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Marcum LLP Madoff
Task Force
Advice to Clients Blessed by IRS
On March 17th, Internal Revenue Service Commissioner Doug Shulman addressed the Senate Finance Committee
indicating that advice would be issued to taxpayers to provide
clarity with the very complicated tax issues facing Ponzi scheme victims, most notably investors with
Bernard L. Madoff Securities. That advice was promulgated by Revenue
Ruling 2009-9 and Revenue Procedure 2009-20. These technical releases
mirror the advice Marcum's Madoff Task Force members
gave clients shortly after the fraud was discovered. Many firms
felt the need to rush out advice to the public before thoroughly
studying the issues, and they may have arrived at conclusions which
were ultimately less beneficial to taxpayers in trying to respond
quickly. Marcum's Madoff Task Force took the
time to examine both precedent in the area as well as the
administrative issues the IRS would be facing given the overwhelming
number of taxpayers affected by Madoff and the other Ponzi schemes which came to light in 2008 and
early 2009.
Taxpayers seeking refunds of taxes
paid will be considered to be under a "safe harbor" by
conforming with IRS recommendations for
determining and deducting their losses. Most tax professionals have
advocated that defrauded investors amend prior years
tax returns in order to remove "phantom income" on which
taxes were paid; the preferred approach of the IRS is to include such
income in the theft loss deduction for 2008 returns. To qualify for
the safe harbor, the deduction is reduced by 5% (25% for those pursuing
claims against third parties) and by any anticipated insurance
recoveries such as claims filed with the SIPC. The theft loss, which
is an ordinary rather than capital loss, to the extent not fully
absorbed in 2008 can be carried back five years in many cases, three
years in others, and then forward for up to 20 years.
With many issues still unresolved,
Marcum is assisting victims in determining proper
courses of action, including how the various state returns should be
recast and whether or not it is in the client's best interest to fall
under the safe harbor protection. Other areas not addressed by the
IRS include feeder fund losses, private foundations, and IRAs, both
Roth and traditional. Anyone with questions or concerns should
contact Marcum Partner Maury Cartine directly at
631.414.4484 or via email at Maury.Cartine@marcumllp.com.
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Marcum
LLP Forms
Madoff Task Force
On December 11, 2008, Bernard L. Madoff was arrested and criminally
charged with masterminding the largest Ponzi
scheme in history. The economic devastation to the community,
charities, and to some of our clients cannot be overstated. We at
Marcum are working diligently to assist all our
current clients and other victims of this scheme to obtain the
maximum tax benefit allowable resulting from their
losses. Please realize that we are less than two weeks into this
discovery, and we will fine tune our tax advice as the matter
continues to evolve. In the meantime, Marcum suggests that you
consider the following to reduce your economic loss from Madoff investments.
Investors should realize that there is much uncertainty
and that the Madoff scheme is unique in its magnitude and reach.
Short of waiting several years for all events to unfold, any tax
strategy will have some element of inherent risk. However, we at
Marcum will advise our clients to take tax positions only where we
believe there is substantial authority.
That being said,
patience is indeed a virtue in this case, and we believe that you should
take the time and care necessary to make the most thoughtful and
correct decisions under the circumstances.
Taxpayers
who invested in Bernard L. Madoff Investment Securities LLC directly, or through a fund of
funds, have a loss that is most probably categorized as a theft loss
for tax purposes. This loss has a more favorable tax treatment
than theft losses of personal non-business property. Theft loss is
determined and applied to get you back taxes for the current year of
loss and the three years prior. These losses remain available beyond
that four year period, and they can be carried forward for 20
years.
Action Step: The
first and most important step you can take is to assemble all
documents, particularly financial records, pertaining to your
Madoff-related investments. Calculating the amount of loss will
be an arduous process but can be simplified in cases where clients
have retained a complete history of statements, correspondence, tax
forms, etc. Since there will likely be requests from receivers
and liquidators for some investors to remit past distributions
received during certain time frames, gathering crucial documents
serves an important purpose. The determination of the amount of the
loss for tax purposes will involve estimates of insurance claims,
including SIPC and homeowners
coverage if applicable.
Income for taxpayers
who received tax reports from Madoff during the last several years
has most likely been overstated, resulting
in taxes being paid that should not have been paid. Those taxes
should be refunded. The inter-relationship of carrying back theft
losses and amending those years during which income was overstated is
extremely complex and requires professional advice from tax
practitioners skilled and experienced in these matters. Furthermore,
in many cases, there will be years affected that are closed by the
three year statute of limitations. We will endeavor to use special
Internal Revenue Code sections to secure tax benefits from closed
years where excessive taxes were paid by clients.
While many advisers are
focused on how many dollars can be retrieved for victimized clients,
we are also focused on the manner in which we pursue refunds. We may
use alternative methods that will give our clients the best opportunity
to receive monies quickly and, in the event of challenge by taxing
authorities, the best chance of prevailing.
Clients with retirement
plans invested with Madoff who have yet to take 2008 required
distributions, and clients who have yet to pay all of their 2008 tax
estimates, have decisions to address immediately and will be treated
with top priority.
Private foundations
have unique tax considerations. We can assist these
organizations in obtaining excise tax refunds and recalculating distributions
required to be given to public charities.
There are many other special situations not
mentioned (e.g., how to deal with partnership interests, Roth IRAs)
which we would be happy to address on an individual basis. Each
state may treat the losses differently,
therefore our discussion has been confined exclusively to federal tax
treatment. Marcum has established a special task force devoted to
assisting clients with these complex tax issues and to help guide
them through the process of restoring some of the wealth that was
taken away from them by Bernard L. Madoff. Anyone with questions or
concerns regarding this matter may contact Marcum Partner Maury Cartine directly at
631.414.4484 or via email at Maury.Cartine@marcumllp.com.
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