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Tax Implications for those affected by the Bernard Madoff scandal
Investors who have suffered losses resulting from the Bernard Madoff debacle likely have many unanswered questions. How could this have happened? Where was the SEC oversight? High among the unanswered questions are the tax implications of this horrific scandal and how investors can potentially use their losses to reduce their current income taxes and recover taxes paid in prior years.
Many of you have been avidly reading the numerous news reports, articles, press releases and other materials which purport to address the tax implications. These materials often give conflicting and potentially misleading advice. The Tax Partners of MWE have been diligently researching the various tax issues so that we can advise our clients, on an individual basis, about the best course of action to take in order to maximize their tax “benefits.”
At this time, and while the facts and circumstances remain unclear, there are unfortunately more questions than answers. While it is almost certain that most, if not all, of the losses were due to “theft” versus investment losses, such amounts and the amount of possible recovery are not yet known. In addition, the tax implications to each investor will depend on the particular facts and circumstances such as:
• Was the investor a direct investor with Bernard Madoff Investment Securities LLC or did he invest through a “feeder” organization such as a fund of funds?
• When did the investor make the investments?
• Did the investor receive distributions or withdrawals in any year?
• How much might the investor recover from SIPC or through insurance, bankruptcy proceedings or litigation?
• What additional costs will the victimized investor incur?
It is likely that it will take an extended period of time to determine all the relevant facts. In the meantime, decisions will have to be made about the amount of loss that should be reported on the investor’s 2008 federal and state income tax returns and whether to file amended returns or protective refund claims for tax years not yet barred by the statute of limitations (generally three years from date of filing).
The Tax Partners of MWE are prepared to assist you with these difficult decisions. Please contact us if you have been impacted by the Madoff situation so that we can guide you through the tax issues and the alternative tax strategies that may be available to you.
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