Madoff and his Buddy, the Tax Collector

Chidem Kurdas

Bernard Madoff, it turns out, did a great favor to the US Treasury. All those fake returns he reported for years generated tax liabilities for his clients, who paid the Internal Revenue Service every year.

In March 2009, the IRS said Madoff investors and others who are victims of fraud can claim a theft-loss deduction for what they put in net of what they took out and compensation  from the Securities Investor Protection Corp., an organization created by Congress to give some compensation to clients of broker-dealers that go under. SIPC has a fund financed by levies on member broker-dealers.

But long-term Madoff investors paid billions of dollars in taxes on non-existent gains over time and just the compounded interest on those tax payments dwarfs the deduction.

Matthew Gluck, a lawyer with Milberg LLP, says he does not see any effort to get back the money paid in taxes that were not owed. Litigating against the government is difficult, he said, speaking at a conference by Capital Link.

Other lawyers on the panel agreed. Suits against the government don’t go far, with exceptions for very specific situations, said William McGuiness of Fried, Frank, Harris, Shriver & Jacobson.

The Madoff trustee wants certain investors who withdrew their money before the collapse to give back the excess returns. These will go back into the common pot, which Mr. Gluck expects will have a total of  $1.4 billion to $1.5 billion to be eventually distributed to investors.

At least the SIPC is paying the trustee’s legal expenses, Mr. Gluck said. Otherwise the legal fees would eat up the estate. Meanwhile, some Madoff investors are suing SIPC.

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