IRS Guidance for Ponzi Scheme Investors

April 14, 2009 The Legal Intelligencer

© 2009 The Legal Intelligencer

In the face of significant uncertainty about the appropriate tax treatment of the losses suffered by investors in the collapse of Madoff Investment Securities and other recently discovered Ponzi schemes, the IRS has issued guidance on how such losses should be treated. In addition, the IRS has issued a procedure for how to claim these tax losses.

In Revenue Ruling 2009-9, issued on March 17, the IRS confirmed that an investor who lost all or a portion of his or her investment in a Ponzi-type investment scheme is entitled to claim such loss under Section 165(c)(2) of the Internal Revenue Code as a loss arising from a transaction entered into for profit, deductible in-full against the investor's ordinary income. This is a very pro-taxpayer position, especially when compared with the alternative approaches, which would have treated such loss either as "personal" subject to a variety of limitations on deductibility or as a capital loss, deductible only against capital gains and up to $3,000 per year of ordinary income.


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