May 15, 2009 Deadline For Certain Taxpayers with Madoff/Other Ponzi Scheme Losses (Follow-up to March 19, 2009 Management Alert)

Our March 19, 2009 Management Alert “ Some Tax Guidance (and Tax Relief) for Madoff (and other Ponzi Scheme) Victims” described the new guidance that the Internal Revenue Service (IRS) had issued for taxpayers who had invested (and lost) money in a Madoff (or other Ponzi scheme) investment, including Revenue Procedure 2009-20 which sets forth a safe harbor for such taxpayers to claim a theft loss deduction for such losses.^*

One of the Revenue Procedure 2009-20 safe harbor requirements is that a taxpayer who avails himself/herself of the safe harbor must attach the executed statement provided in Appendix A of Revenue Procedure 2009-20 to his/her timely filed (including extensions) federal income tax return for the “discovery year” (which, for Madoff investors, would be 2008). However, a taxpayer who, before April 17, 2009, has filed a tax return for the “discovery year” or an amended tax return for a prior year that is inconsistent with the safe harbor treatment provided by Revenue Procedure 2009-20, must indicate this fact on the aforementioned executed statement and then must, by May 15, 2009, file the tax return (or amended tax return) for the “discovery year” that is consistent with such safe harbor treatment (and to which said executed statement must be attached). Thus, for example, if you are a Madoff investor who desires to avail yourself of the Revenue Procedure 2009-20 safe harbor and who has already filed one or more amended tax returns for an open year seeking a refund of taxes paid on “fictitious income,” you would have only until May 15, 2009 to file your tax return or amended return (with the aforementioned executed statement attached to it).

For more information on Revenue Procedure 2009-20 please contact the Seyfarth attorney with whom you work, or any Tax attorney on our website.

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^*As a clarification to what was noted in footnote 5 of the March 19, 2009 Management Alert, the amount of the theft loss deduction that a taxpayer (who is a “qualified investor”) may claim under Revenue Procedure 2009-20 is, in general—either: (a) 95% of the taxpayer’s “qualified investment”, in the case where the taxpayer’s only actual or potential claims are against the promoter/“responsible group” or in respect of insurance, other “loss protection” contractual arrangement and/or Securities Investors Protection Corporation (SIPC) recoveries; or (b) 75% of the taxpayer’s “qualified investment”, in the case where the taxpayer has any other actual or potential claim besides those claims referred to in clause (a) (e.g., a claim against an accounting firm or investment advisor)—reduced by the sum of: (i) any recoveries actually received by the taxpayer in the discovery year from any source as reimbursement or recovery for the qualified loss; and (ii) any actual or potential claims for reimbursement for a qualified loss in respect of insurance, other “loss protection” contractual arrangement or SIPC recoveries. A taxpayer may then have income or an additional deduction in a year subsequent to the discovery year depending on the actual amount of the loss that is eventually recovered; thus, if the taxpayer is unable to recover any of the remaining 5% or 25%, as applicable, of his/her “qualified investment,” then the taxpayer would be able to claim an additional deduction equal to such remaining amount.