Tax consequences of Madoff "investments"

Stock and Bond Fraud, including Boiler Rooms / Pump and Dump Schemes, Mutual Fund & Hedge Fund Fraud, FOREX scams, plus Churning, Private Placements, Venture and Bridge Funding, IPOs, Viaticals Fraud, HYIP and Prime Bank scams, MTNs, Historical Notes, Recovery Schemes, etc. Includes the Jim Norman Project and the Michael Dotson Project and similar HYIP scams.
Arthur Rubin
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Tax consequences of Madoff "investments"

Postby Arthur Rubin » Thu Jan 22, 2009 1:54 am

To combine the multiple purposes of this board....

Suppose you had "investments" with Madoff. What would the tax consequences be?

It appears the consensus on a professional tax board is that it's a theft loss, on the return covering the date the theft was discovered (December 2008).

Others have opined that the "shares" are worthless, and should be covered as a long-term capital loss (probably as of this year, 2009).

In either case, dividends that have to be (re)paid to the receiver should be a "claim of right" deduction, to the extent taxable (and to the extent that the exceed $3000 per tax year), with the non-taxable components of repayments treated the same way as lost investments.

"Unwinding" dividends received (amending previous returns to reflect that the dividends were return of investment) has been suggested as a plausible interpretation, but probably not acceptable.

Many have suggested that the IRS may issue a notice describing their opinion, even if they do not have to abide by it.
Arthur Rubin, unemployed tax preparer and aerospace engineer
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LaVidaRoja
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Re: Tax consequences of Madoff "investments"

Postby LaVidaRoja » Thu Jan 22, 2009 4:33 am

Any direct investor should request a private letter ruling. The indirect investors may face a greater challange.
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Arthur Rubin
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Re: Tax consequences of Madoff "investments"

Postby Arthur Rubin » Sat Mar 21, 2009 3:25 am

Finally resolved. It's a business theft loss. Relevant IRS sources are Revenue Ruling 2009-9 and Revenue Procedure 2009-20. (I don't have URLs from the IRS, only from Kiplinger, so I won't repeat them here.)

Links at this thread
Last edited by Arthur Rubin on Sat Mar 21, 2009 3:33 am, edited 1 time in total.
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