Interesting Madoff tax story sub-plot

I know this is a blog about charitable giving techniques – and this post has nothing to do with charitable giving.  And, I promise my readers not to send garbage to their in-boxes.

But, this story I found so interesting and really starts to address one of the “what ifs” raised by the Madoff fiasco.  It is purely for those interested tax stuff in general.

Here is a link to the story: You can probably find a 100 or more stories on the web on this case.  The summary of the story is that a New Jersey couple is fighting for a return of taxes paid on phantom Madoff gains for the 2005 – 2007 tax years.  This round they won.

What was amazing to me wasn’t that they won a court round, but that they actually lost the previous round.  Why did they initially lose in the tax court?  The tax court reasoned that since this couple in theory could have withdrawn their gains during those tax years, they deserve to pay taxes on those gains even though they were completely fictional and in fact, they will never see those gains (remember, the gains are different than the principal which did get returned to them).

A judge in America came up with that line of reasoning? Yes.  Insane as it sounds.

Why I posted this story is the creativity/logic of the next judge in overruling the first judge. The latest ruling: if all or most investors in Madoff had in fact asked for their gains in those years, the ponzi scheme would have collapsed (as it eventually did), so who are we to say they really had access to the money.  Great reasoning.

I have my own logic.  Why on earth should anyone be required to pay taxes (i.e. not get their money back for taxes previously paid) on fictitious gains that were part of a known fraud?  If they got the money beyond their principal investment, fine, pay taxes because that is real gain.

I am guessing that there is limit to how many years you can go back and amend your returns. If I were a Madoff investor, and paid taxes on “gains” that were never received, I would want my tax dollars back.  That is the least this country can do considering its own watchdog agency royally screwed up and let Madoff do this for decades.



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