Bernie Madoff or Gordon Grigg Fraud Losses – Perhaps IRC Section 165(c)(2) Will Help…

February 16, 2009

There is nothing fun about fraud – especially if you are on the losing end.  Not only do you feel betrayed – your trust destroyed, but most of the time you find that you have also suffered financial loss that in many ways can’t be replaced.  irslogo

As a busines ethics and fraud prevention speaker, I believe in giving credit where credit is due.  Today I received a response to two blog postings I made by Moira Souza Shiver who reminded me about a provision of the Internal Revenue Code that, in many ways, is little known.  Her website can be found here and it states the following:

My name is Moira Souza-Shiver and I am the founder and President of MSS Advocacy Group, LLC (MSSAG).  I’m extremely proud to have established an organization whose main mission is bringing help to victims by attaining the assistance they deserve and were promised.  Working in the investment fraud industry for the past 10 years has created in me a passion to fight for what’s right and even more, has instilled in me a deep respect for victims and the suffering they endure.

My decision to establish MSSAG came from what I describe as a desperate need within the 165 industry.  After serving 6 years with JK Harris 165 Services, LLC, it was clear there was little being done in the form of victims’ advocacy and an organization was needed to help alleviate their suffering.   Believing that investment fraud victims deserve the same rights allotted to other victims, MSSAG was born.

MSSAG is committed to doing everything it can for this cause, including aligning itself with other organizations and advocates that can provide complimentary assistance through established programs.  By combining forces with these types of organizations, we intend to maximize all available sources of assistance and bring hope back to victim’s lives.

Now, before you assume that I have a financial interest in promoting Moira or Section 165, let me clarify that I do not.  But like Moira, I do have an interest in making sure that all aspects of ethics and fraud (including prevention and recovery) are explored.

I have talked with several of the victims of Gordon Grigg (who the SEC is actively conducting an investigation on) and I know and feel their pain.  So please read the following as it might help you understand the application of IRC Section 165(c)(2).

An excellent article was written in the Journal of Accountancy related to Section 165.  A portion of the article is reproduced below:

When a client is the victim of fraud or embezzlement, for example, CPAs can reduce the client’s ordinary income, recoup any previously paid taxes and minimize future tax obligations by using IRC section 165(c)(2).

Be aware that CPAs who prepare and defend an investment loss deduction under IRC section 165(c)(2) must meet numerous technical requirements and make certain determinations based on examining the circumstances. Section 165(c)(2) deductions also frequently prompt IRS oversight, and in many instances, the standard tax preparation software does not adequately address this deduction, since it’s generally geared to the more familiar section 1211 capital loss treatment. But while section 1211 is an appropriate treatment, using it may result in clients’ paying more taxes than are required.

If a client suffers an investment loss as a result of a fraudulent investment or unethical sales practice, probably the most prudent action a CPA can take, even though there is no requirement to do so, is to suggest the client first discuss it with his or her lawyer. Taxpayers are required to take reasonable action to recover a loss and not doing so disqualifies it for section 165(c)(2) treatment. If the lawyer feels there was malfeasance and it is not practical to pursue recovery due to a lack of recoverable assets, the cost of litigation or other reasons, the loss probably is deductible in the current period. Losses from embezzlement, blackmail, kidnapping for ransom, burglary, larceny, extortion and threats also may qualify for section 165 treatment.

While I no long provide tax advice, I do feel that providing information on fraud recovery options is a positive benefit.  Below are some links to articles on Section 165.  I do advise that that you give Moira a call.  Please note the following from her web site:

First and foremost, there is no guarantee you will ever recover any of your lost investment.  MSS165 will never be able to make you whole or guarantee a partial recovery of your money.  We can however promise to be truthful, try to help in any way we can and be available for questions as the needs arise.  With a combination of over 31 years experience in the investment fraud recovery industry, we’re confident that our ability, combined with our passion for helping victims will provide you with the best chance of recovery available.

*  MSS165 is compensated for its efforts by means of speaking engagements and donations to the company.  There is no charge to victims or their accounting professionals for our time, information or efforts on victim’s behalves.