Posts Tagged ‘Madoff’

Tax Roundup, 5/22/14: IRS teams up with Bernie Madoff. And: more on the new e-file ID rules.

Thursday, May 22nd, 2014 by Joe Kristan
Bernie Madoff

Bernie Madoff

The IRS wants in on Bernie Madoff’s action.  The Tax Court is going to think about it.

Bernard Kessell died in July 2006.  He might have died content believing he was leaving a healthy investment portfolio for his heirs.  After all, just one part of the portfolio had issued its most recent month-end statement showing a value of $3,221,057.  That statement was issued by Bernie Madoff.

Of course Mr. Madoff was arrested in 2008 and is now residing in federal prison on charges arising from the Ponzi scheme that victimized Mr. Kessell and so many others.  The real value of the securities in Mr. Kessell’s Madoff portfolio was zero.

But the IRS isn’t letting that get in the way.  The agency says Mr. Kessell’s estate should pay estate tax on the value that Mr. Kessell died thinking he owned, rather than the zero actual value.  It wants to piggyback on Mr. Madoff’s fraud to tax an estate value that wasn’t there.

The IRS asked the Tax Court for summary judgment that the asset to be taxed was the account itself, not the vaporous underlying assets, and that because Mr. Madoff hadn’t been unmasked, a willing buyer would pay full sticker for the lying value on the Madoff statements.  The Tax Court court wasn’t willing to go along on summary judgement:

We cannot say on the record before us, however, whether that agreement constituted a property interest includible in Decedent’s gross estate separate from, or exclusive of, any interest Decedent had in what purported to be the assets held in the Madoff account. This question is best answered after the parties have had the opportunity to develop the relevant facts at trial. We will therefore deny respondent’s motion on this point.

As to the issue of the value, Judge Kroupa had this to say (citations omitted).:

     Respondent argues that a Ponzi scheme, by its very nature, is not reasonably knowable or foreseeable until it is discovered or it collapses. Respondent notes Mr. Madoff’s particular skill and that his Ponzi scheme was not disclosed until it collapsed in December 2008. Respondent then reasons that Mr. Madoff’s Ponzi scheme was knowable or foreseeable only at the point when it collapsed — when the amount of money flowing out of Madoff Investments was greater than the amount flowing in. For purposes of this motion, at least, we disagree.

Some people had suspected years before Mr. Madoff’s arrest that Madoff Investments’ record of consistently high returns was simply too good to be true. Whether a hypothetical willing buyer and willing seller would have access to this information and to what degree this information would affect the fair market value of the Madoff account or the assets purportedly held in the Madoff account on the date Decedent died are disputed material facts.  Thus, we will deny respondent’s motion on this point as well.

The rule on how assets are valued is in Reg. Sec. 20.2031-1(b):

 The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.

Most folks would consider the fact that the account was invested in a Ponzi scheme to be one of those relevant facts.  I guess that’s why most of us don’t work at IRS.

Cite: Estate of Bernard Kessel, T.C. Memo. 2014-97.


20130121-2The AICPA doesn’t care for the “voluntary” IRS preparer regulation proposal.  The reports:

That system, the AICPA argues, would create implied government backing for those preparers who comply with the standards, while punishing those who do not.

“The proposed voluntary system would undoubtedly leave the impression among most taxpayers that certain tax return preparers are endorsed by the Internal Revenue Service (IRS),” according letter.

Further, nonbinding standards would fail to root out bad actors, according to the group.

“As a practical matter, any voluntary regime constructed would still not address the problems with unethical and fraudulent tax return preparers,” the group contends.

All excellent points.  The AICPA has figured out that the “voluntary” program would eventually be voluntary like United Way contributions were “voluntary” when I was a green staff accountant at a national accounting firm.  They were voluntary, but amazingly, participation in the drive was always 100%.  Maybe the AICPA leaders still remember their staff accountant days.

I would add one more point.  Commissioner Koskinen and Taxpayer Advocate Olson never tire of telling us how underfunded the IRS is.  If so, why are the diverting some of their already inadequate resources to start a new nonessential program?  The obvious answer is they are trying a back door power grab now that the courts have barred the front door.

Going Concern: The AICPA Voiced “Deep Concerns” About the IRS’ Voluntary Tax Preparer Proposal.  “This means war…”

Larry Gibbs, Recent Developments in the IRS Regulation of Return Preparers (Procedurally Taxing).  A long guest post by a former IRS Commissioner about the power grab he never tried.


Russ Fox, New Identification Rules Go Over Like a Lead Balloon:

In this morning’s post, Joe Kristan told his readers to call the IRS. I agree; I urge all tax professionals to speak to or email their IRS Stakeholder Liaison.  

Russ quotes a new post by Jason Dinesen, I Was Wrong: We SHOULD Be Outraged About the New IRS E-File Requirements, which Jason followd up with Questions to Ponder About New IRS E-file Requirements.  I love Question 8: “How many ID thieves use a tax pro?”

Robert D. Flach has a special Thursday Buzz!, which includes Robert’s take on “voluntary” preparer regulation and the new IRS e-file requirements.


20140321-3TaxGrrrl, Still Looking For Your Tax Refund? Errors, 4464C Letters And Other Explanations

Peter Reilly,  Tax Court Threatens To Sanction Courtroom Commando Mac MacPherson.

Kay Bell, NYC arena Madison Square Garden pays no property taxes

Me, IRS Releases Applicable Federal Rates (AFR) for June 2014


William McBride, High U.S. Corporate Tax Rate Chases Away Companies, Jobs and Tax Revenue (Tax  Policy Blog).  If it didn’t, it would be a fascinating case of economic actors failing to respond to incentives.

TaxProf, The IRS Scandal, Day 378

Renu Zaretsky, Relief, Credits, Cuts, and Roads.  The TaxVox daily headline roundup talks about new tax relief for Minnesotans and the continuing worthlessness of film tax credit programs for everyone but filmmakers.

Cara Griffith, Should Taxpayers Challenge States if They Fail to Enact Rules? (Tax Analysts Blog):

State regulations are often vague or ambiguous, and authorities can use that to their advantage. But states should not be permitted to simply take the position that is in their best interest. They should be required to provide guidance and clarification on the positions they intend to take and, even better, clear-cut examples of how that position will be applied. And if a position will be applied to an entire industry, the state should issue a rule.

States prefer Calvinball rules.


Tax Justice Blog, Junk Economics: New Report Spotlights Numerous Problems with Anti-Tax Economic Model.  I suspect the biggest problem is that TJB doesn’t care for any model that doesn’t justify infinitely-high tax rates.


Des Moines, sometimes you are just adorable:

adorable des moines

Des Moines has started posting commute travel times, just like a big city.  On a bad day, it could be as much as 2 minutes to downtown from here.



There are worse things for a CPA than losing a permit to practice

Thursday, August 5th, 2010 by Joe Kristan

David Frieling, the man who, er, “audited” the financial statements of Bernie Madoff’s Ponzi palace, has been stripped of his CPA license in New York. That wouldn’t be so bad if it weren’t for the 100-year prison sentence that may follow.


More thoughts on IRS Madoff relief

Wednesday, March 18th, 2009 by Joe Kristan

Our initial thoughts on the IRS relief for Ponzi scheme victims seem to hold up after a days reflection. Tax Analysts notes ($link) some complaints that the guidance doesn’t cover IRA and 401(k) plans victimized by Bernard Madoff, and that some taxpayers will have more losses than they can recover through NOL carrybacks. But most of the practitioners they quote are positive towards the guidance.
The TaxProf has a comprehensive roundup of coverage of the Madoff/Ponzi relief.


IRS throws St. Patrick’s Day party for Madoff victims

Tuesday, March 17th, 2009 by Joe Kristan

It looks like the IRS is buying the green beer today for the victims of the Madoff Ponzi scheme. They have issued a ruling (Rev. Rul. 2009-09) and a safe-harbor procedure (Rev. Proc. 2009-20) that together look very taxpayer-friendly.
The high points from a quick reading:
There will be a safe-harbor theft loss deduction for 95% of the investment if the victim doesn’t pursue recovery, and 75% if they do; this deduction is reduced by any actual recoveries received and any potential SIPC recovery. (RP 2009-20, Sec. 5.02).
– The “investment” includes both direct cash contributions and amounts included in income from the fraudulent investment; it is reduced by any cash withdrawals prior to the scheme’s collapse. (RP 2009-20, Sec. 4.06)
The deduction is available in the year the criminal complaint was filed. (RP 2009-20, Sec. 4.04). Since Mr. Madoff was charged on December 11, 2008, that allows Madoff victims to take their losses in 2008.
Recoveries might generate income in subsequent years; further losses might be available when the final loss tallies and recoveries are settled.
You need to have clean hands; you don’t qualify for the safe harbor if you knew of the fraud.
– The deduction is considered to be a Sec. 165(b)(2) deduction for a “transaction entered into for profit,” so it is not subject to the 10% of AGI floor that otherwise applies to personal theft losses. (RR 2009-09, Holding 2)
– If the Ponzi losses generate a net operating loss, they will be eligible for the temporary five-year carryback provision in the stimulus bill. (RR 2009-09, Holding 5)
The Revenue Procedure is a safe harbor, and it must be affirmatively elected. Taxpayers may opt out and pursue different amounts if they choose.
Perhaps reflection or reading other commentary will reveal some shortcomings in these rulings, but at first glance it looks as though today’s IRS releases provide a simple and taxpayer-friendly way to deal with the Madoff losses, and those from other Ponzi schemes. While it’s still cold consolation for those who have been fleeced, it at least helps them get their tax affairs in order with minimal complexity.
And you don’t even have to be Irish.
Prior coverage:
Theft losses for Madoff victims?