On 3/17/09, IRS Commissioner Doug Shulman told the Senate Finance Committee:

“. . . Thousands of Taxpayers have been victimized by dozens of fraudulent investment schemes.  These too-good-to-be-true investment uses have often taken the form of so-called “Ponzi schemes” (i.e., the fraud perpetrator promises investments returns, some or all of which are fictitious) . . . The Madoff scandal has affected a very large and diverse pool of Investors, some of whom are reported to have lost most of their life savings . . . To help provide clarity and to assist Taxpayers the IRS is today issuing guidance articulating the tax rules that apply and providing “safe harbor” procedures for Taxpayers who sustained losses in certain investment arrangements discovered to be criminally fraudulent.”

In response, the IRS issued Rev. Rul. 2009-9, Rev. Proc. 2009-20 which allows Investors, defrauded by “Ponzi schemes” (including Madoff’s “Ponzi scheme”) to claim an IRC §165(e) theft loss deduction (i.e., ordinary loss deductions not a capital loss deduction for their “qualified investment” (Rev. Proc. 2009-20, Sec 2.06).

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