New IRS rules may aid Ponzi Clawback Victims
From Palm Beach Daily News
By Gail Liberman
If you’re among those who have been crying in your beer over your losses from Bernie Madoff or another Ponzi scheme, the IRS may have coughed up some relief.
Amid cries from attorneys and the U.S. Government Accountability Office, the IRS on Sept. 5 issued some favorable guidance on the treatment of clawbacks for tax purposes.
A clawback is one of the miserable repercussions of a Ponzi scheme, which pays phantom returns to existing investors from funds contributed by new investors. With a clawback, the Ponzi schemer’s bankruptcy trustee sues those who might have received and even spent phantom profits from the Ponzi scheme — frequently unaware that they were fraudulent. The bankruptcy trustee’s objective: To recover or “claw back” those paid-out assets to help reimburse Ponzi scheme victims who actually lost principal. Clawbacks — as many Bernie Madoff victims know all too well — have financially devastated innocent Ponzi scheme victims.
The bottom line, according to Boca Raton attorney Richard S. Lehman: Clawback victims need to go to their tax attorney, calculator in hand, to make sure they at least claimed their clawback in the most favorable way on their taxes. In certain cases, an amended tax return — at a relatively low cost, thanks to the new IRS guidance — could result in savings of beaucoup bucks.
The new IRS guidance is complex, but generally lets clawback victims claim the amount the trustee clawed back in one of two ways, according to Lehman.
They can deduct it on federal income taxes in the year they paid it. Or, they can deduct it in the year they earned the phantom income that cost them the tax. “By being able to go back to a different year, they can choose between which year will give them the biggest refund,” he says. In fact, they even can carry tax savings forward into future years.
Lehman says he has campaigned aggressively for this fairer tax treatment of clawbacks based on his own New York-based clients, who were clawback victims in a Ponzi scheme. The couple were double-whammied because they had paid nearly $1 million in taxes, thanks to nearly $2 million in phantom interest they received on a $12 million Ponzi scheme investment. Because they had other money, their income from the scheme — as dutifully reported on taxes — pushed them into the highest income tax bracket. So they paid city, state and federal income taxes at the highest rates.
Meanwhile, in 2011, when they finally were forced to repay that nearly $2 million in phantom interest via a clawback, the tax deduction available for clawbacks was of little help. Reason: They had so little taxable income that particular year.
The new IRS rules could change such outcomes by permitting the clawback to be deducted in the year phantom income was received.
“I hear from Ponzi scheme victims from all over the country — not just Madoff,” Lehman says. “The general rule is that anybody who’s paying a clawback probably is going to make more money by going back to the time they paid the taxes instead of the year they deducted (the clawback).”
ERIC N. ASSOULINE, ESQ.
Business and Bankruptcy Litigation
ASSOULINE & BERLOWE, P.A.
213 E. Sheridan Street, Suite 3
Dania Beach, Florida 33004
Intellectual Property, Labor & Employment Law, Bankruptcy, Commercial Litigation, and Corporate Law
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