Ponzi Scheme Update

Philadelphia partner David Shechtman spoke at the American Bar Association’s Tax Section Winter Meeting on Saturday, January 26, in Orlando, Florida.

David spoke on a panel titled, “Ponzi Scheme Update: Tax Treatment of Clawbacks and Other Items.”

The panel addressed tax issues for Ponzi scheme "net winners," i.e., those who withdrew more from the scheme than they paid in, who may find themselves subject to a lawsuit seeking to "claw back" funds. In the Madoff bankruptcy, for instance, the trustee reportedly filed over 1,000 lawsuits against former Madoff customers seeking to claw back "net winnings" and in some cases amounts representing "principal."

In September, 2012, the IRS issued guidance addressing the Federal tax treatment of clawback repayments of amounts previously reported as income from a Ponzi scheme. The panelists analyzed the IRS's clawback guidance and explored other tax issues affecting Ponzi scheme investors.