Consequences for the Defrauded: What Every Madoff Investor Should Know

February 10, 2009 The Legal Intelligencer

© 2009 The Legal Intelligencer

Bernard L. Madoff was arrested Dec. 11, 2008, on a single count of securities fraud. The criminal complaint alleges that Madoff defrauded investors out of billions of dollars in a classic Ponzi scheme by paying purported investment gains to earlier investors with the investment funds received from subsequent investors. The precipitous decline in the stock market and the acceleration of redemptions from investment funds has caused other schemes and scams to be uncovered. The U.S. federal income tax consequences that defrauded investors face are not as simplistic as they might appear upon first glance.

Section 165 of the Internal Revenue Code governs the treatment of losses. Section 165 contains at least four different provisions that could arguably apply to the losses suffered by defrauded investors. Each provision will lead to significantly different tax and financial consequences.

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