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I.R.S. Plans a Deduction for Madoff Victims

  Tax  -   POSTED: 2009/03/17 16:12

The Internal Revenue Service will allow victims of Bernard L. Madoff’s investment fraud to claim a lucrative tax deduction related to the bulk of their losses, the I.R.S. commissioner testified Tuesday morning before the Senate Finance Committee .

The commissioner, Douglas H. Shulman, told lawmakers that the agency was offering guidelines for taxpayers who are victims of losses from Ponzi schemes like Mr. Madoff’s.

The plan represents the first time that the I.R.S. has come forward with a policy regarding how it will treat Mr. Madoff’s victims. The subject has been a point of debate and anxiety for the victims and their accountants, given the uncertainty and lack of clarity in the tax code over how the matter should be dealt with.

The plan, which applies to victims of all Ponzi schemes, is likely to provide major relief to the victims of Mr. Madoff, who pleaded guilty last week to orchestrating what prosecutors say is the largest Ponzi scheme ever — one that could reach $65 billion and cover 13,000 investors.

The plan would ease existing rules governing what are known as theft-loss deductions, which are losses claimed by investors who are cheated by their investment advisers and others in Ponzi schemes and other frauds.

Under the plan, which has been reviewed by the congressional offices, the I.R.S. will allow investors who are not suing Mr. Madoff to claim a theft-loss deduction equal to 95 percent of their investments, minus any withdrawals, reinvested gains and payouts from Securities Investor Protection Corporation, the government-chartered fund set up to help protect investors of failed brokerage firms.

Investors who are suing Mr. Madoff, and who thus may have some prospect of recovery, can claim a deduction equal to 75 percent of their investments.


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