Every few months or so seem to bring new revelations of a Ponzi scheme gone bust.1 In the aftermath,
erstwhile investors often struggle to be made whole again.
Fortunately, the federal income tax offers options to help,
although none are perfect.
Under the federal income tax, individuals currently have two
ways to claim a deduction for losses due to Ponzi schemes: 1) follow the general rules for
deducting theft losses under I.R.C. § 165 (which can be unduly
burdensome), or 2) follow the “safe-harbor” under Revenue
Procedure 2009-20 (which sets limitations on the deductible amounts
of such losses).
I.RC. § 165, Generally
I.R.C. § 165 generally allows individuals to deduct losses
not otherwise compensated for that are sustained during the taxable
year in any transaction entered into for profit See I.R.C.
§ 165(a), (c)(2). This includes losses due to theft.
See Treas. Reg. § 1.165-8(a)(1).
For federal income tax purposes, theft has a “general and
broad connotation and includes any criminal appropriation of
another’s property . . . .” Evensen v.
Comm’r, T.C. Memo 2018-141 (citing Edwards v.
Bromberg, 232 F.2d 107, 110 (5th Cir. 1956)). Still, a
taxpayer claiming a theft loss deduction must demonstrate that
there was a taking of property with criminal intent that was
illegal under the law of the jurisdiction in which the taking
occurred. See, e.g., Rev. Rul. 72-112. The taxpayer also
must establish the amount of the loss, the year in which…
