Legal News

A Tax-Break for Madoff Victims . . . And Bernie?s Mugshot!

By Ashby Jones

Any Law Blog readers been swindled by confessed Ponzi-schemer Bernie Madoff? If so, the morning’s papers contain a little ray of sunlight for you today: The Internal Revenue Service has announced unprecedented tax relief for victims of Ponzi schemes, saying many of those affected could deduct up to 95% of their losses immediately. Here are stories from the WSJ, the NYT and Reuters.

According to the WSJ, the move represents a relaxation of limits on tax relief for victims of investment scams. It reflects the pressure officials are feeling to help individuals who have been hurt in the current financial crisis, particularly at a time when public resentment is growing over the billions of dollars the government is directing into troubled banks and other big corporations.

The IRS action drew praise from lawmakers, who have been pondering legislation to help victims of swindlers such as Madoff. “It’s a rare day when someone can be happy with the IRS,” said Sen. Charles Schumer (D., N.Y.) at the hearing held by the Senate Finance Committee.

The IRS guidance is more favorable to victims than prior positions the agency has taken, said Robert Willens, a New York tax adviser.

In broad terms, the IRS said Ponzi scheme victims who aren’t suing to recover their losses can generally deduct up to 95% of their qualified losses — minus any potential recoveries from insurance or the Securities Investor Protection Corp. — in the year the fraud is discovered. Those pursuing third-party recoveries can deduct 75% of relevant investments, after potential recoveries. The Securities Investor Protection Corp., or SIPC, is an organization designed to help investors at failed brokerage firms.

Chadbourne & Parke tax partner Donald Schapiro, who gave an interview to the American Lawyer, breaks it down this way:

What did the IRS decide?

They allowed a deduction in full on a tax-cost basis, that is the amount that was on your books as invested with Madoff. So suppose someone invested $1 million and it grew to $3 million. [You then] took out the original $1 million [before the Ponzi scheme collapsed]. Under this Treasury ruling, you get a loss for that $2 million [profit] because you paid tax on it.

Now this is a safe harbor procedure, where you have to agree you won’t claim refunds for other years. But it is a very fair rule. They interpreted all the provisions in a way that’s fair and appropriate.

So, a rare good day for Madoff victims. And it’s a good day for those who blog about Madoff, too, for this very simple reason: Bernie’s mugshot is out.

Full post as published by Law Blog - WSJ.com on March 18, 2009 (boomark / email).