Investors conned into Ponzi-scheme losses used to be out of luck in claiming theft-loss deductions if the scheme leader died before a criminal conviction. New IRS revisions of Revenue Procedure 2009-20, 2009-1 C.B. 749, however, extend the safe harbor for investment theft-loss deductions and ensure investors' proper tax treatment of losses.
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IRS revenue procedure revisions help victims claim a Section 165 theft-loss deduction for Ponzi scheme losses if the Ponzi scheme leader dies before conviction
In previous revenue rulings certain investors were allowed to claim theft loss deductions under Section 165 of the Tax Code if the leader of the scheme was charged by indictment, information, or a criminal complaint with a theft crime.
During the investigation of recent Ponzi schemes, the death of the scheme leader has precluded criminal charges, thereby foreclosing on investors’ opportunities to claim loss deductions.
Revenue Procedure 2011-58 modifies Section 4.02 of Revenue Procedure 2009-20, 2009-1 C.B. 749 so that the criminal conviction requirement merely require only that the charges were not withdrawn or dismissed for a reason other than the death of the “lead figure.” Moreover, now a civil complaint made by an administrative agency before the lead figure’s death that alleges facts which substantially comprise the elements of an appropriate crime is sufficient.
The term “discovery year” has also been changed to the tax year in which the criminal complaint is filed. “Discovery year” is alternatively defined as the tax year when the agency-made civil complaint is filed or the death of the lead figure occurs, whichever is later.
This revenue procedure is an appropriate response to recent events. The language ensures taxpayers, who would otherwise qualify, do not find themselves unable to claim the theft-loss deduction. It ensures that victims of ponzi schemes and other fraudulent investment arrangements are treated similarly.