IRS Issues Guidance on Ponzi Schemes (Bernie Madoff IRS Stimulus Package)

[Alan]

The IRS has issued a Revenue Ruling on 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.

The IRS has issued a Revenue Procedure that provides an optional
safe harbor method for eligible taxpayers to deduct theft losses
from criminally fraudulent investment arrangements that take the
form of “Ponzi” schemes. The safe harbor method provides a
uniform, simplified method for eligible taxpayers to determine
the amount and timing of their theft loss deductions.

http://www.irs.gov/pub/irs-drop/rr-09-09.pdf
http://www.irs.gov/pub/irs-drop/rp-09-20.pdf

--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>

[Alan]

Alan wrote:
> The IRS has issued a Revenue Ruling on 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.
>
> The IRS has issued a Revenue Procedure that provides an optional safe
> harbor method for eligible taxpayers to deduct theft losses from
> criminally fraudulent investment arrangements that take the form of
> “Ponzi” schemes. The safe harbor method provides a uniform, simplified
> method for eligible taxpayers to determine the amount and timing of
> their theft loss deductions.
>
> http://www.irs.gov/pub/irs-drop/rr-09-09.pdf
> http://www.irs.gov/pub/irs-drop/rp-09-20.pdf
>

Here are the holdings from the Rev. Ruling with my comments for
those who don't know the code sections.

HOLDINGS
(1) A loss from criminal fraud or embezzlement in a transaction
entered in profit is a theft loss, not a capital loss, under § 165.

(2) A theft loss in a transaction entered into for profit is
deductible under § 165(c)(2), not § 165(c)(3), as an itemized
deduction that is not subject to the personal loss limits in §
165(h), or the limits on itemized deductions in §§ 67 and 68.

[This means you get to deduct the amount of the loss as an
itemized deduction that is not subject to the 2% AGI limit and is
not subject to phase-out of itemized deductions due to AGI]

(3) A theft loss in a transaction entered into for profit is
deductible in the year the loss is discovered, provided that the
loss is not covered by a claim for reimbursement recovery with
respect to which there is a reasonable prospect of recovery.

(4) The amount of a theft loss in a transaction entered into for
profit is generally the amount invested in the arrangement, less
amounts withdrawn, if any, reduced by reimbursements or
recoveries, and reduced by claims as to which there is a
reasonable prospect of recovery. Where an amount is reported to
the investor as income prior to discovery of the arrangement and
the investor includes that amount in gross income and reinvests
this amount in the arrangement, the amount of the theft loss is
increased by the purportedly reinvested amount.

(5) A theft loss in a transaction entered into for profit may
create or increase a net operating loss under § 172 that can be
carried back up to 3 years and forward up to 20 years. An
eligible small business may elect either a 3, 4, or 5-year net
operating loss carryback for an applicable 2008 net operating loss.

[An individual is treated as a sole proprietor for purposes of
this provision. As such, if gross receipts are under $15 million,
an individual is a small business for the revised 3, 4 or 5 year
carryback in the American Recovery & Reinvestment Act of 2009.]

(6) A theft loss in a transaction entered into for profit does
not qualify for the computation of tax provided by § 1341.

[This means the alternative method of computing your tax benefit
under a claim of right is not allowed.]

(7) A theft loss in a transaction entered into for profit does
not qualify for the application of §§ 1311-1314 to adjust tax
liability in years that are otherwise barred by the period of
limitations on filing a claim for refund under § 6511.

[This means that the mitigation provisions that allow one to open
a closed year due to the statute of limitation is not allowed.]

[removep...@yahoo.com]

On Mar 17, 9:48 am, Alan <sfcnm-...@yahoo.com> wrote:

> [This means you get to deduct the amount of the loss as an
> itemized deduction that is not subject to the 2% AGI limit and is
> not subject to phase-out of itemized deductions due to AGI]

And not subject to AMT.