Legislation would offer tax relief for Madoff victims

Friday, April 3, 2009

The measure, sponsored by Sen. Richard S. Madaleno, would allow state taxpayers to reflect the investment scheme losses through amended state income tax returns dating back five years. Until recently, federal law allowed the investment losses to be carried back for two years.

The bill would amend Maryland's tax laws to conform to revisions announced March 17 by the IRS on theft-loss deductions pertaining to money lost through Ponzi schemes and other frauds.

According to court documents, 139 of Madoff's victims had addresses in Maryland.

Madaleno (D-Montgomery) called the bill "the least we can do for Marylanders as they try to recover financially."

But Marylanders victimized by Madoff should be treated no differently than Marylanders suffering other investment losses, said Neil L. Bergsman, director of the Maryland Budget and Tax Policy Institute, a nonpartisan research organization.

"It seems that just in terms of equitable tax policy, that a loss is a loss is a loss, and I certainly understand how someone who is an elected politician has a hard time seeing it that way," Bergsman said.

Politics aside, Madaleno's bill makes good sense, and all investment losses are not the same, said Comptroller Peter Franchot.

"The distinction is that this is real fraud here," said Franchot (D). "Other investors can complain about losses, but these victims suffered fraud. We thought it was appropriate to reach out to these people who were robbed by a thief."

The Madoff victims would be allowed to claim a theft-loss deduction on their federal income tax returns equal to 95 percent of their investments, minus any withdrawals, reinvested gains and payouts from the government fund set up to protect investors of failed brokerage firms.

Investors suing third parties involved in the scheme can claim a 75 percent deduction.

The same losses would be filed on a Maryland taxpayer's state tax return. The federal and possible state change would allow amended returns of up to five years to record the loss.

If the Madoff losses were treated as typical capital losses — or decreases in an investment — the victims would be limited to deducting $3,000 per year on their tax returns.

Despite the fraud associated with the Madoff scheme, changing the tax rules could set a bad precedent, Bergsman said.

"There may be future frauds and cases of victimization which are either as bad or not as bad, and following this policy, the victims and their representatives will say, ‘You helped the Madoff victims,'" he said. "And this could be a wedge that leads to the proliferation of tax breaks in the future."

Madoff's Ponzi scheme defrauded thousands of investors of a reported $65 billion. He pleaded guilty March 12 to 11 felony counts, including money laundering and securities fraud, which carry a prison term of up to 150 years.

He currently is in jail awaiting sentencing in June.

jdavis@gazette.net