Built on the foundation of the Tax Management Portfolios™, Bloomberg BNA Tax & Accounting is a comprehensive tax research solution designed by tax practitioners for tax practitioners.
The IRS recently issued Rev. Proc. 2009-20, 2009-14 I.R.B. 749, which offers an optional safe harbor for victims of Ponzi-like investment schemes, such as the one run by Bernard Madoff, that are determined to be criminally fraudulent. The procedure provides that investors in such schemes will be entitled to claim a theft loss under §165 rather than a capital loss. However, recovery by investors who invested in Ponzi schemes indirectly through intermediaries may be limited by the definition of “qualified investor” as set forth in Rev. Proc. 2009-20, as well as by legal action taken by intermediaries against third parties.
The IRS created the safe harbor for victims meeting certain conditions because it recognized that eligibility to claim a theft loss under the Code and Rev. Rul. 2009-9, 2009-14 I.R.B. 735, is a highly factual and uncertain determination. Accordingly, in Rev. Proc. 2009-20, the IRS stated that it will not challenge a theft loss deduction if a taxpayer complies with the requirements of the procedure. Taxpayers who opt not to use the safe harbor to deduct investment fraud losses will be subject to the more rigorous evidentiary requirements for theft losses under §165 and Rev. Rul. 2009-9.
The fact pattern in Rev. Rul. 2009-9 involves a taxpayer that invested directly with a Madoff-type perpetrator. Similarly, only “qualified investors” who made direct transfers of cash or property to a “specified fraudulent arrangement” may avail themselves of the safe harbor set forth in Rev. Proc. 2009-20. Investors who put their money into an intermediary “feeder” fund that in turn put the money into a Ponzi arrangement do not qualify for the safe harbor.
Section 4.03 of Rev. Proc. 2009-20 defines a “qualified investor” as a U.S. person under §7701(a)(30) that generally qualifies to deduct theft losses, that did not have actual knowledge of the fraudulent nature of the investment arrangement before it was publicly disclosed, and that transferred cash or property to a “specified fraudulent arrangement” which is not a tax shelter under §6662(d)(2)(C)(ii). Specifically, §4.03(4) of the revenue procedure provides: “A qualified investor does not include a person that invested solely in a fund or other entity … that invested in the specified fraudulent arrangement. However, the fund or entity itself may be a qualified investor within the scope of the this revenue procedure.”
Accordingly, the fund can use the safe harbor to determine its total losses. If the fund is a partnership, it will report a share of the losses to each investor on Schedule K-1. Thus, taxpayers who invested in the Madoff scheme indirectly through a feeder fund will not report the tax loss directly. Instead the feeder fund will report the loss and taxpayers will report their allocable shares of the loss on their individual tax returns.
Qualified investors may deduct up to 95% of qualified losses from a specified fraudulent arrangement. However, the amount of recovery is limited to 75% if the qualified investor is pursuing or intends to pursue any potential third-party recovery. Thus, the recovery of an investor who invested in a Ponzi arrangement through an intermediary may be limited by the intermediary's decision or intention to sue a third party.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)