Because of potential clawbacks and huge tax breaks that Bernard Madoff’s victims are now getting, the news in the end might not be as horrible as once feared for those who invested in Madoff’s Ponzi scheme, The Wall Street Journal says this morning.
Irving Picard, the trustee for Madoff’s estate, has already recovered about $1.5 billion on what is now estimated at a total $19.4 billion loss – not the $50 billion or more that was originally feared. And Picard is trying to wrestle another $15 billion away from those he says made money off of the scheme.
Thanks to that, and significant tax incentives, the WSJ estimates that Madoff’s victims could recover about 40 percent of their money in total.
Writes the Journal:
For some Madoff investors, taxes are proving to be a saving grace. In March, the Internal Revenue Service said victims of Ponzi schemes could generally deduct nearly all of their qualified losses, including any "phantom income," in the year the fraud was discovered. In the past, such victims would typically have had to wait years to deduct their losses and could generally deduct only their principal.
Under the recently issued rules, investors who had taxable accounts with Mr. Madoff’s firm can recover taxes paid in prior years by "carrying back" qualified losses for five years and applying any remaining losses against income going forward for as much as 20 years. Under prior rules, many investors had to subtract $100 and 10% of their adjusted gross income from their loss deductions, and could carry back losses only three years or forward 20 years.
"No matter how successful [Mr. Picard] is in recovering assets, it’s clear that the bulk of the recompense here will be from taxes," says Robert Willens, a New York tax adviser. "It’s not nearly as dire as we all feared. At the end of the day, you could recover a good 40% of your losses."
