The judge's decision does not affect an underlying tax case against Fumo. In a separate legal fight in U.S. Tax Court in Washington, Fumo is contesting an IRS demand that he pay almost $3.8 million in back taxes.
Still, the ruling gives Fumo some breathing room. It means the IRS must unfreeze $77,000 he has in cash in local banks and withdraw the liens, including one on his $2.5 million Victorian mansion in Philadelphia's Spring Garden section.
The IRS did not respond to a request for comment.
Fumo declined to comment. His lawyer, E. Marc Cedrone, called the ruling a "complete vindication of our position."
In seeking to freeze Fumo's assets, the IRS had noted that the former Democratic power broker, in a message sent from prison and made public in an unrelated court dispute, had written: "My goal is to become as judgment-proof as possible. I want to 'own nothing but control everything.' "
Buckwalter, however, said he believed Fumo, 71, when the former senator said he was not trying to hide assets and instead offered an innocent explanation for his property transfers.
Fumo said he added his fiancée, Carolyn Zinni, and his son to various deeds for estate-planning purposes - specifically, out of fear that big federal tax exemptions for gifts were about to expire. Buckwalter said he found Fumo's explanation reasonable.
The IRS also found suspicious Fumo's transfers of $920,000 in cash to his grown son, Vincent E. Fumo, and said it should be treated as a taxable gift.
Again, however, Buckwalter found the transfer benign. He said the elder Fumo at the time was merely trying to manage his money better as he neared the start of a prison term.
The judge dismissed Fumo's remarks about seeking to be "judgment-proof," noting the IRS had sought to freeze Fumo's money even before it knew about the statement.
Buckwalter presided over the jury trial of Fumo, sentencing him to 55 months in prison in 2009. The sentence sparked widespread public outrage as being too lenient, and federal prosecutors successfully appealed it. At a resentencing, the judge added six months to the term.
Fumo, who completed his prison sentence in January, is paying a heavy financial price for his crimes. Buckwalter has ordered him to pay about $4.5 million in fines and restitution to his victims.
The IRS seeks millions more on top of that. It contends that Fumo, despite his massive restitution payments, owes the government unpaid taxes and fines for the goods and services he received through his wrongdoing.
Once the most powerful Philadelphia Democrat in the legislature, Fumo was convicted of defrauding the state Senate and two nonprofit organizations, and of then trying to orchestrate a cover-up.