Crowley & Weiner Call on IRS to Help Ponzi Scheme Victims Recoup Payments Made on “Phantom Income”

As Thousands of Taxpayers in Queens, NYC and Nationwide Lose Money from Ponzi Schemes, Crowley-Weiner Send Letter to IRS Commissioner Asking for Clarification on Laws Intended to Help Fraud Victims

As more Ponzi schemes are unearthed and thousands of victims discovered across Queens, New York City and the United States, Congressmen Joseph Crowley (D-Queens, the Bronx) and Anthony Weiner (D-Brooklyn, Queens) called on the Internal Revenue Service (IRS) to clarify regulations on payments made on “phantom income” in order to help victims recover their assets.

“Victims of Ponzi schemes are not only limited to Madoff-level investors. Just last month, the FBI raided a Queens-based Ponzi operator who had bilked local investors of more than an estimated $380 million,” said Congressman Crowley.

“With little regard for their victims, Ponzi scheme operators like Bernie Madoff prey on clients’ retirement funds, investments and life savings. The Federal government is not only responsible for finding and prosecuting these scam artists, it must also let victims know their rights and how they can recoup the taxes they paid on phantom income. Congressman Weiner and I believe the time has come for the IRS to clarify its laws and help the victims of these crimes more easily recover their assets.”

Rep. Weiner said, “For many victims, the injury of the fraud has been compounded by the insult of having to pay taxes on the phantom gains.”

Congressmen Crowley and Weiner sent a letter on February 27, 2009 to IRS Commissioner Douglas Shulman requesting clarification of the Federal tax laws governing taxes paid on phantom income as well as losses incurred by the victims of various Ponzi schemes. The full text of the Crowley-Weiner letter is included below.

Congressman Crowley is a member of the exclusive House Committee Ways and Means with jurisdiction over the IRS; Congressman Weiner is a member of the House Energy and Commerce Committee, with jurisdiction over interstate commerce.

February 27, 2009

The Honorable Douglas Shulman

Commissioner of Internal Revenue

Internal Revenue Service

1111 Constitution Avenue, NW

Washington DC 20224

Dear Commissioner Shulman:

The news of the Madoff Ponzi scheme, which reportedly totaled $50 billion, as well as the Bayou scheme and another major Ponzi scheme in Queens, New York, has brought a few tax-related issues to the forefront.

Considering the likelihood of additional fraud cases being uncovered due to the increased attention and regulation of the financial sector and the increasing redemptions occurring on Wall Street, we respectfully request clarification of the Federal tax laws governing taxes paid on phantom income as well as losses incurred by the victims of various Ponzi schemes.

Theft Loss Rule – Clarification of the Designation

As we understand, section 165 of the Code provides for deductions of losses, including losses from theft. Taxpayers affected by the growing number of Ponzi schemes have expressed some uncertainty regarding whether their losses should be recorded under section 165(c)(2) pertaining to losses incurred in a transaction for profit or section 165(c)(3) pertaining to losses from theft.

This is an important determination because if the losses are treated as having been incurred from transactions entered into for profit, there would be no casualty loss limitations imposed under section 165(h).

While we understand the IRS will not – nor should it – comment on issues specific to individual taxpayers or cases, we do seek overall guidance from your agency on the criteria used in determining how to classify these losses from Ponzi schemes. Clarification of this question by the IRS is important as the victims of these schemes are looking for relief.

Additionally, we seek guidance from the IRS on the criteria used in determining the classification of taxpayer losses in the Bayou Group Ponzi scheme, which until recently was the largest such fraud of this nature in American history.

Finally, we ask that you clarify that such losses be determined by an investor’s basis in the investment, including both invested principal and reported income not previously withdrawn, and if a taxpayer may carry back these losses three years and may carry forward the losses 20 years. This would allow the victims some ability to recover taxes on erroneously reported income, as well as some portion of their lost principal.

Theft Loss Rule -- Timeline for Claiming

Under Treasury regulations, a taxpayer may only claim a theft loss deduction after there is no reasonable chance of recovery of the funds.

This appears to mean that taxpayers who may be interested in claiming the theft loss deduction must first apply for any reimbursement or insurance, such as a claim from the Securities Investor Protection Corporation (SIPC), before being able to claim this deduction.

Is it possible for taxpayers (i) to reduce the amount of loss by any potential claim and take the remaining loss currently, or (ii) to waive any claim for reimbursement in order to get closure and to ensure they can utilize losses against income?

Additionally, as the process of unwinding the finances or filing of bankruptcy protections by the perpetrators of these frauds could add months – and likely even years – to any resolution of the question of reasonable chance of recovery, but the law only permits a three year carry back for losses from theft, it raises the question of whether the IRS stops the clock with respect to the three carry back upon determination of the theft.

There is concern that it will take many years, especially in the most complex cases, before any official determination can be made as to whether there is any chance of recoupment of funds for those victims of theft. This multi-year delay could rob these taxpayers of their ability to claim their rightful deduction under theft loss rules.

Taxes Paid on Capital Gains and Other Phantom Income

The law allows a taxpayer to file an amended Federal tax return dating back three years to take into account any taxes paid on any phantom gains, including capital gains or other income that never really existed.

We have been asked about the fairness of this three year limitation as there are many defrauded investors who had investments dating back more than three years, and who paid taxes on income that never existed. So we request that you provide explanation of the rationale behind limiting this carry back to three years, and if there is precedence in law or regulation for a taxpayer to seek redress for taxes incurred on phantom income dating back more than three years. For example, would the claim of right doctrine provide possible relief?

We appreciate your attention to this matter and look forward to working with you on this matter. Thank you.

Sincerely,

Joseph Crowley, Member of Congress

Anthony D. Weiner, Member of Congress

Madoff Key Aide Recruited Her Neighbors as Investors by David Voreacos & David Glovin - Bloomberg.com: Exclusive

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Feb. 13 (Bloomberg) -- Bernard Madoff’s longtime aide Annette Bongiorno recruited investors from the neighborhood in Queens, New York, where she grew up next door to Madoff’s future finance chief, a former co-worker said.

Bongiorno and her husband, Rudy, a retired electrician, recruited and stayed in touch with investors in the old neighborhood who held accounts called “RuAnn,” according to the employee, who requested anonymity. “RuAnn” is short for Rudy and Annette, the employee said. An account statement reviewed by Bloomberg News had the initials RU.

Bongiorno, 60, grew up in Howard Beach next to Frank DiPascali, a 33-year Madoff veteran who called himself chief financial officer. The families lived across from the Lindenwood Gardens co-ops, which bear the sign: “A Suburb in a City.”

“They were friends, like neighbors would be,” said Ann Casalotti, a resident of the red-brick, two-family house where Annette Bongiorno once lived next to DiPascali. Casalotti was one of thousands of Madoff customers whose name appeared on a list prepared for Irving Picard, the trustee who is liquidating the firm.

Madoff, 70, was arrested Dec. 11 and charged with securities fraud after allegedly confessing to running a $50 billion Ponzi scheme in which early investors were paid with money from later participants. Madoff, who is under house arrest in his New York apartment, hasn’t formally responded to the charge.

His lawyer, Ira Sorkin, declined to comment.

Federal Probe

U.S. investigators are examining whether DiPascali, 52, played a role in the fraud, according to people familiar with the matter.

The ex-employee who described Bongiorno’s role in the 1980s joined Madoff when fewer than three dozen people worked at the firm, which was then based on Wall Street. Madoff and his wife attended the employee’s wedding and paid for airfare for the honeymoon.

Bongiorno, who worked as Madoff’s personal secretary in the 1980s, the former employee said, also had clerical duties at the firm. Clients who discovered that the wrong Social Security numbers on their statements were told to call Bongiorno, according to a copy of one such notice.

The Picard list, filed in U.S. Bankruptcy Court in New York, includes five Madoff investors who lived at the same addresses or within half a block of the former homes of Bongiorno and DiPascali. Bongiorno introduced DiPascali to the Madoff firm, according to the ex-employee.

Madoff Investors

In addition to Casalotti, Madoff investors include DiPascali’s brother-in-law Robert Cardile, a longtime Madoff worker. DiPascali and Cardile now live in Bridgewater, New Jersey. The list also includes the estate of John Argese; Bongiorno’s maiden name is Argese.

“I am” an investor, Casalotti said. “I mean, I was.”

Half a dozen other investors in Howard Beach live within a mile. One of them, an 84-year-old retired dressmaker, said she lost most of her life savings in a RuAnn account.

One Howard Beach investor who lost $9,000 and requested anonymity said he has relatives who lost money through RuAnn accounts. One was valued at more than $2 million, he said.

The investor said both DiPascali and Bongiorno told his family after Madoff’s arrest that they had nothing to do with any wrongdoing. DiPascali said his own mother lost money invested with Madoff, according to the investor.

DiPascali’s attorney Marc Mukasey declined to comment. Bongiorno, who hasn’t been charged in the case, didn’t immediately return calls to her homes in Manhasset, New York, and Boca Raton, Florida.

Clerical Assistants

Two assistants who did clerical work for Bongiorno at the Madoff firm have met with prosecutors recently, the Wall Street Journal reported today, citing people familiar with the matter.

One investor who knew the Madoff family for decades said Bongiorno was a “very important person” at the firm who often rode home to Manhasset at night in a company-supplied car. She was bright and “a right-hand person” to Madoff, the investor said.

Bongiorno and DiPascali worked together on the 17th floor of the firm’s Midtown Manhattan building, where their boss ran an investment-adviser business that was off-limits to most employees, said a person familiar with the matter. Agents of the Federal Bureau of Investigation have been working out of an office on the floor.

Bongiorno began recruiting small investors in the early 1980s, the employee said. While Madoff collected money from large investors, Bongiorno proposed that she gather money from smaller ones and feed it into Madoff’s fund, the employee said.

Tearful Call

The former employee said Annette Bongiorno telephoned after the collapse of Madoff’s firm, crying, to ask if the employee held Bongiorno responsible for the fraud.

The Bongiorno home in Manhasset, on Long Island, is valued at more than $2.6 million, according to property records. The Boca Raton home is assessed at $1.25 million, property records show.

The couple’s three cars include a 2007 Mercedes Benz E550 with a base price of $59,775 and a 2002 Mercedes Benz S55 AMG priced at $99,500, according to motor vehicle registration records.

Rudy Bongiorno worked as an electrician for the New York City Department of Transportation from 1975 to 1996, according to spokeswoman Nicole Garcia.

The case is U.S. v. Madoff, 08-mag-2735, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporters on this story: David Voreacos in Newark, New Jersey, at dvoreacos@bloomberg.net; David Glovin in New York federal court at dglovin@bloomberg.net.