Internal Revenue Service Commissioner Doug Shulman has announced guidance for Ponzi scheme victims and their tax preparers. The guidance, which Shulman emphasized is not specific to the Madoff case, is in the form of a revenue ruling and a revenue procedure.
“Clearly the Madoff case is tragic as so many people were victims of this fraud, but the case also raises a staggering array of tax issues for the victims,” he said during a national teleconference. “We worked hard to reduce the burden on taxpayers and provide a straightforward way for people to deduct their losses.”
Revenue Ruling 2009-09 addresses the tax treatment of losses from criminally fraudulent investment arrangements that take the form of Ponzi schemes. The ruling holds that the losses are theft losses and provides guidance on the character, timing, and amount of the loss deduction.
Revenue Procedure 2009-20 provides that the IRS will deem the loss to be the result of theft if: (1) the promoter was charged under state or federal law with the commission of fraud, embezzlement or a similar crime that would meet the definition of theft; or (2) the promoter was the subject of a state or federal criminal complaint alleging the commission of such a crime, and (3) either there was some evidence of an admission of guilt by the promoter or a trustee was appointed to freeze the assets of the scheme.
“Some taxpayers have argued that they should be permitted to amend tax returns for years prior to the discovery of the theft to exclude the phantom income and receive a refund of tax in those years,” said Shulman. “The revenue ruling does not address this argument, and the safe-harbor revenue procedure is conditioned on taxpayers not amending prior year returns.”
“The good news is there’s no 10 percent AGI haircut,” said Neil Tipograph, tax partner at New York-based Imowitz Koenig & Co., LLP “That was one unknown issue.”
“A 2008 deductible theft loss equals investment plus income reported minus withdrawals times 95 percent (or 75 percent if suing third parties such as accountants or investment advisors) less potential insurance/SIPC recovery. And most individuals will get a 5-year NOL carryback.”
