Ponzi Scheme Tax Losses

• Published in: Tax Management Real Estate Journal Vol. 27; no. 2; p. 103
• Main Author: Lehman, Richard S
• Format: Trade Publication Article
• Language: English
• Published: Washington Bloomberg BNA 02.02.2011
• Subjects: Capital losses; Costs; Criminal law; Embezzlement; Income taxes; Jurisdiction; Losses; Pyramid operations; Robbery; Securities fraud; Tax basis; Tax deductions; Tax planning; Tax refunds; Taxable income; Theft; United States > US
• ISSN: 8755-0628; 1544-0796

The theft loss tax deduction is an extremely valuable tax deduction, and for many victims of a Ponzi scheme fraud, the tax deduction will have a cash value equal to 35% or more, depending upon state and city income taxes. Unlike capital losses, which are limited for both corporations and individuals, theft losses are granted ordinary loss treatment and are not subject to the 2% floor or the 80% limitation on itemized deductions. As an alternative to claiming a deduction for a theft loss, in certain limited circumstances, funds that have been paid to an investor from a Ponzi scheme and that were reported by that investor as income in a previous year may instead be considered a return of the defrauded investor's investment and not taxable income. It is critical that tax advisors and litigation counsel plan properly and work closely together to avoid foreclosing any of the options available for a Ponzi scheme victim to make use of tax losses while they are available, and to determine which of the many potential avenues of recovery would maximize that particular victim's economic benefit from the tax losses, considering that victim's particular situation.