By Charles Paikert

The painful process of recovering from investment fraud is being eased by recently issued IRS guidelines that accountants and tax experts say will greatly benefit fraud victims. Issued in the spring, the rules are expected to draw close attention over the next two months, as taxpayers who filed for an extension face an Oct. 15 deadline to report their 2008 income.

The guidelines, Revenue Ruling 2009-9 and Revenue Procedure 2009-20, are “very favorable” for those who were victims of a Ponzi scheme, said David Earley, tax senior manager for New York-based Deloitte LLP. In fact, the Internal Revenue Service implemented the guidelines in direct response to last year's high-profile Ponzi schemes, most notably the one orchestrated by New York financier Bernard L. Madoff.

In testimony before the Senate Finance Committee in March, IRS commissioner Doug Shulman noted that the Madoff scandal “has affected a very large and diverse pool of investors” and has caused “numerous tax and pension implications for the victims.”

Under the IRS' revised rules, investors defrauded in any Ponzi scheme after Jan. 1, 2008, can declare their net operating loss from the investment a “theft loss,” which may be carried back five years instead of two, which was the case under the old rule. That is important, Mr. Earley said, because a theft loss is considered an ordinary loss that allows taxpayers to offset other types of income fully. “It's a very beneficial loss,” he said. “If you have to take a loss, that's the kind of loss you want to have.”

For that very reason, Mr. Earley added, previous IRS rules made determining a theft loss much more complicated and lengthy. Allowing the theft loss to be carried back for five years is very good news for fraud victims, said Barry Newman, a certified public accountant and partner in Lehman Newman & Flynn PC of New York. “It's important because the loss that people will probably incur will wipe out more than two years of income. It's extremely beneficial,” said Mr. Newman, whose clients include several victims of Mr. Madoff's Ponzi scheme.

Taxpayers have one year after they have filed their 2008 taxes to file their carry-back claim, Mr. Newman said. However, fraud victims need to make sure that they find “capable tax advice” when dealing with the new guidelines, said David Selznick, who is a CPA, an attorney and principal of Selznick & Co. LLP in Armonk, N.Y. “A tax adviser should know how to properly file the 2008 return with the appropriate theft loss forms and disclosures,” he said.

For example, Mr. Selznick pointed out, in order to claim a theft loss for five years, the taxpayer must make an election to do so. “I reviewed a return today that did not have such an election,” he said.

Fraud victims also need to document meticulously all their paperwork involving the fraudulent investment, said Wayne Titus, principal of Plymouth, Mich.-based AMDG Financial Services. “It's really important to make sure that you document everything to support your position,” said Mr. Titus, whose clients include victims of a limited partnership scam.

Proper documentation will help establish when the investment loss occurred, which is a critical issue, he said. If the loss occurred before Jan. 1, 2008, the loss gets “totally different” treatment by the IRS, said Mr. Titus, who is also a CPA. “Under the guidelines before 2008, investors have to wait for the resolution of the litigation, which could last for 10 years,” he said.

AMENDED FORM

Family members of fraud victims who face estate tax issues should file an amended estate form to claim a refund for estate taxes that have already been paid, Mr. Newman said. However, the IRS hasn't issued final guidelines for estates involved in Ponzi schemes after Jan. 1, 2008.

Some investors in fraudulent securities or a Ponzi scheme may have received money that wasn't the result of a legitimate investment but that in fact came from others who came into the scheme after they did. Investors who have received those additional funds may be asked to give up at least some of the money in a legal process known as disgorgement. In addition to facing lawsuits, Mr. Titus said, those investors “may not be able to determine what their theft loss truly is, because the disgorgement issue has not been settled.”

However, investors who received the funds “in good faith and had no idea what was going on are likely to be in a position to make a reasonable claim to keep the funds,” said attorney Therese Pritchard, a partner in Bryan Cave LLP in Washington. Tax issues for investors in Madoff and other Ponzi schemes who lost money indirectly through feeder funds remain unresolved, Mr. Earley said.

For the time being, he said, it appears that to prove a theft loss, they will have to “default” to the IRS rules applicable before Jan. 1, 2008.

E-mail Charles Paikert at -cpaikert@investmentnews.com.

VRI NOTES: We beleive there are two errors in the above article. Investors DO NOT have to wait for a resolution of litigation, which could last for 10 years"

"Before taking a 165 theft loss It is not sufficient for a taxpayer to show only that the property is missing, but it is sufficient to show that theft is the most plausible explanation for the disappearance of the property. It is not necessary to identify or convict the alleged thief. NOTE: At VRI we believe SEC, FTC, FCC and/or state lawsuits for theft create the most ‘plausible’ explanation for specific investment losses. (Allen v. Commissioner, 16 T.C. 163 (1951)).

In fact waiting for a resolution could even jeopardize taking the deduction because ''Theft losses must be deducted in the year the theft is discovered. The loss is not deductible in the year the theft occurred (unless it is the same as the year of discovery). Reg. Section 1.165-8(a)(2)."

In addition it is also false that the claim that a 165 theft loss cannot be utilized because the investor ''may not be able to determine what their theft loss truly is because the disgorgement issue has not been settled."

"...a taxpayer who reasonably believes that investment theft precludes recovery and claims a theft loss; but subsequently receives reimbursement or recovers the stolen property must recognize income in the year of recovery, subject to limits of the tax benefit rule of Code Section 111."

IRS Commissioner Douglas Shulman told Congress the guidelines are for taxpayers who have suffered losses from Ponzi investment schemes such as the massive Madoff swindle.

Madoff investors should have reported earnings from their investments with him through the years and thus paid taxes on those earnings. Given that some of those were "phantom" profits, investors have said they should be entitled to refunds of the taxes they paid.

Investors in some of these cases are entitled to a "theft-loss" deduction, not subject to the limits on normal capital losses from investments, according to the IRS guidelines, Shulman testified at a Senate Finance Committee hearing.

The theft-loss deduction can be taken in the year a fraud is discovered, except to the extent an investor has a "reasonable prospect" of recovering the lost money, Shulman said.

Determining the amount and timing of losses from Ponzi schemes is "factually difficult" and it can take years to determine the prospects for recovering the lost money, he noted.

In Ponzi schemes, early investors are paid returns from money put in by later investors.

"Some taxpayers have argued that they should be permitted to amend tax returns for years prior to the discovery of the theft to exclude the phantom income and receive a refund of tax in those years," Shulman testified. The new IRS guidelines do not address that argument, he said.

Sen. Charles Schumer, D-N.Y., a member of the Finance Committee who has been pushing for tax relief for victims of Ponzi schemes, said that with the new guidelines 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."

To date, about $1 billion in assets have been identified for Madoff investors, a tiny portion of the $65 billion he told his 4,800 investors that he had on hand in November. Authorities say they believe the figure included what would have existed if much smaller original investments had grown for decades.

By some estimates, the IRS could be out as much as $17 billion in lost tax revenue from refunds to investors who earned fictitious profits in the Madoff scheme.

The 70-year-old disgraced money manager and former chairman of the Nasdaq Stock Market has been living in a small cell at the Metropolitan Correctional Center in lower Manhattan since he pleaded guilty Thursday to securities fraud, perjury and nine other charges. He could be sent to prison for up to 150 years at a June sentencing.

The Securities Investor Protection Corp., the industry-funded organization that steps in when brokerage firms fail, has begun sending out the first checks to Madoff victims. Investors are eligible for up to $500,000 from the organization and have until July to file claims.

Around $1.6 billion or so is currently available to SIPC.

Shulman said that investors should deduct the $500,000 they receive from SIPC from the amount they claim as a "theft loss" from their Madoff investment.

The IRS expects that statements provided to investors by Madoff's fund, showing the amounts they invested, should be sufficient documentation to establish losses for filing tax claims, he told the hearing.

Associated Press Writer Stephen Ohlemacher contributed to this report.

Marcy Gordon, Associated Press

IRS Commissioner Douglas Shulman told Congress the new guidelines are for taxpayers who have suffered losses from Ponzi investment schemes such as the huge Madoff swindle.

He said the guidelines will apply to victims of all Ponzi schemes - financial scams in which early investors are paid returns from money put in by later investors. But given the scope of the Madoff scandal, the IRS wanted to establish an easy system for investors to recover taxes they paid on "fictitious income," Shulman said.

Madoff investors who reported earnings from their investments with him through the years - the scheme stretched from the early 1990s to Madoff's arrest on Dec. 11 - paid taxes on those earnings. Given that some of those earnings were "phantom" profits, investors have said they should be entitled to refunds of the taxes they paid.

Investors in some of these cases are entitled to a "theft-loss" deduction, not subject to the limits on normal capital losses from investments, according to the IRS guidelines, Shulman testified at a Senate Finance Committee hearing.

The theft-loss deduction can be taken in the year a fraud is discovered, except to the extent an investor has a "reasonable prospect" of recovering the lost money, Shulman said. Investors will be able to deduct 95 percent of their losses immediately. If they are unable to recover the remaining 5 percent, they can claim those losses in subsequent years.

Determining the amount and timing of losses from Ponzi schemes is "factually difficult" and it can take years to determine the prospects for recovering the lost money, Shulman noted.

Jamie Golombek, Tax Expert, Financial Post

Just 10 days after Montreal financial advisor Earl Jones was charged with fraud and theft in connection with the loss of between $30-million and $50-million from his clients, a similar scheme has come to light in British Columbia. Earlier this month, a B.C. Securities Commission panel found that four B.C. residents perpetrated a "deliberate and well-organized" scheme that resulted in the loss of more than US$10-million by about 800 investors.

The scheme began as an investment club. Investors were encouraged to put their money with "experienced traders who had a long history of producing double-digit monthly returns through foreign-currency trading," said the B.C. Securities Commission in a statement.

Bizarrely, the scheme used a vehicle called a "private common law spiritual trust," which seems to have been invented by one of the promoters. The panel concluded it was a Ponzi scheme and that the trust structure was a "sham." For investors who lost money, there may be some relief through the tax system.

With respect to clients of Earl Jones, late last month, Jean-Pierre Blackburn, Minister of National Revenue, issued a statement encouraging affected investors who may be having trouble meeting their current tax bills to contact the Canada Revenue Agency directly. The CRA, under the "fairness" provisions, has the discretion to waive or cancel all or part of any penalties or interest charged if taxpayers can't make required tax payments on time due to "extraordinary circumstances."

While this may help affected investors with their immediate cash-flow problems, two more significant tax issues remain. First, what relief is there for taxes paid on phantom income reported in prior years? And second, can an investor write off a loss for tax purposes?

The answer to the first question seems relatively straightforward. If investors have been reporting interest income, for example, in prior years' returns, if the investments were non-existent, then the "income" received was fictional and shouldn't have been taxable. Although the CRA hasn't yet made a formal announcement on how investors should proceed, current law suggests investors could request adjustments going back up to 10 years to recoup taxes paid on such phantom income.

The tax treatment of the investment loss may be more problematic. Last March, Bernie Madoff investors facing similar tax issues were given generous tax relief by the Internal Revenue Service. The IRS announced that the amount of any Ponzi-related losses could be claimed as a "theft loss" as opposed to a capital loss and therefore be deductible against all sources of income. The loss could also be carried back up to five years and carried forward for up to 20 years. To date, the CRA has not commented on the Canadian tax treatment of such losses.

Jamie Golombek, CA, CPA, CFP, CLU, TEP, is the managing director, tax and estate planning, with CIBC Private Wealth Management in Toronto.

Jamie.Golombek@cibc.com

MISREPRESENTATION AND THEFT

“A taxpayer must establish that his property was stolen in order to claim a theft loss. (Allen v. Commissioner, 16 T.C. 163 (1951)). It is not sufficient for a taxpayer to show only that the property is missing, but it is sufficient to show that theft is the most plausible explanation for the disappearance of the property. It is not necessary to identify or convict the alleged thief. “

“…a criminal conviction, moreover, was not a necessary element in a taxpayer’s proof of a theft loss. Monteleone v. Commissioner (1960) 34 TC 688 (Acq),

“…a preponderance of the evidence of intent to defraud may be proved by the circumstances surrounding the transaction… Hartley v. Commissioner (1977) TC Memo 1977-317, 36 TCM 1281, [FN16]

“The taking of money or property through fraud or misrepresentation is theft if it is illegal under state law.” (IRS publication 547)……”when there is criminal intent.” Louisa B. Gunther Farcasanu v. Commissioner, 436 F. 146 (1970), affirming per curiam, 50 T.C. 881 (1968); Nona R. Johnson v. United States 291F. 2d 908 (1961); and William J. Powers v. Commissioner, 36 T.C. 1191 (1961).

“It is not sufficient for a taxpayer to show only that the property is missing, but it is sufficient to show that theft is the most plausible explanation for the disappearance of the property. It is not necessary to identify or convict the alleged thief.”… Allen v. Commissioner, 16 T.C. 163 (1951)

“…under applicable state law, obtaining title to property of another by intentionally deceiving that person with a false representation, which is known to be false, made with intent to defraud, and which does defraud the person to whom it is made, constitutes theft; and that false representation includes a promise made with intent not to perform, if it is a part of a false and fraudulent scheme. Schneider v. Commissioner (1981) TC Memo 1981-603, 42 TCM 1449

“Theft is defined as “a word of general and broad connotation intended to cover and conveying any criminal appropriation of another’s property to the use of the taker, particularly theft by swindling, false pretenses, and any other form of guile… and that the nature of the crime is of little importance so long as it amount to theft.” (Edwards v. Bromberg 232, F. 2d 107, 110 (C.A. 5, 1956); Robert S. Gerstell, 46 T.C. 161, 171-172 (1966).” (Cited in Cramer v. Commissioner, 55 T.C. 1125.).

The phrase “stolen, converted, or taken by fraud” is intended to cover all forms of theft offenses regardless of whether such “taking” was in the nature of common law larceny, an embezzlement, or false pretenses. United States v. Lyda, 279 F.2d 461 (5th Cir. 1960). See also United States v. Turley, 352 U.S. 407 (1957) (under 18 U.S.C. § 2312); and Bell v. United States, 462 U.S. 356 (1983) (under 18 U.S.C. § 2113). National Stolen Property Act.

“A theft loss deduction will be allowed if obtaining money from another under false misrepresentations or false pretenses constitutes fraud under state law.” IRS Rev. Rul. 71-381, 1971-2.

“…the court reasoned that the investing entity was the device the organizer used to route the taxpayer’s money into their pockets and that the judgment in the taxpayer’s lawsuit against the organizers showed the state’s refusal to recognize the existence of any sanctuary behind corporate doors in cases of this sort. Vietzke v Commissioner (1961) 37 TC 504 (Acq), [FN20]

“The word “theft” is not, like “larceny,” a technical term of art with narrowly defined meaning, said the court, but is a word of general and broad connection, covering any criminal appropriation of another’s property to the taker’s use, particularly including theft by swindling, false pretenses, embezzlement, or any other form of guile. The court observed that exactness in determining the nature of the crime (whether it be larceny, embezzlement, obtaining money under false pretenses, or otherwise) or in naming the guilty party or parties is of less importance than the character of the deduction. The controlling issue, observed the court, is whether the taxpayer sustained a loss as a result of a transaction that amounted to theft under state law. McKinley v Commissioner (1960) 34 TC 59 (Acq),

WRITE OFF DATE

The year of discovery is deemed to be the year a “reasonable person” would have discovered the loss. “A loss is considered to be discovered when a reasonable man in similar circumstances would have realized the fact that he had suffered a theft loss.” (Cf. Jane v. Elliot, 40 T.C. (1963), acq. 1964-1 C. B. (part 1). Reg. Section 1.165-8(a)(2)).

“Section 1.165-1(b) of the regulations provides that to be allowable as a deduction under section 165(a) of the Code, a loss must be evidenced by closed and completed transactions, fixed by identifiable events, and actually sustained during the taxable year. Only a bona fide loss is allowable. Substance and not mere form shall govern in determining a deductible loss.” “The burden of proof is upon the taxpayer to establish by whatever evidence is available the occurrence of the act and the date thereof to support a deduction for a loss.” “The date of loss may be established by whatever evidence is available, including evidence of a circumstantial nature.” Rev. Rul. 62-197 /1/ 1962-2 C.B. 66.

Theft losses must be deducted in the year the theft is discovered. The loss is not deductible in the year the theft occurred (unless it is the same as the year of discovery). Reg. Section 1.165-8(a)(2).

“You generally can deduct theft losses only in the year you discover your property was stolen. You must be able to show there was a theft, but you do not have to know when the theft occurred.” IRS Publication 547.

And: “The date of loss may be established by whatever evidence is available, including evidence of a circumstantial nature.” Rev. Rul. 62-197 /1/ 1962-2 C.B. 66.

“Full recovery by the owner or his agents, including law enforcement officials, will terminate the stolen character. On the other hand, if the stolen property is not in their sole possession and is only under their “surveillance,” the stolen character remains. See United States v. Muzii, 676 F.2d 919 (2d Cir. 1982); United States v. Dove, 629 F.2d 325 (4th Cir. 1980).” National Stolen Property Act

REASONABLE PROSPECT FOR RECOVERY

A theft loss is not deductible while there is a reasonable prospect of recovery or reimbursement. (Reg. Section 1.165-1(d)(3)). But a taxpayer who reasonably believes that investment theft precludes recovery and claims a theft loss; but subsequently receives reimbursement or recovers the stolen property must recognize income in the year of recovery, subject to limits of the tax benefit rule of Code Section 111.

AMENDED RETURNS AND ROLLNG LOSSES FORWARD

In general losses can be used to recapture taxes up to two years back (under Rev Ruling 2009-9 (see attached) for losses sustained in 2008, amended returns can be filed for 5 previous years) and unused write offs rolled forward for 20 years. TITLE 26, Subtitle A, CHAPTER 1, Subchapter A, PART IV, Subpart D, Sec. 3. NOTE: Under Rev Ruling 2009-9 losses taken in 2008 can file amended returns for 5 years back.

IRA AND PUBLIC STOCK LOSSES ARE NOT QUALIFIED

If an investment is done through an Individual Retirement Account (IRA), since the money was not taxed initially, the investors cannot write the loss of his or her taxes. Public stock losses are written off under a separate mechanism.

In addition, if the loss is incurred because ‘insiders’ in that company stole from the company rather than directly from the investor, the 165 theft loss is not allowable.

NEW YORK -- Suing. It's the American way. When it comes to shareholder lawsuits, it may be time to reconsider. Class-action shareholder suits remain a popular fixture in courts throughout the land, although they very rarely pay shareholders much of anything. Nor are they a stellar way to change a company's bad behavior. Some might argue the lawsuits serve as a deterrent to bad behavior. That's a hard sell: Because there are so many lawsuits, they carry little stigma. That shareholder suits will almost immediately follow a company's bad news is now a matter of custom. In the last few weeks, shareholders sued H&R Block Inc., Northfield Laboratories Inc. and Bausch & Lomb Inc., to name just a few.

There were 182 federal securities fraud class actions in 2005, according to the Stanford Law School Securities Class Action Litigation Clearinghouse, which keeps numbers in cooperation with Cornerstone Research, a consulting firm that does financial and economic analysis in commercial litigation. The suits are hardly a path to riches for shareholders. Consider Milberg Weiss Bershad Hynes & Lerach, the law firm that was lead or co-lead plaintiff in more than 50 percent of federal shareholder suits settled from 1997 to 2004.

The firm's median settlement as a percentage of the estimated damages in each case was 3.7 percent, according to Cornerstone. Other firms didn't do much better: The median for the top 10 firms was also 3.8 percent. So, if you lost $10,000 when your stock declined and you proceeded to join a class-action shepherded into federal court by the biggest names in the field, you might get a whopping $380 when the case was settled.

Except you won't. The lawyers customarily take one-third of the settlement. And who pays for the settlement? Maybe the company's insurer, so the company's rates go up, cutting into profits.

Or maybe the company itself pays. That would be a vindication, unless you still own the stock, in which case, "You may be suing yourself, in a sense," said Cindy Ma, vice president of National Economic Research Associates Inc., an economic consulting firm that studies shareholder suits.

Stanford just counts the federal suits. Another wave of suits can hit companies in state court. Do shareholders do better there? No.

Robert B. Thompson and Randall S. Thomas, both law professors at Vanderbilt University Law School, studied 1,000 corporate fiduciary duty cases filed in Delaware state court between 1999 and 2000. Because of its laws favorable to business, Delaware is a popular state for companies to incorporate in. Of all the litigation at the state level, "the only real dollar recovery occurs in one subset: cases against controlling shareholders who squeeze out the public shareholders at too low a price," Thompson said.

Even those cases have a lottery-like element to them. Litigation is brought in about 150 such cases a year; cash recovery occurs about 20 percent of the time. Still, the settlements in these cases count for roughly 80 percent of all state-court corporate law settlements. As Cindy Ma sees it, "There has to be a better way to prevent fraudulent activity."

Ponzi Schemes
It is illegal for an investment to be offered where the source of the returns come from the investor’s own money. The operators of a Ponzi schemes promise high returns, pretending there is some business basis, but merely pay some of the original investors with new investors money and skim off the major portion for their own use. \ You will rarely find a Ponzi scheme running a legitimate business. The later investors are the most injured victims. A Ponzi scheme can also be a situation where a business sells one product to many investors each believing they were the sole owners.

Pyramid Schemes
Investors are offered to buy a membership, upfront in cash, in a pyramid shaped organization with the objective of finding others to pay to join the pyramid. The pyramid operators promise payment from selling stock or obtaining a loan. There is no effort To secure the loan or sell stock and the investors lose their membership fee.

Misrepresentations and Omissions
Promoters offer a legitimate investment but misrepresents important facts or hide information in order to sell large quantities of the security. Promoters fail to disclose important negative information about the investment.

High Yield Investments (HYIP)
Investors are offered high yield from an investment that is purported to be backed by banks, the FDIC or the U.S. Treasury. Some have been set up outside the U.S. to avoid regulation.

Misappropriation
Promoters sell interests in a company and proceed to misappropriate the money for their own purposes ultimately causing the failure of the business.

Nigerian Investments
Individuals from foreign countries, mostly from Nigeria, claim they would have access to large amounts of money, but need funds to get through the legal process. They have very colorful stories regarding why they can get the funds. In return for the help they agree to pay huge fees. By merely giving these people access to your bank account or paying a fee there will be an incredible payment. These are completely fraudulent and have bilked investors out of millions of dollars.

Stockbrokerage Churning
There are stockbrokers that promote very active trading in an investment account causing substantial commissions to be charged. When these investments are unsuitable for the investor and the amount of trading leads to substantial losses, the investor may be a victim of “churning”. In many states this is considered theft.

Stockbrokerage “Pump and Dump” Schemes
Stockbrokers and their firms that aggressively promote a stock “pumping” and then quickly sell (dumping) the stock to give the original investors a profit, injure the later investors at the expense of the original investors. This is considered theft in many states.

Abandoned Stock
Final regs section 1.165-5(i) were issued for abandonment of stock or other securities after March 12, 1008. If the security is a capital asset then the resulting loss is treated as a loss from the sale or exchange of a capital asset on the last day of the taxable year. The loss is only allowed if all rights in the abandoned security are permanently surrendered and relinquished for no consideration.

BY BART H. SIEGEL

Investment theft losses that result from nonbusiness, for-profit transactions may qualify for advantageous tax treatment. When a client is the victim of fraud or embezzlement, for example, CPAs can reduce the client’s ordinary income, recoup any previously paid taxes and minimize future tax obligations by using IRC section 165(c)(2).

Be aware that CPAs who prepare and defend an investment loss deduction under IRC section 165(c)(2) must meet numerous technical requirements and make certain determinations based on examining the circumstances. Section 165(c)(2) deductions also frequently prompt IRS oversight, and in many instances, the standard tax preparation software does not adequately address this deduction, since it’s generally geared to the more familiar section 1211 capital loss treatment. But while section 1211 is an appropriate treatment, using it may result in clients’ paying more taxes than are required.

If a client suffers an investment loss as a result of a fraudulent investment or unethical sales practice, probably the most prudent action a CPA can take, even though there is no requirement to do so, is to suggest the client first discuss it with his or her lawyer.

Taxpayers are required to take reasonable action to recover a loss and not doing so disqualifies it for section 165(c)(2) treatment. If the lawyer feels there was malfeasance and it is not practical to pursue recovery due to a lack of recoverable assets, the cost of litigation or other reasons, the loss probably is deductible in the current period. Losses from embezzlement, blackmail, kidnapping for ransom, burglary, larceny, extortion and threats also may qualify for section 165 treatment.

THEFT LOSS VS. CAPITAL LOSS

Section 165(c)(2) theft loss deductions can be more advantageous than capital loss ones for the following reasons:

As ordinary deductions, they’re not subject to limitations imposed by IRC section 1211.
They’re not miscellaneous itemized deductions subject to the 2% floor imposed under section 67(a).
They’re excluded from the phaseout of itemized deductions required by section 68(b).
Theft losses that exceed a taxpayer’s gross income give rise to net operating losses that can be carried back three years or forward for 20 years.
They can be used to reduce a taxpayer’s tax liability to zero without resulting in any liability for alternative minimum tax (AMT). [Sec. 56(b)(1)(A)(i) and 67(b)(3)].

Theft Loss Deduction Can Help Victims of Investment Fraud Recover Losses and Regain Their Financial Livelihood

ENCINO, Calif., Dec 18, 2008 /PRNewswire via COMTEX/ -- While the list of investors allegedly defrauded by Bernie Madoff's $50 billion scheme continues to grow, experienced tax professionals are advising victims to take advantage of tax benefits that can help them recover their financial losses. According to tax expert Michael Rozbruch, taxpayers affected by one of Wall Street's biggest Ponzi schemes can claim an "ordinary" (versus a "capital") loss deduction under section 165 of the IRS tax code. "These victims of investment fraud may qualify for a little known tax break that until now, not many people have been eligible for," said Rozbruch, founder and CEO of Tax Resolution Services, Co., a company that provides affordable solutions to people with tax problems.

To maximize tax benefits, taxpayers can offset their ordinary income, up to the amount of the fraud loss (in the year of discovery) and carry back their losses to previous years. This helps recuperate any previously paid taxes while minimizing their future tax obligations. "For instance, if you've lost $100 million in this scheme, you can recoup $30 to $40 million of that in taxes," said Rozbruch. "I've helped people in this situation before and it's incredibly rewarding to help victims wiped out by fraud regain their financial welfare."

While there are clear tax benefits to deducting a fraud loss, Rozbruch points out that it is an incredibly technical and a complicated process that will certainly put taxpayers under IRS scrutiny. "To recover your losses, you will need to go back and amend your tax returns, which means you will inevitably be audited," he says. "My best advice is to have experienced professionals help you through the process so you can successfully turn your financial life back around."

Tax Resolution Services is dedicated to providing affordable solutions to businesses and individuals who find themselves in trouble with the IRS. Their team of expert tax attorneys, enrolled agents and CPAs has a success rate of 90% - second to none in the industry - and an Offer in Compromise Settlement Rate of $0.13 on the dollar. For more information or to receive a FREE tax relief consultation, visit www.TaxResolution.com or call 818-774-1813.

Tax code torments cheated investors

FILING SEASON: They can take larger deductions for stolen money, but defining "theft" is tricky.
By DEVONA WELLS
The Press-Enterprise

Peter B. Lombardo had hoped the tax man might ease the financial pain of losing more than $50,000 to investment firm D.W. Heath & Associates.

Arrests made 21 months ago in the Heath fraud case have resulted in one guilty plea and the ongoing prosecution of three others. So Lombardo, 63, wanted to score a major deduction this year by claiming the loss as a theft on his tax return.

A theft deduction would give Lombardo a larger break up front. Otherwise, the sum would be spread out over several years. Such a deduction, however, taps into a confusing quirk of the tax code, with no definitive rules on when to make the claim and what is required to show an investor's money has been stolen. Beyond being a difficult deduction, experts say it can raise red flags, inviting Internal Revenue Service scrutiny.

With the April 17 deadline approaching, those who invested in what prosecutors say was a Ponzi scheme run by Heath & Associates continue sizing up their tax options. Hundreds of Heath investors, who are owed about $100 million, have an incentive to investigate a theft deduction: Taking one could deliver larger write-offs than a standard investment loss. Hundreds more who invested and lost in MX Factors and Ohana International, both based in Riverside, might also be eligible.

A month ago, Lombardo had said he would go ahead with the theft deduction. Lombardo, who does his own taxes, says he could use the extra cash. He had expected to retire last year but instead will work at least two more years at his computer-support job for the city of Riverside.

But then he called three accountants -- all of whom told him to wait on the write-off. "I'm hoping they steered me right," he said.

IRS tax code does not specifically address the alleged Ponzi scheme that targeted Lombardo but it does allow claims for theft, which can include a stolen car, getting robbed at the ATM or even paying a ransom. Ponzi schemes use money from later investors to pay earlier ones.

To claim an investment loss as a theft, a taxpayer must show "that the taking was done with criminal intent," according to tax law. Such a definition does not apply to a legitimate company whose executives mishandled shareholder money, as is alleged in the Enron case, said Bernie Bicoy, president of Venture Research Institute. The institute researches companies for people seeking safe investments. An attorney's opinion can be enough to claim a theft as a loss, according to court cases on the subject, Bicoy said. But the IRS typically wants a civil or criminal judgment, which can take years, he said. As with the upcoming Heath trial, the MX Factors and Ohana International cases, also accused of being Ponzi schemes, have yet to wrap up.

Timing can be critical.

Claims should be made for the year it's clear investor money won't be recovered, said Riverside tax attorney Dwight Montgomery. Those who wait too long, experts say, can generally amend tax returns for only the previous three years.

Opinions Differ

Even those immersed in tax law view the theft deduction differently.

IRS spokesman Raphael Tulino said he couldn't talk about specific cases but said any deduction should be fine if it has been substantiated. "The key is making sure you have all the paperwork and have done what you could to track the money," he said.

But Redlands certified public accountant Joe Walloch said qualifying a theft deduction could be difficult. Most types of corporate fraud, such as the collapse of WorldCom, don't count, he said. "The chance of success is remote," he said.

Less than 1 percent of tax returns deducted any kind of casualty or theft loss for the 2003 tax year, Tulino said. The statistics didn't break out theft figures, but most of the $1.6 billion claimed, he said, likely went to casualties, such as hurricane damage. In rare cases, the issue can end up in court.

After the IRS challenged a theft deduction taken by a Utah couple in 1993, they sued. A federal tax judge allowed the $400,000 loss -- swallowed by a Ponzi scheme -- to be deducted as a theft, said David C. Wright, the couple's attorney.

Prosecutors accuse the remaining Heath & Associates defendants of bilking more than 1,600 investors by pitching them safe, guaranteed investments. The firm had offices in Hemet, Pasadena and Brea.

Daniel Heath; his father, John Heath; and Denis O'Brien have pleaded not guilty to various felony charges, including securities fraud. Heath & Associates investor Joe Risse said claiming his loss as a theft could mean about a $10,000 tax deduction for each of the next several years. He lost more than $200,000.

Risse waited to see how much he would see from the court-appointed receiver, which is locating and selling Heath assets to get money back to investors. Checks mailed in December returned 15.3 cents for every dollar lost. Another check will be on the way after the receiver collects additional money, though it will be for far less than the first, said Brick Kane, chief operating officer for court-appointed receiver Robb Evans.

Even without the Heath & Associates case wrapped up, Huntington Beach accountant Don Bandoli said he plans to write off Risse's loss as a theft this year. Kane said the receiver probably will not finish liquidating Heath assets by the end of the year but hopes to finish in 2007.

"I think there's enough evidence that they're not going to get their money back," Bandoli said.

Investors Holding Off

Investor Lombardo said the accountants he talked to told him it would be best to wait until the Heath trial ended and the receiver finished disbursing money to investors.

Wendy Bodenschot also is waiting for the Heath prosecution to wrap up. Attorneys say the trial, expected to last at least two months, likely won't begin until summer.

Bodenschot sold her Fullerton house and gave the proceeds, more than $300,000, to Heath & Associates while being treated for non-Hodgkin's lymphoma.

But proving a criminal case carries a heavier burden than claiming a theft on your taxes, said tax attorney Montgomery.

"The question is: Would a reasonable person think there was a theft here?" said Montgomery, a partner at Best Best & Krieger. Clarence and Elinor Morris investigated their tax options last year for the $178,000 in taxable savings they invested with Heath & Associates.

"Our tax man had told us we could only deduct $3,000 a year. So we would probably not be alive by the time we would recoup all our money," Elinor Morris, 72, said. When an investment goes sour but is not a theft, the IRS allows an annual $3,000 deduction if what was lost is bigger than what was gained.

A second accountant claimed the Brea couple's loss as a theft and took a deduction that yielded them almost $25,000, Clarence Morris said.

"Every little bit helps. I wish I could have gotten more," he said.

Advice from Attorney Richard Lehman

BOCA RATON, Fla., Jan 13, 2009 (BUSINESS WIRE) (Business Wire) — Tax refunds could help victims of the alleged Bernard Madoff Ponzi scheme recover 35- to 50-percent of their losses, an issue largely overlooked by many claimants, according to attorney Richard Lehman, a U.S. tax law expert.

"The IRS acknowledges Ponzi schemes as 'theft losses,' and there are several methods of tax recovery available," said Lehman, a prominent tax attorney in Boca Raton, Florida and former senior attorney for the IRS. "However, each of these potential options of recovery has its limitations, restrictions and strict requirements that must be met in order to take advantage of the maximum tax benefits from the alleged Bernard Madoff theft." According to Lehman, victims of any Ponzi scheme, including the alleged Bernard Madoff fraud, may have the following three tax refund options:

-- "Theft Loss" - In a Ponzi scheme, theft loss is an extremely valuable tax deduction that could have a cash value equal to 35- to 50-percent of the lost investment, depending on city, state and federal income taxes.

-- "Capital Return" - In certain cases, funds that were paid from a Ponzi scheme and reported as 'income' in a previous year may instead be considered a return of the defrauded investor's capital.

-- "Phantom Income" - Income taxes paid by Ponzi investors on what turns out to be fake profits, or "phantom" income, may be recovered as theft losses or under certain circumstances by re-characterizing the income as non-existent.

Lehman also cautions victims of the alleged Bernard Madoff Ponzi scheme against two common mistakes that will limit the potential tax recovery: failure to deduct tax losses in the proper year and entering into premature settlements that convert theft losses into capital losses of lesser total value.

All of the issues involved in maximizing the tax recovery from the alleged Madoff fraud or other Ponzi schemes, in addition to litigation options, are being discussed in-depth in a special eight-part TV series that will air Fridays at 7:30 p.m. EST, beginning January 16th, on WXEL's "Wealth & Wisdom" show.

For more information, visit www.bernardmadofftaxloss.com or www.lehmantaxlaw.com.

Here are some referrals on others who are in this business. VRI does not necessarily endorse them, and if any investors have complaints about their work please let us know and we will remove their names from this page.

WASHINGTON STATE

http://www.americanjusticecoalition.org/

Their intent to help investors recover money and report the perpetrators to the appropriate authorities.

WEBSITE: AMERICAN JUSTICE COALITION

EMAIL: AMERICAN JUSTICE COALITON

Here is the email they sent to us.

American Justice is a not for profit entity that advocates and investigates on behalf of victims of financial fraud. Generally the victims that we assist are the elderly senior citizens that seem to have a propensity to being vulnerable to this type of criminal activity. We welcome the opportunity to be able to utilize your resources and hopefully utilize your services to expose those that commit this type of crime. We would be happy to forward the $20 for any and all support you may be able to provide in the quest for justice.

Thank-You!!
Edwin Commet

If you use them, please give us feedback on your experiences.
Bernie Bicoy

ILLINOIS

From: Joseph Shadle [mailto:jws@ameritech.net]
To: 'inquire@vcresearch.info'
Subject: Code Section 165

Mr. Bicoy,

Pursuant to our conversation I would like to provide you with some background regarding Tax Relief, Inc.
Our main focus in tax resolution meaning we assist individuals and/or corporation resolve tax liabilities – we have been in business for about 14 years and assist taxpayers across the country
I have helped taxpayers recover investment losses through the use of Code Section 165 – one taxpayer owed about $150,000 and through the use of 165 reduced the balance to almost nothing
We are Accredited Members of the BBB – please see our website at www.taxreliefinc.com for further information
Thank you for the time and consideration

Joseph W. Shadle, President
Tax Relief, Inc
907 N Elm Street, Suite 304
Hinsdale, IL 60521
800.953.0271 tel
630.325.7301 fax