Deducting Theft Losses From Ponzi Schemes - John R. Dundon II, Enrolled Agent
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Deducting Theft Losses From Ponzi Schemes

The Perturbing New Treatment of Patents Under the Tax Cut & Jobs Act (TCJA)

Deducting Theft Losses From Ponzi Schemes

Deducting Theft Losses From Ponzi Schemes, a topic near and dear to my heart.

The IRS released Rev. Rul. 2009-9 addressing the tax treatment of “Ponzi” scheme losses, and Rev. Proc. 2009-20 which provides safe harbor options for deducting these losses. The guidance is welcome relief to the thousands of investors who have lost money in the Bernard Madoff scandal and others who have incurred similar Ponzi scheme losses.

The revenue ruling holds that the losses are theft losses not subject to casualty loss limitations under §165(h) or the itemized deduction limits under §67 and §68. The rulings allow the losses against ordinary income and even allow an NOL generated by Ponzi losses to be treated as sole proprietorship losses potentially eligible to be carried back 3, 4, or 5 years under the business tax breaks enacted by the American Recovery and Reinvestment Act of 2009.

The safe harbor options under Rev. Proc. 2009-20 allow a 95% deductible loss for investors with no potential third-party recovery or a 75% deductible loss for investors with potential third-party recoveries. The investor may have additional losses or income in later years depending on actual recoveries.

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