Bipartisan Bill Proposes Tax Breaks for Ponzi Victims
A bipartisan bill introduced in the U.S. Senate by Senators Charles E. Schumer, Democrat of New York, and Jon Kyl, Republican of Arizona on March 22 proposes to extend tax breaks to the tens of thousands of Ponzi scheme victims. In contrast to previous proposed legislation which focused exclusively on those who made direct investments with the Ponzi schemers, this bill would apply to both those who invested directly and those who invested indirectly (such as those who lost their money through other investment vehicles, such as hedge funds and pension plans). This would be a boon to various feeder funds, pension plans and partnerships who passed money along into Ponzi schemes such as Bernie Madoff’s, in addition to helping investors who lost money through individual retirement accounts (a category which is estimated to have lost $1 billion to Madoff alone).
The legislation, however, according to the New York Times, will only cover the losses of those affected by Ponzi schemes during 2008 and 2009.
That will catch the largest recent frauds — Bernard L. Madoff’s gigantic crime, which wiped out more than $60 billion of investor savings; the $3.6 billion swindle run out of Minneapolis by the industrialist Tom Petters, who was convicted late last year; and the collapse of Stanford International Bank, which is expected to cost investors as much as $7 billion.
It would also cover the victims of dozens of smaller, less visible frauds — an Associated Press study this year identified 190 Ponzi scheme cases at the state and federal level in 2008 and 2009.
But the proposed relief may not help victims of new cases filed by regulators since January, which include a $135 million investment scheme marketed to Cuban-Americans in Miami and a $14.7 million scheme regulators say was aimed at retired bus drivers in Los Angeles.
The proposed bill would expand the period for which investors can apply losses to prior income to up to six years. The previous IRS rule let investors carry back losses five years. The carry back lets investors get cash back for taxes paid in prior years. The plan also increases the amount a victim can apply against previous income and lets victims recoup some losses within an individual retirement account, by allowing a loss on their basis of half of their total losses. Because these accounts contained pre-tax dollars, their owners could not take advantage of new tax rules last year that extended fraud loss write-offs for taxable accounts owned by direct investors, according to the New York Times. The tax refunds generated by the longer carry-back periods are an important source of cash for investors wiped out by fraud — one that had not been available to investors who lost money in I.R.A. accounts.
The New York Times writes:
According to the senators’ announcement, the new bill “would increase the amount a victimized investor can carry back on his income taxes; allow victims who lost money within an I.R.A. to recoup some of the losses for the first time by allowing a theft loss for their basis in the account, or half their total losses; raise the limit on tax-free contributions to retirement accounts so investors can replenish losses quicker; and waive penalties for withdrawing from retirement accounts to increase daily cash flow.”
The legislation has been praised by leaders of groups representing Ponzi victims and has support from both sides of the aisle. The bill is sponsored by 11 Democrats and six Republicans.
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