Federal Income Tax. On March 17, 2009, the IRS issued Revenue Procedure 2009-20 providing an optional safe harbor method for qualified investors to deduct theft losses under IRC § 165(c) from investments in criminally fraudulent Ponzi-type schemes. Also, on March 17, 2009, the IRS issued Revenue Ruling 2009-9 which describes the proper federal income tax treatment for losses resulting from these Ponzi schemes.

Massachusetts Personal Income Tax. In the case of individual investors, Massachusetts law does not adopt the federal deduction for theft loss under IRC § 165(c)(2) or (3). Thus, Massachusetts does not adopt the federal safe harbor treatment for qualified investors with losses from a Ponzi scheme that is outlined in Revenue Procedure 2009-20.

The Department is developing further guidance on the Massachusetts tax treatment of investments in criminally fraudulent Ponzi-type schemes and fictitious income reported therefrom.

At this time, pending the issuance of such guidance, the Department notes that in the case of an individual investor who paid tax in prior tax years on fictitious income from a criminally fraudulent Ponzi-type scheme, the taxpayer may submit a claim for refund from any tax paid in error by applying to the Commissioner for an abatement of tax. G.L. c. 62C, § 37. The Application for Abatement must be filed with the Commissioner on Form CA-6 at any time within the longer of the following times:

(i) three years from the due date of the return (determined without considering extensions),

(ii) two years from the date the tax was assessed, or

(iii) one year from the date the tax was paid.

Taxpayers should attach whatever substantiation they have available, such as relevant investment statements, 1099s, and other tax documents relating to the year for which an abatement is claimed. See Administrative Procedure 627, Applications for Abatement.

In general, an application for abatement for tax year 2005 must be filed by April 15, 2009.