"New Revenue Procedure and Revenue Ruling Issued by IRS: Tax Deductions for Theft Loss"

On March 17, 2009, the IRS issued advance copies of Revenue Procedure 2009-20 and Revenue Ruling 2009-9.  The advice clarifies and eases the theft loss rules, providing certainty to taxpayers looking to take theft losses from investments in so-called “Ponzi” schemes.  Taxpayers may elect the safe harbor treatment provided under Rev. Proc. 2009-20 or they will be subject to the generally applicable provisions governing theft losses as described in Rev. Rul. 2009-9.  These rules are applicable to all direct investors, including feeder funds, but are not applicable to investors in feeder funds.

The IRS was particularly generous in (1) treating income reported in prior years, even if fictitious, as giving rise to deductible basis, (2) allowing individual taxpayers to use the 5-year net operating loss (“NOL”) carry-back provisions if the theft loss can be taken in 2008, and (3) allowing the use of safe harbor estimates for recoveries from certain alleged Ponzi schemes.

This Stroock Special Bulletin highlights the provisions of Rev. Rul. 2009-9 and Rev. Proc. 2009-20.