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FOR IMMEDIATE RELEASE: March 17, 2009

SCHUMER ANNOUNCES IRS HEEDS HIS CALL, PROVIDES RELIEF TO MADOFF VICTIMS WHO PAID TAXES ON PHANTOM INCOME


Victims Will Be Able To Take Tax Deduction Not Only For Amount They Invested With Madoff, But Also Bogus Gains Madoff Told Them They Were Earning

IRS Commissioner Announces Relief Measures At Hearing Requested By Schumer; Attorneys For Madoff Victims Call Schumer's Help 'Invaluable'

Madoff Scheme Cost Investors At Least $50 Billion—Victims Included Families, Small Busine

WASHINGTON, DC—Today, U.S. Senator Charles E. Schumer (D-NY) announced that the IRS has accepted his suggestions for tax relief measures allowing victims of Ponzi schemes, including the one run by disgraced financier Bernie Madoff, to deduct theft losses in the 2008 tax year and recoup taxes they paid on phony investment income. Schumer said the measures will help the countless families, small businesses and charities that were innocent victims of these schemes. The largest Ponzi scheme, run by Madoff, cost investors more than $50 billion.

 

IRS Commissioner Douglas Shulman personally called Schumer yesterday to inform him the agency would be taking these steps, and Shulman announced the measures formally at a Senate Finance Committee hearing held this morning in Washington. Earlier this month, Schumer had joined Senators Robert Menendez and Maria Cantwell (D-WA) to request that Senate Finance Committee Chairman Max Baucus (D-MT) and Ranking Member Charles Grassley (R-IA) to hold this hearing.

 

“The IRS has done the right thing here. In most every area where there was a major dispute, they have sided with the victims,” Schumer said. “These victims were not only sophisticated financial professionals, but also ordinary people who believed they were making safe, responsible investments for their future. The steps announced today mean victims won’t owe taxes on income they never received.”

 

Since Mr. Madoff’s arrest, as former clients have attempted to calculate their losses due to the massive fraud, several questions have arisen about provisions of the tax code that apply to victims of theft, including when the Madoff victims could avail themselves of that relief.  There were questions about whether the Internal Revenue Code's “theft loss” deduction could allow Madoff’s victims to recoup a substantial share of what they lost.  However, while a theft loss typically is claimed in the year it is discovered, the Code stipulates that a loss cannot be claimed until it has been determined with “reasonable certainty” that the claimant will not be able to recover any of the loss. Given that the investigation of Madoff is ongoing and is unlikely to be resolved for several years, there was a great deal of uncertainty about whether and when it is appropriate for investors to claim the deduction.  

 

Furthermore, Madoff’s clients were sent bogus earnings statements showing “phantom income” on dividends that were reinvested with Madoff’s fund. These taxpayers paid the taxes they thought were due, but in reality there was no income.  There has been tremendous uncertainty about whether these individuals could file amended returns to recoup those taxes paid in past years.  For instance, Schumer said several of his constituents have asked whether the IRS will allow this procedure, under what circumstances, and for how many past years.  

 

The IRS guidance settles all of this uncertainty in a productive way for Madoff’s victims. The IRS said that the victims will indeed qualify for a “theft loss” deduction, but they are lifting the usual limits that apply to such a deduction. Usually, the deduction is equal to the loss less 10 percent of Adjusted Gross Income and a $100 fee. As of today, the IRS will allow victims of the Madoff fraud and other Ponzi schemes to take a deduction equal to 95 percent of the amount they invested with Madoff, plus any investment income they believed they were earning, less any expected recovery from the government or private insurance. For victims who are suing Madoff, they will be allowed to deduct 75 percent of their investment.

 

The IRS also clarified that the “theft loss” deduction can be claimed in the year the fraud was exposed, meaning that Madoff’s victims can take the deduction in the 2008 tax year. The loss can also be carried back five years or forward for the next 20 years.

 

The steps announced by the IRS, at Schumer’s urging, were hailed Tuesday by lawyers representing Madoff’s victims.

 

“The guidance provided today by the Internal Revenue Service addresses some of the most critical and important tax issues faced by Madoff victims in a clear, concise, and thoughtful way.  I want to thank Senator Schumer for his engagement in the issue.  His attention was invaluable in getting the IRS to issue timely guidance that will be a lifesaver to the more than 300 Madoff clients that I represent,” said Andrew N. Lerman, an independent CPA in private practice from White Plains, NY.

 

A copy of Schumer’s statement, delivered at today’s Senate Finance Committee hearing, is below.

 

STATEMENT BY SENATOR CHARLES E. SCHUMER

SENATE FINANCE COMMITTEE HEARING ON PONZI SCHEMES

MARCH 17, 2009

 

Thank you, Mr. Chairman.

 

The perfidy of Bernie Madoff is now well-known.  His Ponzi scheme victimized not only well-known names such as Steven Spielberg and Fred Wilpon, the owner of the Mets, but hardworking, middle-class people who thought they were making prudent investments for their retirement.

 

Madoff’s fraud also has jeopardized dozens of union pension funds in Syracuse, Rochester, Buffalo, and Binghamton, as well as more than 150 philanthropic foundations. 

 

The fraud affected hard-working, middle-class individuals who thought that they were investing wisely and safely for their retirement years, and just like that they are wiped out.  I’d like the Committee’s permission to enter into the record the personal stories of three Madoff victims with connections to New York:  Ronnie Sue Ambrosino, Richard Friedman, and Adriane Biondo.  The pain this man inflicted is as wide-spread as it is piercing. 

 

Two weeks ago today, I wrote you and the Ranking Member a letter, along with Senators Menendez and Cantwell, asking that the Finance Committee hold a hearing on the various tax issues related to the Madoff fraud.  I asked for the hearing because I was worried that not only had people lost their life savings, but they would also have also paid taxes on money that they never received.  I want to thank you, Mr. Chairman, for agreeing to the request and scheduling this hearing so quickly.

 

After Madoff’s arrest, several questions arose about provisions of the tax code related to the “theft loss deduction” and when taxes paid in past years on “phantom income” might be eligible for a refund, among other issues.  People were confused about what to do on their 2008 tax returns and needed guidance from the IRS.

 

I am very pleased that the IRS has decided that in each area in which there was a major dispute, the IRS today sides with the victims.  The IRS ruling says that people can take a theft loss deduction in 2008 for any money directly invested with Madoff, including any reinvested gains, and that such losses can be carried back for five years and forward for 20 years.  By treating the theft losses in this way, victims will not have to worry about filing amended returns for prior years.  This means that victims will not owe taxes on income that they never received.  Victims will receive the most lenient tax treatment in a simple and straightforward way.

 

The guidance the IRS is issuing today is clear, comprehensive, and comes at a crucial time, and I want to thank the Commission and his team for their good work.  We have heard from the victims and some of their attorneys, and they have complimented you on your good work. There are some issues left unresolved which I will explore in my questions, but for the most part, I believe the most prominent issues have now been addressed.

 

Thank you, Mr. Chairman.  Now let me turn to my questions.

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