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IRS throws St. Patrick's Day party for Madoff victims
March 17, 2009
It looks like the IRS is buying the green beer today for the victims of the Madoff Ponzi scheme. They have issued a ruling (Rev. Rul. 2009-09) and a safe-harbor procedure (Rev. Proc. 2009-20) that together look very taxpayer-friendly.
The high points from a quick reading:
- There will be a safe-harbor theft loss deduction for 95% of the investment if the victim doesn't pursue recovery, and 75% if they do; this deduction is reduced by any actual recoveries received and any potential SIPC recovery. (RP 2009-20, Sec. 5.02).
- The "investment" includes both direct cash contributions and amounts included in income from the fraudulent investment; it is reduced by any cash withdrawals prior to the scheme's collapse. (RP 2009-20, Sec. 4.06)
- The deduction is available in the year the criminal complaint was filed. (RP 2009-20, Sec. 4.04). Since Mr. Madoff was charged on December 11, 2008, that allows Madoff victims to take their losses in 2008.
- Recoveries might generate income in subsequent years; further losses might be available when the final loss tallies and recoveries are settled.
- You need to have clean hands; you don't qualify for the safe harbor if you knew of the fraud.
- The deduction is considered to be a Sec. 165(b)(2) deduction for a "transaction entered into for profit," so it is not subject to the 10% of AGI floor that otherwise applies to personal theft losses. (RR 2009-09, Holding 2)
- If the Ponzi losses generate a net operating loss, they will be eligible for the temporary five-year carryback provision in the stimulus bill. (RR 2009-09, Holding 5)
The Revenue Procedure is a safe harbor, and it must be affirmatively elected. Taxpayers may opt out and pursue different amounts if they choose.
Perhaps reflection or reading other commentary will reveal some shortcomings in these rulings, but at first glance it looks as though today's IRS releases provide a simple and taxpayer-friendly way to deal with the Madoff losses, and those from other Ponzi schemes. While it's still cold consolation for those who have been fleeced, it at least helps them get their tax affairs in order with minimal complexity.
And you don't even have to be Irish.
Prior coverage:
Theft losses for Madoff victims?
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Comments
This new ruling only helps Ponzi victims if the Scheme happened after Dec. 31, 2007.
What about all the other Ponzi schemes prior to that? Just pretend they never happened or not large enough to force the IRS to create a new ruling.
Make it fair to all who have suffered as victims to a Ponzi scheme or NONE.
Posted by: Ron | March 18, 2009 8:39 AM
I agree with Ron. This tax break is going to some of the most wealthy and influential people in the US. It is estimated to cost the US TAX revenues 17 BILLION dollars.
Talk about bonuses for AIG...this is a special break for the rich and famous. America should be outraged.
Posted by: Gary | March 30, 2009 6:53 AM