Members Looking For Relief For Madoff Fraud Victims

Senate Finance Committee members will be looking for answers today from IRS Commissioner Douglas Shulman as to whether investors defrauded by financier Bernard Madoff and other Ponzi schemes will be entitled to tax relief.

The panel's hearing comes as momentum builds for action by the Obama administration or a legislative fix to deal with losses suffered by victims of Madoff, which may be in the realm of $65 billion, investigators say.

The hearing was requested by Finance Committee Democrats Charles Schumer of New York, Maria Cantwell of Washington and Robert Menendez of New Jersey.

New York and Florida are home to the largest numbers of investors defrauded by Madoff. In the House, Ways and Means Committee Rep. Kendrick Meek, D-Fla., wants the tax-writing panel to hold a hearing on the Madoff scandal as well, and is planning to send a letter today to Ways and Means Chairman Charles Rangel. Meek, who is running for the Senate, has introduced legislation to provide tax relief for retirees and charities that lost money in Madoff-style schemes.

In their letter to Finance Chairman Max Baucus and ranking member Charles Grassley, the three Finance Democrats raised a series of tax-related issues within the panel's jurisdiction. Menendez and members of the New Jersey delegation wrote separately to Shulman on Feb. 20, urging him to clarify what tax relief defrauded investors are entitled to, as did House members from New York the following week.

According to lawmakers and tax lawyers, the uncertainty surrounds provisions of tax law dealing with capital gains and dividend taxes paid on "phantom" income, as well as IRS theft loss rules.

Technically, defrauded investors can file amended returns dating back three years to recoup taxes paid on investment income that never materialized. They can also carry back losses due to theft in the year it was discovered as far as three years to offset previous taxes paid.

Paul DiSangro, an attorney for dozens of investors who lost money with Madoff, said IRS regulations are unclear in part because it could take years to resolve the finances of the fraud perpetrators.

"The problem is that in the IRS guidance, they've indicated they don't like the idea of amended returns to deal with phantom income, and we're not sure how much loss you can take in the year of discovery," said DiSangro, a partner in the San Francisco office of Nixon Peabody LLP. "They could be telling these people, 'You get no tax relief until X number of years from now until the dust settles in bankruptcy.'"

Meek and others, including Rep. Gary Ackerman, D-N.Y., are not waiting for the IRS to act. Meek's bill would extend the three-year theft loss carryback period to 10 years. In his letter to Rangel, Meek notes the provision would benefit elderly investors who parked money with Madoff and others for years.

Ackerman's bill would enable investors to recoup taxes paid on losses dating back to 1995, stemming from findings by the court-appointed trustee for the liquidation of Madoff's firm that there was no evidence of any securities transactions in customers' accounts for the last 13 years.

Meek's bill, of which Ways and Means Select Revenue Measures Subcommittee Chairman Richard Neal, D-Mass., is a co-sponsor, has provisions to aid charitable foundations and donors that lost billions.

William Josephson, former head of the New York State Law Department's charities bureau, suggested in an interview that charities were sorely lacking in oversight, when many of the 147 private foundations with exposure to Madoff had all of their money in his funds. The largest was the Palm Beach, Fla.-based Picower Foundation, with nearly $1 billion in assets invested with Madoff.

"With respect to the overall issue of charity reform, it seems to me there are real questions of a regulatory nature with the nature of charities themselves," said Josephson, who will testify at the Finance hearing this morning. "There was a dramatic failure of the audit process."

Presented by

Cyra Master

Cyra Master is a W.E.B. Du Bois fellow at the Atlantic. Previously, she was an editor at the nonprofit Center for Law and Social Policy and was a reporter for the New Hampshire Eagle Tribune. She is a graduate of Emerson College.

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