24 Aug Ponzi V. Pyramid Scheme
A friend of mine asked me to blog today about my experiences from a tax perspective with Ponzi schemes and pyramid schemes.
Both are for the most part perpetrated by clandestinely malcontent people that have inadvertently grown trustworthy, a “friend” or relative or fellow member of your spiritual congregation for example, or even a guy giving a sales presentation that can draw a connection. These schemes can go unrecognized for years, particularly when new ‘investors’ are readily available. The money deposited from these newer ‘investors’ is used to pay off older or original ‘investors’.
Ponzi AND pyramid scheme con artists use words like “trust me” or “personal guarantee” etc. They also claim to offer returns that usually appear to good to be true like ‘12% annually guaranteed risk free.’ They prey on weakness and take advantage when you are most vulnerable. What seems to hurt the most is the sense of overwhelming moral abandonment suddenly recognized in someone who is (was) close. From my own personal perspective the ironic trait that presented itself is that many of these perpetrators claim openly to have an extra devotion to organized religion and use this to attempt to control emotion and psyche. Some even work in the field of organized religion as Pastor, Priest, Rabbi etc. Having had victims in my office telling their stories while shedding copious tears I have felt their pain.
So just remember it can be a cruel world. There are a lot of amoral plebes spinning their wheels screwing friends, family and acquaintances alike without mercy in pursuit of the almighty dollar. The worst of the bunch for me are the one’s that do it in the name of God. If it sounds too good to be true, IT IS! Now that Bernie Madoff is behind bars more and more of these ‘smaller’ schemes are being rooted out.
That said IRS Revenue Procedure 2009-20 was produced so that victims of Ponzi Schemes can at least deduct their losses for tax purposes. The loss is reported on IRS form 4684 Casualty or Theft Gain or Loss. Interestingly enough the amount calculated on form 4684 is then reported on IRS Form 1040, Schedule A, Line 28 Other Miscellaneous Deductions. It is of utmost importance that substantiating documentation is in order, particularly the court determination pronouncing the perpetrator as guilty. If you are a victim of Ponzi it is probably a good idea to get familiar with IRS Rev Proc 2009-20.
Pyramid schemes like Ponzi schemes require new suckers to ‘invest’ to keep the house of cards from collapsing. The big difference is that pyramid schemes seem to rely on many people pulling other people into the ‘investment’ or as I call it, trap. All with the same expectation, to cash out before collapse. Ponzi schemes on the other hand, at least the ones I’ve worked on, usually involve a single perpetrator and multiple victims, usually from the same extended family.