfeiture in the courts have consistently held that the purpose of a forfeiture is to punish a defendant who's been convicted of a serious crime by disgorging the illicit gains.

[00:05:32] Speaker 05:
That is the punishment imposed.

[00:05:33] Speaker 05:
And so yes, it's a disgorgement of the illicit gains imposed as a punishment, and the courts have consistently held and characterized forfeiture in that manner.

[00:05:42] Speaker 05:
So the fact that the gains were disgorged here supports

[00:05:47] Speaker 05:
the government's position and is consistent with the case law holding that forfeitures are intended to punish by disgorging ill-gotten gain.

[00:05:57] Speaker 03:
Whether or not there were victims from whom the ill-gotten gains had been debt.

[00:06:03] Speaker 03:
That's right.

[00:06:03] Speaker 05:
Restitution is an entirely, it's a distinct remedy with a separate purpose and the case law also clearly distinguishes between forfeiture and restitution.

[00:06:12] Speaker 05:
On the one hand,

[00:06:13] Speaker 05:
As I said, forfeiture is designed to punish by disgorging the ill-gotten gains.

[00:06:18] Speaker 05:
It shows that crime does not pay.

[00:06:21] Speaker 05:
On the other hand, restitution is intended to compensate victims and it's paid to the victims.

[00:06:29] Speaker 05:
And the calculation of a restitution amount is based on the victim's loss, as opposed to a forfeiture penalty, which is based on the gain from the criminal activity

[00:06:41] Speaker 04:
But here the money that actually got paid to, I guess, the class action plaintiffs was based on their loss.

[00:06:49] Speaker 04:
Excuse me?

[00:06:49] Speaker 04:
The amount that each individual person, and I guess there were class action plaintiffs, received was based on their loss.

[00:06:57] Speaker 04:
The so-called restitutionary payment, when they cut the checks to the people, that was based on their loss.

[00:07:04] Speaker 04:
They received a pro rata share.

[00:07:07] Speaker 04:
apparently based on what their losses were.

[00:07:10] Speaker 04:
They filed claims and said, this is the amount we claim to have lost.

[00:07:14] Speaker 04:
And then there was maybe not enough in the pot to satisfy the whole thing, but they prorated it to their loss.

[00:07:21] Speaker 05:
Yes, that's correct, Your Honor.

[00:07:22] Speaker 05:
But the important thing here is that the forfeiture amount, the $44 million, was not calculated at all with respect to the loss of the victims.

[00:07:31] Speaker 05:
There was no determination in the criminal case

[00:07:34] Speaker 05:
as to what amount any victim had suffered in damages.

[00:07:38] Speaker 05:
Instead, by statute, the forfeiture amount was required to be determined to equal the net profit of the Mr. Nassio gain through his criminal insider trading offenses.

[00:07:52] Speaker 05:
So that was the calculation of the forfeiture in this case.

[00:07:56] Speaker 05:
It was based on his gain.

[00:07:59] Speaker 05:
And the loss suffered by any victims played no part

[00:08:04] Speaker 05:
in that calculation.

[00:08:06] Speaker 02:
So this just means that the government gets paid twice because the government gets taxes on this $44 million gain and then gets to keep the $44 million without any deduction.

[00:08:20] Speaker 05:
The policy behind Section 162F is that in the case of a fine or similar penalty that's paid to a government for the violation of law,

[00:08:32] Speaker 05:
such fines or penalties must be paid with after-tax dollars.

[00:08:36] Speaker 05:
That's the policy that is manifested in section 162.

[00:08:40] Speaker 02:
But the answer to my factual question is yes.

[00:08:44] Speaker 05:
Yes, so essentially the penalty is paid with after-tax dollars and the person paying the penalty is not entitled to deduct that amount.

[00:08:54] Speaker 05:
In other words, even though the person has already paid taxes on that amount.

[00:08:58] Speaker 05:
So in any case,

[00:09:00] Speaker 05:
where section 162f applies, that would be the situation.

[00:09:04] Speaker 03:
I guess if I'm a taxpayer and I'm hit with a fine, the fine is going to be paid with after-tax dollars if it comes out of my bank account, because my bank account has been accumulated only with after-tax dollars.

[00:09:19] Speaker 03:
So I suppose you could say that that's parallel.

[00:09:23] Speaker 03:
It does sound like there is a kind of double hit here, but you're saying that's what the statute

[00:09:29] Speaker 03:
specifically requires.

[00:09:30] Speaker 05:
That is the policy behind section 162.

[00:09:32] Speaker 05:
But there was a separate fine.

[00:09:35] Speaker 05:
There was a separate fine.

[00:09:36] Speaker 02:
He's not asking for any kind of deduction as it relates to that.

[00:09:39] Speaker 05:
No, and there's no argument with respect to that.

[00:09:41] Speaker 05:
And Your Honor, with respect to the forfeiture as well, the Supreme Court, the forfeiture was either a fine or similar to a fine.

[00:09:55] Speaker 05:
The Supreme Court in the Bajajian case, which was an Eighth Amendment case, explained that forfeitures are fines if they constitute punishment for an offense.

[00:10:08] Speaker 05:
And the cases are consistent that a forfeiture and a criminal forfeiture, as we have here, are intended to punish the defendant for guilty conduct by disgorging the ill-gotten gains.

[00:10:21] Speaker 02:
What about the fact that all of those cases that you're talking about were

[00:10:25] Speaker 02:
based at a point in time where there had not been this congressional decision to sort of make sure that those forfeited amounts get to victims.

[00:10:40] Speaker 02:
In other words, yes, that's how everything worked.

[00:10:43] Speaker 02:
I did this a lot at the district court, take people's cars, take people's houses, take anything that was their ill-gotten gains.

[00:10:51] Speaker 02:
And yet there were victims out there who were never getting paid.

[00:10:54] Speaker 02:
So Congress makes a decision that says, no, we need to basically morph this forfeiture process into a process where we can give recompense to the victims.

[00:11:05] Speaker 05:
So I believe your honor is referring to the Civil Asset Forfeiture Reform Act of 2000.

[00:11:10] Speaker 05:
Again, Congress intent and the purpose manifested in the legislative history of that act was

[00:11:19] Speaker 05:
was focused on protecting innocent property owners from civil forfeitures of their property.

[00:11:26] Speaker 05:
And so what CAFRA did was to enact safeguards to protect innocent owners from the wrongful seizure of their property by the government.

[00:11:36] Speaker 05:
And one of the critical ways that Congress did that was by enacting section 2461 paragraph C, which is a forfeiture statuted issue in our case,

[00:11:48] Speaker 05:
in order to encourage the use of criminal forfeiture in lieu of civil forfeiture.

[00:11:58] Speaker 05:
Because in a criminal forfeiture case, there's no possibility that the forfeiture is going to be imposed upon an innocent owner.

[00:12:06] Speaker 05:
Rather, it's only imposed at the culmination of a criminal proceeding that results in a conviction of an underlying felony

[00:12:15] Speaker 05:
Uh, and it cannot be imposed on an innocent person.

[00:12:18] Speaker 05:
And so Congress was enacted CAFRA and as relevant here, the purpose was to encourage a greater use of criminal forfeiture, which cannot be to protect.

[00:12:30] Speaker 03:
All of that may be true.

[00:12:33] Speaker 03:
I'm confident it is true, but that doesn't, I think, answer Judge O'Malley's question, which is that

[00:12:41] Speaker 03:
If you have a system in which by virtue of the combination of statute and regulation, you've converted in effect, at least with respect to those crimes as to which there are identifiable victims, a forfeiture system into, in effect, a restitution system, isn't it appropriate, as the trial court did here, to treat the whole transaction as a form of restitution?

[00:13:10] Speaker 03:
So I would strongly... That's really, I think, the heart of what the trial court was doing in this case.

[00:13:15] Speaker 03:
So if you could address that.

[00:13:17] Speaker 05:
Yeah, I would strongly disagree with that.

[00:13:21] Speaker 05:
In CAFRA, Congress did give the attorney general discretion to use amounts that were forfeited to grant remission, but by no means was that a requirement.

[00:13:35] Speaker 05:
This court has held and other courts have held that

[00:13:38] Speaker 05:
the remission process, which was totally separate from the criminal proceeding in this case, is purely a matter of administrative grace, whether the attorney general decides to use the funds in that matter.

[00:13:50] Speaker 03:
Do you think the regulations can find that exercise of administrative grace in a meaningful way?

[00:13:56] Speaker 03:
I guess is the next question.

[00:13:58] Speaker 05:
I don't think so.

[00:13:59] Speaker 05:
I think the attorney general has sole discretion

[00:14:03] Speaker 05:
whether to grant those petitions or to use the forfeited funds for any of the other number of authorized uses that are specifically enumerated in the statute.

[00:14:14] Speaker 04:
Is there any mandatory language in the regulations like the attorney general shall remit unless he fines?

[00:14:22] Speaker 05:
Absolutely not.

[00:14:23] Speaker 05:
It uses the term may, the attorney general may.

[00:14:26] Speaker 02:
But may only in very limited circumstances, right?

[00:14:30] Speaker 02:
I mean, he's

[00:14:31] Speaker 02:
He's very cabined in terms of his ability to not give it to victims when victims can be identified.

[00:14:37] Speaker 05:
No, no, I don't agree with that.

[00:14:39] Speaker 05:
He has, under the statutes and the regulations, he has complete discretion.

[00:14:44] Speaker 05:
And he's not required to grant remission.

[00:14:48] Speaker 02:
There are a number of other authorized uses.

[00:14:52] Speaker 02:
Yeah, but it's not like he can pick from column A or column B or column C. In other words, he has to go to column A unless there's

[00:15:01] Speaker 02:
a more extreme justification to go to column B or C, right?

[00:15:05] Speaker 02:
That's not correct, Your Honor.

[00:15:06] Speaker 05:
That's not the way that I read the statute or the implementing regulations with respect to remission.

[00:15:13] Speaker 05:
And I might add that when we get away and start looking at the government's subsequent use of the funds, we're starting to stray from the

[00:15:26] Speaker 05:
purpose for which section 162 F was enacted, which was to deny a deduction in cases where allowing a deduction was deemed to violate public policy.

[00:15:38] Speaker 05:
The court below should not have looked beyond the criminal judgment itself in determining whether the forfeiture was deductible.

[00:15:48] Speaker 02:
So in this circumstance, because the statute requires forfeiture and doesn't allow for a

[00:15:56] Speaker 02:
criminal judgment that includes a restitution, then you would never have, no matter what happens to the money, you would never have something that would be viewed as restitutionary.

[00:16:07] Speaker 02:
Is that your view?

[00:16:08] Speaker 02:
Well, Your Honor, here restitution simply was not applicable.

[00:16:11] Speaker 02:
Right, that's what I'm saying, because the criminal statute under which he was charged didn't allow for restitution.

[00:16:18] Speaker 05:
And had it, and had Mr. Nascio been ordered to pay restitution in the criminal case, that would have been deductible.

[00:16:25] Speaker 05:
But the judge didn't have the authority to order him to court.

[00:16:28] Speaker 05:
The restitution was inapplicable, is what the district judge concluded.

[00:16:33] Speaker 04:
Well, under what circumstances does the court have the authority to order a restitution in a criminal setting?

[00:16:40] Speaker 05:
My understanding is that there was no applicable restitution standard in the whole system.

[00:16:44] Speaker 03:
Is there any in the whole system?

[00:16:46] Speaker 03:
Yes.

[00:16:46] Speaker 03:
Well, what about the Stevens case?

[00:16:48] Speaker 03:
That was a case where the judge, as a condition of probation, imposed an obligation of restitution, right?

[00:16:54] Speaker 03:
That's right.

[00:16:55] Speaker 03:
Would a judge be free and would Judge Nottingham or Judge Krieger have been free to do that in this case?

[00:17:01] Speaker 05:
I'm not sure what the answer to that is.

[00:17:04] Speaker 05:
My understanding is that there was not an applicable restitution statute.

[00:17:11] Speaker 03:
I'm not sure whether there needs to be a statute in order for the judge to do something which is not at least prohibited by law as a condition of probation.

[00:17:20] Speaker 05:
Your Honor, I'm not sure what the answer to that question is.

[00:17:22] Speaker 05:
What discretion the district court would have had to grant

[00:17:25] Speaker 05:
restitution.

[00:17:28] Speaker 05:
In Bailey, the Sixth Circuit held that in characterizing a payment for purposes of Section 162F, the court must look to the origin of the liability given rise to that forfeiture.

[00:17:43] Speaker 05:
And here it was the criminal judgment which required Nascio to forfeit the money to the United States.

[00:17:51] Speaker 05:
There was the order

[00:17:53] Speaker 05:
The judgment said that restitution was not even applicable.

[00:17:57] Speaker 05:
So Mr. Nasho never paid restitution to any victims.

[00:18:01] Speaker 05:
And the government's discretionary decision to do so after the fact is not relevant to the question of deductibility under Section 162F.

[00:18:11] Speaker 05:
Your time is up.

[00:18:12] Speaker 02:
We'll give you two minutes for rebuttal.

[00:18:18] Speaker 02:
Is it Mr. Gentile or Mr. Gentile?

[00:18:21] Speaker 01:
Thomas Gentile, Your Honor.

[00:18:23] Speaker 01:
Okay, even better.

[00:18:25] Speaker 01:
Thank you and may it please the court.

[00:18:27] Speaker 01:
At the oral argument on the party's cross motions for summary judgment before the court of claims, Judge Williams posed the fundamental question that this case presents.

[00:18:35] Speaker 01:
Why should Mr. Naccio pay taxes on money that he didn't get to keep?

[00:18:40] Speaker 01:
Judge Williams pointed out that day, normally in American jurisprudence, one pays taxes on income that the taxpayer gets to keep.

[00:18:48] Speaker 01:
This is a basic premise of tax law.

[00:18:51] Speaker 01:
In the Stevens case,

[00:18:53] Speaker 01:
The Second Circuit applied this premise in circumstances very similar to those of Mr. Naccio's case.

[00:18:59] Speaker 01:
The Second Circuit held that because Mr. Stevens has already paid taxes on the funds that he ultimately paid as restitution, disallowing the deduction for repaying those funds would result in a double stint.

[00:19:12] Speaker 02:
Isn't the problem there that there was an actual restitution order in that case?

[00:19:16] Speaker 01:
Your Honor, labels don't matter here, whether you call it restitution or compensatory payment or remedial payment.

[00:19:22] Speaker 01:
The case law regarding section 162F and the public policy exception holds that you need to look at the economic reality of the transaction to determine whether a payment is compensatory in nature or punitive in nature.

[00:19:38] Speaker 02:
So the fact that it fits into a... When you say in nature, when do we decide that?

[00:19:42] Speaker 02:
Do we decide after the fact to see if someone got some money or do we look at whether it's classified as a forfeiture or a restitution?

[00:19:50] Speaker 01:
Now the government submits

[00:19:52] Speaker 01:
that there's something inherent about forfeiture that is necessarily punitive.

[00:19:58] Speaker 01:
But that is not the case.

[00:20:00] Speaker 01:
The government would say that there's something inherent about forfeiture that necessarily... Criminal forfeiture.

[00:20:09] Speaker 01:
We're talking about criminal forfeiture.

[00:20:10] Speaker 01:
That's what's applicable in this case.

[00:20:12] Speaker 01:
Right.

[00:20:13] Speaker 03:
But there are various differences between civil and criminal forfeiture that may obtain here.

[00:20:18] Speaker 03:
So what the government's argument is that criminal forfeiture is

[00:20:22] Speaker 01:
Well, remember, Your Honor, respectfully, that Stevens was a criminal case.

[00:20:27] Speaker 01:
I understand that.

[00:20:27] Speaker 01:
And Caravata, which is from the tax court, was also a criminal case.

[00:20:31] Speaker 01:
But there was no forfeiture in Stevens.

[00:20:32] Speaker 01:
Yes, but there were restitutionary or compensatory payments, compensatory in nature, that were found to be deductible.

[00:20:41] Speaker 01:
Here, the issue of first impression in this case is whether there is something necessarily punitive about forfeiture

[00:20:51] Speaker 01:
that distinguishes it from any other payment, whether you call it restitutionary or compensatory, in nature.

[00:20:59] Speaker 02:
Well, in this particular case, the criminal section under which it was charged allows for forfeiture but does not authorize a restitution payment.

[00:21:08] Speaker 01:
It does not specifically authorize restitution.

[00:21:12] Speaker 01:
But the facts of this case, which have never been in dispute, is that the funds that were forfeited were channeled to qualified

[00:21:21] Speaker 01:
and identifiable victims and given to them as compensatory payments for losses that they incurred due to the conduct that was the subject of the forfeiture.

[00:21:32] Speaker 02:
Could the judge have ordered restitution, for instance, as a condition of supervised release in this case?

[00:21:41] Speaker 01:
Well, this is not a case that involves a conditionary or an in lieu payment.

[00:21:47] Speaker 01:
This is a payment that was agreed to by all parties at the resentencing.

[00:21:51] Speaker 01:
At the resentencing, the prosecutor presented to the resentencing judge the intention that these funds, the forfeited funds, would be used to compensate victims.

[00:22:01] Speaker 01:
That was stated by the government's attorney at the resentencing hearing.

[00:22:07] Speaker 01:
And that belies the notion that this was a subsequent act of the attorney general.

[00:22:11] Speaker 01:
If it was represented at that hearing, the attorney general wasn't going to turn around and at whim keep these forfeited funds in the government's coffers

[00:22:19] Speaker 01:
when, under the terms of the CAFR statute, there were identifiable and qualified victims to whom the money could be channeled.

[00:22:27] Speaker 02:
But you didn't really answer my question.

[00:22:30] Speaker 02:
Despite the fact that there was an intention to pass this money on, there was never an order that was called restitution, right?

[00:22:38] Speaker 04:
No, there was no order that was called that.

[00:22:40] Speaker 04:
The very sentencing judge the second time around said that this is not compensation.

[00:22:45] Speaker 01:
The judge did not say this was compensation.

[00:22:47] Speaker 01:
They said this is not restitution.

[00:22:49] Speaker 01:
That's right.

[00:22:50] Speaker 01:
And our position all along, Your Honor, has been that it doesn't matter if it fits into the neat little box of restitution.

[00:22:57] Speaker 01:
If it's a payment that's compensatory in nature, it is deductible.

[00:23:01] Speaker 03:
So your position then is if the government had kept this money, then you would lose this case.

[00:23:08] Speaker 01:
That's not what happened, Your Honor.

[00:23:10] Speaker 01:
And our position is that the fact that the money was channeled to

[00:23:17] Speaker 01:
But I want to know the answer to my question.

[00:23:20] Speaker 03:
Is your position that if the government had kept the money, that you would have no argument?

[00:23:24] Speaker 01:
In that case, in that hypothetical, it would not have been a compensatory payment.

[00:23:28] Speaker 01:
So we wouldn't be here today.

[00:23:29] Speaker 01:
Okay.

[00:23:30] Speaker 01:
So you would lose.

[00:23:32] Speaker 02:
So in each case, we have to ultimately look forward to see what the attorney general decides to do.

[00:23:40] Speaker 01:
We need to look forward to see what actually happened.

[00:23:43] Speaker 01:
I don't believe the attorney general had a broad discretion here.

[00:23:45] Speaker 04:
I thought you conceded a footnote 18 in your red brief that Bailey applies, that the characterization of the payment turns on the origin of the liability giving rise to it.

[00:24:01] Speaker 04:
And I read your footnote to say, yeah, you agree with that.

[00:24:04] Speaker 04:
You just make some arguments.

[00:24:08] Speaker 01:
The characterization of the payment for purposes of 162f turns on the origin of the liability giving rise to it does not mean that just because it happened in a criminal case or just because it carried the label of forfeiture that it's non-deductible.

[00:24:22] Speaker 01:
Why not?

[00:24:23] Speaker 01:
Because if you look at, for example, the Fresnius case from the first circuit, that holds that we need to look at the economic reality of the transaction.

[00:24:31] Speaker 01:
That is the origin of the liability.

[00:24:36] Speaker 04:
Isn't the origin of the liability here the conviction and the sentence?

[00:24:41] Speaker 01:
But the conviction and the sentence in our argument, Your Honor, are not determinative of whether the payment is deductible.

[00:24:49] Speaker 04:
It's not determinative of whether or not it's a penalty?

[00:24:52] Speaker 04:
Well, Section 162... They say, you know, what we're asking you to do is we're disforging amount of money that has nothing to do with loss.

[00:25:01] Speaker 04:
We have no idea what the status of the class action plaintiffs is.

[00:25:05] Speaker 04:
You got 44 million bucks that you should not have had.

[00:25:09] Speaker 04:
You, Mr. Naccio, disgorge it.

[00:25:12] Speaker 04:
That doesn't sound like it has anything at all to do with distributing money to the victims of the insider trading at the origin, at the time of the liability giving rise to it.

[00:25:24] Speaker 04:
And as I say, I saw you to concede that we apply bailing.

[00:25:30] Speaker 01:
Your Honor, the phrase, the characterization of a payment turns on the origin of the liability giving rise to it, is not determinative of deductibility.

[00:25:41] Speaker 01:
The fact that this took place in a criminal proceeding is not determinative of deductibility.

[00:25:47] Speaker 01:
You mentioned that it's not a penalty.

[00:25:48] Speaker 04:
Aren't you being circular?

[00:25:49] Speaker 01:
I'm sorry, Your Honor?

[00:25:52] Speaker 04:
You're saying, well, what happens way down the end that has nothing to do with what was in the mind of the sentencing judge or the reason for imposing the forfeiture?

[00:26:00] Speaker 04:
There's nothing to do with characterization, because you look later on to see what happened.

[00:26:06] Speaker 01:
That's what you're... Well, one thing we need to remember about the unique facts of this case, Your Honor, is that it was expressly stated... But do you agree that the $44 million has got actually nothing to do with the amount of the loss?

[00:26:17] Speaker 04:
That's the point that your adversary is making.

[00:26:18] Speaker 01:
The $44 million is money that accrued to Mr. Nachio... Illegally.

[00:26:25] Speaker 01:
Mr. Nachio was convicted.

[00:26:26] Speaker 01:
We don't dispute that.

[00:26:27] Speaker 04:
Illegally.

[00:26:28] Speaker 04:
He had no entitlement to that money.

[00:26:31] Speaker 01:
And he was made to forfeit that money.

[00:26:34] Speaker 04:
That's right.

[00:26:35] Speaker 04:
That's what when you're convicted of a crime, you stole some money from the bank, you have it back.

[00:26:41] Speaker 01:
This is not like a bank robbery, Your Honor.

[00:26:44] Speaker 01:
This is a qualitatively different crime, because there were identifiable and qualified victims to whom the money could be routed.

[00:26:52] Speaker 03:
Well, the bank is a qualified victim of the bank.

[00:26:55] Speaker 01:
Yeah, you give the money back to the bank.

[00:26:56] Speaker 01:
You can, Your Honor, but

[00:26:58] Speaker 01:
But nice people do.

[00:27:02] Speaker 01:
For purposes of deductibility, particularly with regard to the fine or similar penalty qualification of 162F, this is not a penalty that is similar to a fine.

[00:27:14] Speaker 01:
A fine goes into the coffers of the government and never has anything to do with identifiable and qualified victims.

[00:27:21] Speaker 01:
This is qualitatively different from a fine under section 162F because this amount of money was routed

[00:27:28] Speaker 01:
to identify and qualify victims.

[00:27:30] Speaker 01:
I want to emphasize what happened at the resentencing hearing that the prosecutor went, stood in front of the judge and said, it is the intention of the government that this money be used to compensate victims.

[00:27:41] Speaker 01:
So this wasn't something that happened down the line.

[00:27:43] Speaker 01:
It was something that happened at the time of sentencing.

[00:27:45] Speaker 03:
Let me ask you this.

[00:27:46] Speaker 03:
There is a statute now in place.

[00:27:49] Speaker 03:
Victims' rights have become a major issue in recent years.

[00:27:52] Speaker 03:
There's a statute, I believe, that says fines.

[00:27:56] Speaker 03:
will be put into a fund which may be used to compensate victims, perhaps not specific victims of specific crimes.

[00:28:05] Speaker 03:
And I understand you draw that distinction, but suppose that in a particular case there's a fine and the attorney general says, you know what, in this particular case that the victim suffered a grievous harm and there's a $10,000 fine and I intend to use that fine specifically

[00:28:23] Speaker 03:
to compensate this victim.

[00:28:24] Speaker 03:
Would that fine then become deductible in your view?

[00:28:27] Speaker 01:
Well, first of all, when you're speaking about the statute, Your Honor, I believe you're speaking about the Crime Victims Fund.

[00:28:32] Speaker 01:
Right.

[00:28:32] Speaker 01:
And that is a fund that routes money that is paid as fines to general government programs to help victims of crimes generally.

[00:28:40] Speaker 03:
Right.

[00:28:40] Speaker 03:
And suppose in a particular instance, the Attorney General says, I am going to make sure if there's a $10,000 fine, $10,000 is going to the victim of this crime.

[00:28:51] Speaker 01:
I believe this is a very important distinction, Your Honor.

[00:28:53] Speaker 01:
I don't think a judge or the Attorney General has the authority to do that.

[00:28:58] Speaker 03:
Well, the Attorney General surely has the authority to say that $10,000 out of the fund will go to a particular victim, I would assume.

[00:29:07] Speaker 01:
I don't believe that's the case, Your Honor, respectfully.

[00:29:09] Speaker 01:
I believe that the Crime Victims Fund Act requires that the

[00:29:14] Speaker 01:
money-paid-as-fines go into this general fund.

[00:29:16] Speaker 01:
I do not believe there is discretion of the Attorney General to direct money out of that fund.

[00:29:21] Speaker 03:
But somebody has the discretion to direct money out of the fund, because money comes out of the fund.

[00:29:25] Speaker 01:
Thank you.

[00:29:25] Speaker 01:
It's never directed to specific victims who have been harmed by crime.

[00:29:30] Speaker 01:
It's directed to general programs of the government, including state governments, which are used to help victims of crimes generally.

[00:29:38] Speaker 01:
Somewhere down the line, it might be used to help someone who has suffered some crime, but it is not the

[00:29:42] Speaker 03:
Okay.

[00:29:43] Speaker 03:
Well, let's suppose there were the capacity to direct funds to particular victims out of the fine fund.

[00:29:53] Speaker 03:
Would that make, if that happened in a particular case, would that suddenly convert the fine into being deductible?

[00:30:02] Speaker 01:
Well, that's your argument, Your Honor, is that it would work a conversion from a fine into a penalty that is dissimilar to a fine.

[00:30:11] Speaker 01:
The hypothetical that you're posing strips a fine of the characteristic that makes it a fine, which is the fact that it does not go to qualified and identifiable victims.

[00:30:22] Speaker 01:
Actually, OK.

[00:30:24] Speaker 02:
Before you sit down, we need to turn to your alternative, your cross appeal.

[00:30:29] Speaker 02:
Because I don't really view that as an actual cross appeal.

[00:30:31] Speaker 02:
It's really an alternative basis to support the judgment.

[00:30:37] Speaker 02:
Let's give you a few extra minutes to talk about that and then we'll let the government respond.

[00:30:42] Speaker 01:
Thank you, Your Honor.

[00:30:44] Speaker 01:
First of all, if this court finds that Mr. Naccio's forfeiture is deductible under Section 1341, there's no need to touch these issues at all, whether it's deductible under Section 162, 165C1, or 165C2.

[00:31:00] Speaker 01:
We read the opinion of the Court of Claims as holding

[00:31:03] Speaker 01:
that the forfeiture was deductible under section 165 without necessarily specifying whether it was deductible under section 165C1 or section 165C2.

[00:31:15] Speaker 01:
We argue in our final brief that it should be viewed as deductible under both section 162 and section 165C1 because what was forfeited were

[00:31:29] Speaker 01:
the proceeds of compensatory stock options that Mr. Naccio was given as compensation for his services as the CEO of Quest.

[00:31:39] Speaker 02:
But that would be similar to personal income, right?

[00:31:42] Speaker 01:
It is personal income, Your Honor.

[00:31:44] Speaker 01:
It was reported on the tax return as personal income.

[00:31:46] Speaker 01:
We urge the court to hold that it is personal income.

[00:31:50] Speaker 01:
You're treating it as a business expense.

[00:31:52] Speaker 01:
Well, his business, his profession,

[00:31:56] Speaker 01:
was being the CEO of Quest.

[00:31:59] Speaker 01:
And courts have held that employment income qualifies under section 162.

[00:32:04] Speaker 01:
Thank you, Your Honor.

[00:32:11] Speaker 02:
Thank you.

[00:32:12] Speaker 02:
You have two minutes for rebuttal.

[00:32:19] Speaker 05:
Thank you, Your Honors.

[00:32:21] Speaker 05:
No court has ever recorded

[00:32:25] Speaker 05:
case has ever looked to the subsequent use by the government of an amount that's paid as a fine or penalty to determine its character for purposes of Section 162F, including the cases relied on by Mr. Nascio, the Fresenius case in the First Circuit.

[00:32:44] Speaker 05:
There was never any mention in any of those cases or any discussion as to how the government in its discretion says what we use that for.

[00:32:51] Speaker 04:
What about when at the sentencing hearing, the government itself says,

[00:32:55] Speaker 04:
and this stuff's going to be used for compensatory purpose.

[00:33:00] Speaker 05:
A couple points.

[00:33:01] Speaker 05:
First, the intent to do something should not be ascribed to the government until an authorized official has approved of that act.

[00:33:09] Speaker 05:
And in this case, that didn't happen until 2012.

[00:33:12] Speaker 02:
That's not the most persuasive argument you have, so why don't you go to your second point?

[00:33:17] Speaker 05:
The other point is that the resentencing hearing itself

[00:33:21] Speaker 05:
which is the earliest evidence that Mr. Nassio points to of an intent on the part of the government to compensate victims through remission, was three years after Mr. Nassio was sentenced to pay over the forfeiture and actually paid that forfeiture in 2007.

[00:33:36] Speaker 05:
The resentencing hearing was in 2010 and Mr. Nassio was not entitled to a deduction that he paid in 2007 based on the possibility.

[00:33:48] Speaker 02:
But his sentence was vacated.

[00:33:49] Speaker 02:
the whole sentence was vacated.

[00:33:51] Speaker 02:
So it all had to be reimposed.

[00:33:52] Speaker 02:
So it's a new sentence.

[00:33:56] Speaker 05:
The re-sentencing, basically, it was the same sentence except that the Tenth Circuit had held that the amount of the forfeiture was required to be the net profits rather than the gross profits that Mr. Ignacio

[00:34:11] Speaker 05:
had earned.

[00:34:12] Speaker 05:
Right, but they still vacate the original sentence.

[00:34:15] Speaker 05:
That's how it works.

[00:34:15] Speaker 05:
Yes, but substantively, it was the exact same sentence.

[00:34:19] Speaker 03:
The sentence that the forfeiture is mandatory, I gather?

[00:34:22] Speaker 03:
That's correct.

[00:34:23] Speaker 03:
And it was just a question of what the amount was that you say that the 10th Circuit fiddled with the amount, but the actual imposition is mandatory.

[00:34:33] Speaker 03:
So it didn't matter to the imposition of the sentence, I take it, whatever the AUSA said was going to be done with.

[00:34:41] Speaker 03:
with the funds?

[00:34:43] Speaker 03:
It didn't matter to the imposition of the sentence, whatever the AUSA said was going to be done with the funds?

[00:34:51] Speaker 05:
No, and in fact the case law is clear that the district judge certainly had no discretion in imposing the forfeiture.

[00:34:58] Speaker 05:
It was a mandatory forfeiture imposed by Congress and the district court had no say in how that would be subsequently used.

[00:35:05] Speaker 04:
In this particular case, what is the origin of the liability giving rise to it for Bailey purposes?

[00:35:11] Speaker 04:
What's the advantage?

[00:35:12] Speaker 05:
It would be the criminal judgment itself, which imposed the forfeiture amount that Mr. Nascio forfeit the proceeds to the United States.

[00:35:21] Speaker 05:
He was never ordered to pay any victims.

[00:35:24] Speaker 05:
And that forfeiture was imposed as a mandatory sanction under the statute that we refer to, Section 2461.

[00:35:33] Speaker 05:
So that is the origin of the liability here.

[00:35:36] Speaker 02:
When the net profits were calculated and agreed to, was the payment of taxes taken into account?

[00:35:45] Speaker 05:
The issue that's in this case, the net profits represent the amount that Mr. Nasiel paid to exercise his options to purchase a stock, the difference between that amount and the sales price that he ultimately sold the stock for.

[00:36:03] Speaker 05:
Uh, taxes weren't accounted for in that amount.

[00:36:07] Speaker 02:
All right, anything else?

[00:36:10] Speaker 02:
Cases will be submitted.

[00:36:11] Speaker 02:
This court is adjourned.

[00:36:14] Speaker 04:
All rise.

[00:36:18] Speaker 04:
The court is adjourned until tomorrow morning.

[00:36:21] Speaker 04:
It's an o'clock a.m.