One good thing for the poor bastards

The New York Times has an article by Lynnley Browning about a resolution of Ponzi schemes:

The Internal Revenue Service will allow victims of Bernard Madoff’s investment fraud to claim a tax deduction related to the bulk of their losses, the IRS commissioner told the Senate Finance Committee. The commissioner, Douglas Shulman, told lawmakers that the agency was offering guidelines for taxpayers who are victims of losses from Ponzi schemes like Mr. Madoff’s. The plan represents the first time that the IRS has come forward with a policy regarding how it will treat Mr. Madoff’s victims, who include Elie Wiesel, the prominent Holocaust survivor and historian; Steven Spielberg, the Hollywood filmmaker; and actor John Malkovich, as well as scores of other investors. The issue has been a point of debate and anxiety for the victims and their accountants, given the lack of clarity in the tax code.
The plan, which applies to victims of all Ponzi schemes, should provide some relief to investors in Mr. Madoff, who pleaded guilty last week to orchestrating what prosecutors say is the largest Ponzi scheme ever— one that could reach $65 billion and cover 13,000 investors. It is also likely to help the IRS avoid an unwanted avalanche of amended returns.
The plan would ease existing rules governing what are known as theft-loss deductions, which are losses claimed by investors who are cheated by their investment advisers and others in Ponzi schemes and other frauds.
Under the plan, the IRS will allow investors, including those who are suing Mr. Madoff, to claim a theft-loss deduction equal to 95 percent of their investments, minus any withdrawals, reinvested gains, and payouts from Securities Investor Protection Corporation, the government-chartered fund set up to help protect investors of failed brokerage firms. Investors who are suing third-parties involved in the scheme, and who thus may have some prospect of recovery, can claim a deduction equal to 75 percent of their investments.
The plan allows investors to take deductions on gains that they thought they may have received from Mr. Madoff but which turned out to be fictitious. Current theft-loss rules typically allow losses to be carried back two years and forward twenty years, but the IRS plan will allow carrybacks of up to five years, generally if the loss is for a small business with gross annual receipts of less than $15 million. Under the plan, investors must claim the loss as having happened in 2008.
People who invested through so-called feeder funds that placed client money with Mr. Madoff will also get relief. These funds will be allowed to claim the theft-loss deduction but will allot those losses proportionally to individual investors.
The IRS said it did not know how much money had been paid in recent years on Madoff-related income. For investors who put money into Mr. Madoff through retirement plans, like 401(k) and individual retirement plans, the picture is more complicated, because such money was already invested on a tax-free basis. Generally, if the investment was deductible going in, investors “can’t take a loss,” Mr. Shulman said.
But the plan affords significant relief to investors who may have paid taxes on income that turned out to be fictitious, by allowing them to include that income in their loss computations. It also will keep scammed investors from “owing taxes on income that they never received,” said Senator Charles Schumer, a Democrat from New York who is a member of the Finance Committee.