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Ponzi Scheme Losses and Amended Returns

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.

Revenue ruling 2009-9 clarifies the income tax law governing the treatment of Ponzi-type scheme losses, including the nature of such losses (theft losses), the amount of loss to be allowed, and the year of deductibility. Revenue Procedure 2009-20 provides a safe harbor for taxpayers to allow them to deduct the loss as a theft loss. The procedure also provides guidance to taxpayers that choose not to use the safe harbor. Rev. Proc. 2009-20 applies to losses discovered in tax years after 2007 for those choosing to use the safe harbor or not, means of determining the year in which the losses are deemed to occur, and a simplified method of computing the amount of the loss.

Generally, federal and California laws are the same with respect to 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, Revenue Ruling 2009-9 and Revenue Procedure 2009-20 are applicable for California purposes to the extent Federal and California laws are the same.

California law does not currently allow carrybacks of net operating losses. Carryforwards for most taxpayers are suspended for tax years 2008 and 2009.

We will accept the form provided in Appendix A to Revenue Procedure 2009-20 for those taxpayers choosing the optional safe harbor for California purposes.

California purposes, taxpayers using the federal safe harbor can choose to treat the Ponzi-type loss as a theft loss. Taxpayers not using the safe harbor for California purposes may file a claim for refund for prior years, assuming the statute of limitations is open. The normal period for filing a claim for refund under California law is the later of, four years from the original due date of the return (not including extensions), four years from the date the return was filed (including extensions) or one year from overpayment.

We will hold these amended returns as "protective claims for refund" until the law related to the treatment of Ponzi schemes is clarified.

If you have not filed a claim for refund but want to and the statute of limitations remains open, you should write “Protective Claim – Ponzi scheme" in red at the top of the first page of the amended return. You should also include the statement, "This is a claim for refund for (taxpayers name) - Ponzi Scheme & name of investment or promoter" in a statement attached to the amended return or in the Explanation of Changes part of the amended return.

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