LYNNLEY BROWNING
The New York Times
March 17, 2009

The Internal Revenue Service will allow victims of Bernard L. Madoff’s investment fraud to claim a tax deduction related to the bulk of their losses, the I.R.S. commissioner told the Senate Finance Committee on Tuesday.

[efoods]The commissioner, Douglas H. Shulman, told lawmakers that the agency was offering guidelines for taxpayers who are victims of losses from Ponzi schemes like Mr. Madoff’s.

The plan represents the first time that the I.R.S. has come forward with a policy regarding how it will treat Mr. Madoff’s victims, who include Elie Wiesel, the prominent Holocaust survivor and historian; Steven Spielberg, the Hollywood filmmaker and the actor John Malkovich, as well as scores of other investors. The issue has been a point of debate and anxiety for the victims and their accountants, given the lack of clarity in the tax code.

The plan, which applies to victims of all Ponzi schemes, should provide some relief to investors in Mr. Madoff, who pleaded guilty last week to orchestrating what prosecutors say is the largest Ponzi scheme ever — one that could reach $65 billion and cover 13,000 investors. It is also likely to help the I.R.S. avoid an unwanted avalanche of amended returns.

The plan would ease existing rules governing what are known as theft-loss deductions, which are losses claimed by investors who are cheated by their investment advisers and others in Ponzi schemes and other frauds.

Under the plan, the I.R.S. will allow investors, including those who are suing Mr. Madoff, to claim a theft-loss deduction equal to 95 percent of their investments, minus any withdrawals, reinvested gains and payouts from Securities Investor Protection Corporation, the government-chartered fund set up to help protect investors of failed brokerage firms. Investors who are suing third-parties involved in the scheme, and who thus may have some prospect of recovery, can claim a deduction equal to 75 percent of their investments.

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