‘Madoff Investor Tax Bill Of Rights’ Proposed By Sen. Schumer

A year after the Madoff Ponzi scheme became public, N.Y. Senator Charles Schumer introduced legislation, the “Madoff Investor Tax Bill of Rights,” to help investors recoup some of their losses. The bill would expand theft-loss benefits to investors who lose money due to scams, allow for accelerated and increased contributions to tax-free retirement accounts to make up for losses, and allow for penalty-free early withdrawals from retirement accounts for investors in dire need of cash to get by. 

The bill includes the following provisions:
 

• Expanded Income Tax Relief for Smaller, Indirect Investors -- The bill will fix the NOL carryback issue for indirect investors in the fifth year, and allow both direct and indirect investors with losses from a qualified fraudulent investment scheme to carry back their losses for up to six years (seven years, in the case of someone who turned 65 by 12/31/08), essentially doubling the period that existed prior to April 2009.  Both direct and indirect investors will receive identical treatment. 

• Allow Victims to Carryback Losses a Retirement Account -- Under current law, no tax relief is available for theft losses from a retirement account that invested in a Ponzi scheme, directly or indirectly.  Many victims, particularly a number of the smaller investors, had assets in a retirement vehicle, such as an IRA or a 401(k), and now these retirement savings are totally gone. 

• Waiver for Early Withdrawls from Retirement Accounts -- The bill will allow a waiver of the 10 percent tax penalty for hardship withdrawals from retirement plans for people below age 59½ who need the money to survive.  People would still have to pay the taxes; the bill will simply waive the 10 percent penalty on early withdrawals in these circumstances. 

• Benefits for Widows -- The bill will fix a problem related to widowers and the carryback of losses.  Under current law, a surviving spouse may not be able to fully utilize the loss carryback if the dead spouse was the breadwinner and all of the assets were in his or her name. Under the Schumer bill, when there has been a change of marital status due to death, the surviving spouse will be able to carry back a theft loss from a fraudulent investment scheme to a prior joint return year (up to seven years, in the case of someone who turned 65 by 12/31/08) and be able to offset all of the joint income, rather than just the income of the surviving spouse. 

• Increased Contributions to Retirement Accounts -- For people whose retirement losses as a result of Madoff’s fraud exceeded 50 percent of their savings in qualified retirement accounts, the Schumer bill will include a special “catch-up” contribution rule allowing them to contribute 50 percent more to such accounts than they are allowed to under current law, for a period of up to 10 years (or until one’s losses have been restored), in order to help restore their retirement assets.
• Other Provisions -- The bill will also allow a period of time to file amended estate and gift tax returns, because many victims have filed estate or gift tax returns in the past that reported Madoff income which has been found to be fictitious.  The effect of the proposal will be to permit estate or gift taxes paid on fictitious amounts, or lifetime gift tax or generation skipping tax exemptions that have been utilized, to be appropriately refunded or restored.  The Schumer bill will allow returns filed in the six years prior to the discovery of the theft to be amended. In arriving at the total loss eligible for the six-year carryback (both regular and retirement accounts), the amount of the loss shall be reduced by any expected recovery, via the Securities Investor Protection Corporation, legal action, or other sources.