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IRS Issues Revenue Ruling Regarding Ponzi Schemes
Miami, Fla., March 18, 2009 - The Internal Revenue Service has issued guidance on claiming losses from Ponzi Schemes discovered in 2008. Revenue Procedure 2009-20 provides a very taxpayer-friendly safe harbor provision that allows taxpayers to deduct most of their losses from fraudulent investment arrangements discovered in 2008 on their 2008 return. This safe harbor allows taxpayers to get an immediate tax benefit even though the ultimate outcome of their claims may not be known with certainty for several years. The Service also issued Revenue Ruling 2009-9 clarifying that these losses are not subject to the limitation on deducting capital losses and can be carried back by the taxpayers for three years. The Revenue Ruling also states that taxpayers meeting a gross receipts test (less than $15 million) can elect to carry the resulting loss back 4 or 5 years.
In order to qualify for the safe harbor provision, the taxpayer must agree not to file amended returns excluding or recharacterizing income reported with respect to the investment arrangement for years preceding the year of discovery. They must also agree not to claim an alternative tax computation under a claim of right and not to claim any refunds from a period that is otherwise barred by the statute of limitations under any mitigation provision. There is a special procedure available for taxpayers who have already filed amended returns to claim refunds of previously reported income. These taxpayers must basically agree to drop their amended return claims in order to participate in the relief available under the Revenue Procedure.
The deductible loss is limited to 95% of the taxpayer’s basis in the investment arrangement reduced by any recovery actually received and by the amount of coverage provided by the Securities Investors Protection Corporation. Taxable income previously reported from the investment and reinvested in the arrangement increases the taxpayers’ deductible basis. Taxpayers asserting a claim against third parties, such as a broker or money manager that recommended the investment arrangement), in connection with their loss must use 75% instead of 95% when determining how much they can deduct in 2008.
Taxpayers using the safe harbor provision should be eligible for quick tax relief in connection with their losses.
Please contact your Mallah Furman representative for additional information.
About Mallah Furman:
Established in 1960, Mallah Furman is one of South Florida’s largest accounting firms. The Firm provides strategic financial services to South Florida businesses in a broad spectrum of industries and disciplines. For more information, please visit the Firm’s website at www.mallahfurman.com.
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