Tax consequences of Madoff "investments"

[Arthur Rubin]

To combine the multiple purposes of this board....

Suppose you had "investments" with Madoff. What would the tax consequences be?

It appears the consensus on a professional tax board is that it's a theft loss, on the return covering the date the theft was discovered (December 2008).

Others have opined that the "shares" are worthless, and should be covered as a long-term capital loss (probably as of this year, 2009).

In either case, dividends that have to be (re)paid to the receiver should be a "claim of right" deduction, to the extent taxable (and to the extent that the exceed $3000 per tax year), with the non-taxable components of repayments treated the same way as lost investments.

"Unwinding" dividends received (amending previous returns to reflect that the dividends were return of investment) has been suggested as a plausible interpretation, but probably not acceptable.

Many have suggested that the IRS may issue a notice describing their opinion, even if they do not have to abide by it.

[LaVidaRoja]

Any direct investor should request a private letter ruling. The indirect investors may face a greater challange.

[Arthur Rubin]

Finally resolved. It's a business theft loss. Relevant IRS sources are Revenue Ruling 2009-9 and Revenue Procedure 2009-20. (I don't have URLs from the IRS, only from Kiplinger, so I won't repeat them here.)

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