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FTB Follows IRS Guidance for Theft Loss Deductions from Ponzi Schemes

On March 17, 2009, the IRS issued Revenue Ruling 2009-9 and Revenue Procedure 2009-20 providing guidance to taxpayers who are victims of losses from Ponzi-type investment schemes.

The Ruling clarifies the income tax law governing the treatment of losses from such schemes, including the nature of such losses (theft losses), the amount of such losses to be allowed, and the year of deductibility. The Procedure simplifies compliance procedures for taxpayers by providing an optional safe-harbor means of determining the year in which the losses are deemed to occur, and a simplified method of computing the amount of the loss.

Federal and California laws are generally the same with respect to the deduction of theft losses. In general, where California law is in substantial conformity with the Internal Revenue Code, federal regulations, rulings and procedures are applicable for California purposes. Accordingly, the above-referenced Revenue Ruling and Revenue Procedure are applicable for California purposes to the extent Federal and California laws are the same.

In addition, the Franchise Tax Board will accept the form provided in Appendix A to Revenue Procedure 2009-20 for those taxpayers who desire to choose the optional safe harbor provided by the Revenue Procedure for California purposes. However, a taxpayer that takes advantage of the safe harbor for federal purposes is not required to do so for California purposes.

However, it is noted that where the statutes of limitations for filing a claim for refund are different for Federal and California purposes, the California statute of limitations will control.

It is further noted that any reference to federal net operating loss carryforwards or carrybacks is not applicable for California purposes at this time, as California law does not currently allow carrybacks of net operating losses , and carryforwards of such losses have been suspended until 2010.

Further details will be announced in an FTB Notice to be issued in the near future.

For more information, contact Raul Escatel at 510.622.3960.