Echoes of Madoff Madness

Lakeshore has a VERY interesting question: what about refunds for taxpayers who paid cap-gains on Madoff funds?

Hooooboy.

He quotes a letter writer:

Take New Jersey, for instance. On Feb. 20, the New Jersey Division of Taxation came forth with a “Ponzi Schemes and Amended Returns” notice on its website acknowledging that “many people with investments managed by Madoff are likely to have paid taxes on income that was never actually generated by them (phantom income).”

Rather than urge taxpayers to amend their tax returns to get a refund, the division does the exact opposite. “The Division of Taxation is not accepting amended returns with regard to the Bernard Madoff or other alleged Ponzi schemes,” the notice states. It goes on to advise taxpayers to claim a loss of investment that can be taken against capital gains in the year of the loss. Since almost nobody has a capital gain in 2008, the net effect of this notice is simple—Madoff robbed me of $5 million and New Jersey now wants to rob me of $75,000.

And then tells us about IRS' reaction:

The writer goes on to say at the federal level, the Internal Revenue Service is ‘eerily silent’ on the entire situation.

(Chirp, chirp, chirp go the crickets...)

Compared to Porkulus or AIG bucks, these refunds are not even peanuts at the Federal level. But they could have an impact on State budgets.