By Robert L. Moshman
Charles Ponzi is experiencing a renaissance of interest lately thanks to the exploits of Bernard Madoff. In December, 2008, Madoff was accused of losing $50 billion of investments for his clients utilizing a Ponzi or pyramid scheme.
A pyramid scheme pays investors with the contributions of subsequent investors rather than profits. In Ponzi's case, investors of 1920 were lured by 50% returns in just 45 days. A frenzy resulted. Investors mortgaged homes and placed their life savings with Ponzi. Then came a day of reckoning.
In Bernard Madoff's case, 15% returns and a exclusive club-like membership lured investors. Madoff, a former head of NASDAQ, had served as Chairman of Bernard L. .Madoff Investment Securities LLC for 48 years prior to being arrested and charged on December 11, 2008.
Formal indictment of Mr. Madoff is expected by February 11, 2009 and his bankruptcy creditors will meet on February 20, 2009.
Six Degrees of Schadenfreude
The victims are large and small. International banks, huge hedge funds, charities, celebrities and normal individuals who invested their life savings.
A Spanish bank may have lost $3.2 billion. So many retirement plans are involved that the Pension Benefit Guaranty Corporation (PBGC) has filed a claim. Nobel laureate Elie Wiesel's Foundation For Humanity lost all of its assets.
René-Thierry Magon de la Villehuchet, a French aristocrat who ran Access International Advisers on Madison Avenue in New York, lost $1.4 billion of his own money and that of his clients with Madoff. Taking personal responsibility for the losses, he committed suicide as the scandal unfolded.
Under the six degrees of Kevin Bacon trivia game, any celebrity named has some connection with the actor. Unfortunately, Kevin Bacon IS one of the victims along with his wife Kyra Sedgewick, the star of television's "The Closer."
Other well-known victims include "Today Show" co-anchor Matt Lauer; famed pitcher Sandy Koufax, industrialist Ronald Perelman; singer Rod Stewart; New Jersey Senator Frank Lautenberg, New York Mets owner Fred Wilpon; the charitable foundation of film director Steven Spielberg; a lawyer for Zsa Zsa Gabor (91) reports that the actress may have lost $10 million in the Madoff scandal.
Investment Loss Claims
It is hard to make sense of a fraud of such magnitude. Madoff victims have formed their own support group. But the solutions are limited.
The most basic relief available is to treat the losses as bad investments and deduct the losses against other gains. To demonstrate the value of worthless assets and the timing of the loss, an investor can transfer the worthless asset to a third party for $1.
Once assets are proven worthless as of a particular date, they can be deducted against capital gains. However, few investors have sufficient gains to offset a major loss. Although investment losses can be carried forward and deducted against ordinary income, such deductions are limited to $3,000 per year.
For an individual investor facing a significant fraud, there are several additional remedies to pursue.
The Securities Investor Protection Corporation (SIPC) has a reserve fund to help defrauded investors when a brokerage goes under. Individual investors can recover up to $500,000 from the SIPC. Madoff investors have until March 4, 2009 to file for this. Taking these funds may limit the other available deductions that can be taken.
Assuming that Mr. Madoff is found guilty of fraud, and that there is no reasonable hope of recovery, investors would be able to utilize more favorable theft loss rules.
Taxpayers can deduct theft losses if they exceed 10 percent of their adjusted gross income in the year the fraud was discovered, which is 2008. Those deductions can be made on income taxes going back to 2005 and unused losses can be carried forward for 20 years.
Those pursuing class-actions may be ineligible if they have a chance of recovery. Deductions might also not apply to investors buying Madoff funds indirectly through other funds. Charities and pension funds that are tax exempt also can't utilize deductions.
Charles Ponzi is experiencing a renaissance of interest lately thanks to the exploits of Bernard Madoff. In December, 2008, Madoff was accused of losing $50 billion of investments for his clients utilizing a Ponzi or pyramid scheme.
A pyramid scheme pays investors with the contributions of subsequent investors rather than profits. In Ponzi's case, investors of 1920 were lured by 50% returns in just 45 days. A frenzy resulted. Investors mortgaged homes and placed their life savings with Ponzi. Then came a day of reckoning.
In Bernard Madoff's case, 15% returns and a exclusive club-like membership lured investors. Madoff, a former head of NASDAQ, had served as Chairman of Bernard L. .Madoff Investment Securities LLC for 48 years prior to being arrested and charged on December 11, 2008.
Formal indictment of Mr. Madoff is expected by February 11, 2009 and his bankruptcy creditors will meet on February 20, 2009.
Six Degrees of Schadenfreude
The victims are large and small. International banks, huge hedge funds, charities, celebrities and normal individuals who invested their life savings.
A Spanish bank may have lost $3.2 billion. So many retirement plans are involved that the Pension Benefit Guaranty Corporation (PBGC) has filed a claim. Nobel laureate Elie Wiesel's Foundation For Humanity lost all of its assets.
René-Thierry Magon de la Villehuchet, a French aristocrat who ran Access International Advisers on Madison Avenue in New York, lost $1.4 billion of his own money and that of his clients with Madoff. Taking personal responsibility for the losses, he committed suicide as the scandal unfolded.
Under the six degrees of Kevin Bacon trivia game, any celebrity named has some connection with the actor. Unfortunately, Kevin Bacon IS one of the victims along with his wife Kyra Sedgewick, the star of television's "The Closer."
Other well-known victims include "Today Show" co-anchor Matt Lauer; famed pitcher Sandy Koufax, industrialist Ronald Perelman; singer Rod Stewart; New Jersey Senator Frank Lautenberg, New York Mets owner Fred Wilpon; the charitable foundation of film director Steven Spielberg; a lawyer for Zsa Zsa Gabor (91) reports that the actress may have lost $10 million in the Madoff scandal.
Investment Loss Claims
It is hard to make sense of a fraud of such magnitude. Madoff victims have formed their own support group. But the solutions are limited.
The most basic relief available is to treat the losses as bad investments and deduct the losses against other gains. To demonstrate the value of worthless assets and the timing of the loss, an investor can transfer the worthless asset to a third party for $1.
Once assets are proven worthless as of a particular date, they can be deducted against capital gains. However, few investors have sufficient gains to offset a major loss. Although investment losses can be carried forward and deducted against ordinary income, such deductions are limited to $3,000 per year.
For an individual investor facing a significant fraud, there are several additional remedies to pursue.
The Securities Investor Protection Corporation (SIPC) has a reserve fund to help defrauded investors when a brokerage goes under. Individual investors can recover up to $500,000 from the SIPC. Madoff investors have until March 4, 2009 to file for this. Taking these funds may limit the other available deductions that can be taken.
Assuming that Mr. Madoff is found guilty of fraud, and that there is no reasonable hope of recovery, investors would be able to utilize more favorable theft loss rules.
Taxpayers can deduct theft losses if they exceed 10 percent of their adjusted gross income in the year the fraud was discovered, which is 2008. Those deductions can be made on income taxes going back to 2005 and unused losses can be carried forward for 20 years.
Those pursuing class-actions may be ineligible if they have a chance of recovery. Deductions might also not apply to investors buying Madoff funds indirectly through other funds. Charities and pension funds that are tax exempt also can't utilize deductions.
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