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Ponzi Scheme Victims – Tax Guidance

[Stacie says: From the IRS website – some good reads – well if you think Rev Rulings can be considered a good read ]

The IRS provides two items of guidance to help taxpayers who are victims of losses from Ponzi-type investment schemes.

Revenue Ruling 2009-9 provides guidance on determining the amount and timing of losses from these schemes, which is difficult and dependent on the prospect of recovering the lost money (which may not become known for several years).

Revenue Procedure 2009-20 simplifies compliance for taxpayers by providing a safe-harbor means of determining the year in which the loss is deemed to occur and a simplified means of computing the amount of the loss.

For an overview of this guidance, see IRS Commissioner Doug Shulman’s March 17, 2009, testimony before the Senate Finance Committee on tax issues related to Ponzi schemes.

Note: the answer to Q3 was updated on April 8, 2009.

Q1. I invested my money directly in an investment that turned out to be a Ponzi scheme. How do I deduct my loss?

A. See Revenue Ruling 2009–9 and Revenue Procedure 2009-20.

Q2. I invested in a Ponzi scheme through an intermediary such as a partnership. How do I claim my loss?

A. Partnerships ordinarily flow through all of their items of income, loss and deduction to their partners and do not pay tax or receive refunds at the partnership level. The partnership should provide you with a statement (on Schedule K-1 or a substitute), separately stating flow-through items of the partnership, including the theft loss deduction, which you will then include on your own return. You may need to request an extension to file your return. The partnership should also advise you of its gross business receipts, which will help you determine whether you are eligible to carry back a 2008 theft loss as a net operating loss for up to five years instead of the normal three years for theft and casualty losses. See Revenue Procedure 2009-19.

Q3. I invested in a Ponzi scheme through a trust. How do I claim my loss?

A. The tax consequences for taxpayers with investments through trusts will vary depending upon the type of trust arrangement. Certain trusts, known as grantor trusts, do not ordinarily pay tax or receive refunds at the trust level. Instead, the items of income, loss or deduction of the trust appear on the grantor’s own individual tax return. The most common form of grantor trust is a revocable trust, but certain irrevocable trusts may also be treated as grantor trusts, depending on the grantor’s powers over the trust. If a trust is not a grantor trust, then it may pay tax or receive a refund at the trust level, depending on the distributions it makes to its beneficiaries. These non-grantor trusts will take the theft loss into account on their own returns, but beneficiaries will generally receive an indirect benefit from the loss, to the extent that the loss allows the trust to make greater tax-free distributions to the beneficiaries.
You may wish to consult a tax professional for assistance.

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