Chief Counsel Advice 201445009 Released November 7, 2014 Advice

Investor qualifies for Ponzi-scheme theft-loss safe harbor

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This page covers one taxpayer's ruling from 2014, which can't be cited as precedent. Ask about your situation and see what the current Code and IRS guidance say, with citations.

Not precedent. Under 26 U.S.C. § 6110(k)(3), this written determination may not be used or cited as precedent. It resolved one taxpayer's situation on its specific facts, and identifying details were redacted by the IRS before release. The official IRS release (linked on this page as a PDF) is the authoritative source.

About this page: The plain-English summary and ruling snapshot below were written by Ezel based on the official IRS release. The full text is the IRS's own document.

View official IRS release (PDF)

Plain-English summary

An individual transferred investment money through intermediaries that placed it into a fraudulent investment arrangement. Revenue Procedure 2009-20 generally excludes someone who invested only through a separate fund or entity, while Revenue Procedure 2011-58 expands the safe harbor for certain schemes whose lead figure died before criminal charges. The IRS concluded that the intermediaries acted as the investor's agents and that the resulting losses were attributable directly to the investor rather than to a separate investing entity. Treating the investor as having transferred money to the fraudulent arrangement was consistent with the parties' chosen agency form. The investor therefore qualified for the theft-loss safe harbor, subject to any later recoveries.

Ruling snapshot

Question: Was an investor who transferred funds through agents eligible for the investment-theft-loss safe harbor?
Outcome: Advice given: yes, subject to subsequent recoveries.
Key authorities: IRC § 165; Rev. Proc. 2009-20; Rev. Proc. 2011-58.

Full text (IRS public release)

Office of Chief Counsel
Internal Revenue Service
memorandum
Number: 201445009
Release Date: 11/7/2014
CC:ITA:B02:PEFord Third Party Communication: None
POSTF-109423-14 Date of Communication: Not Applicable

UILC: 165.04-00

date: June 06, 2014

 to:   -------------------
       Attorney (-----------, Group 1)
       (Small Business/Self-Employed)

from: Norma Rotunno
Senior Technician Reviewer, Branch 2
(Income Tax & Accounting)

subject: Tax Treatment of Investment Theft Losses

       This Chief Counsel Advice responds to your request for assistance dated March 5,
       2014. This advice may not be used or cited as precedent.


       ISSUES

       Whether an investor (Investor) who transferred money to the principals of -------------------
       -------------------------------------------------------------------------- to invest with ------------------------
       ----------------------------------------------------------------------------------------------------------------, is
       entitled to the safe harbor treatment for theft losses under Rev. Proc. 2009-20, as
       modified by Rev. Proc. 2011-58.


       CONCLUSIONS

       Investor is eligible for the safe harbor treatment under Rev. Proc. 2009-20, as modified
       by Rev. Proc. 2011-58, subject to subsequent recovery of amounts, if any, by Investor.


       FACTS

       Most of the following facts are in addition to those already provided in your request for
       advice. ------------------------------------------------------------- --------------------------------------------

POSTF-109423-14 2

-------------------------------------------- -----------------------------------------------------------------------

---------------------------------------------------------------------------------------------------------------------

------------------------------------------------------------------------------------------- -------------------------

--------------- -----------------------------------------------------------------------------------------------------

In ------, Investor, an individual taxpayer, transferred money to --as an investment, the
proceeds of which were purportedly used to purchase ---------------------------------------------

-- -------. Investor has asserted that she is entitled to claim a theft loss under Rev. Proc.
2009-20, as modified by Rev. Proc. 2011-58, similar to investors that invested directly
with -------.

In exchange for Investor’s funds, Investor did not receive a --------------------------------------

-------------------------------------------------------------------------------------------------------------------.

---------------------------------------------------Persons who transferred money to ---to invest in -
--------had a ----------------------------------------with ----.

---------------------------------------------------------------------------------------------------------------------

------ --------------------------------------------------------------------------------------------------------------

POSTF-109423-14 3

---------------------------------------------------------------------------------------------------------------------

----------owned, operated, and managed ---------until ------------------------------------------.
Bankruptcy proceedings were commenced against --------------------------------. --------------
--------------------------was created in the bankruptcy proceedings, and the plan of
reorganization treated the investors as ---------------------- of -----. You have indicated that

------------------------------------- filed a civil complaint against -----------------------------------,
alleging the following -------violations --------------------------------------------------------------------

---------------------------------------------------------------------------------------------------------------------

-------------------------------------------------:
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
--------------------

     ------------------------------------------------------------------------------------------------------------
     ------------------------------------------------------------------------------------------------------------
     ----------

     -------------------------------------------------------------------------------------------------------
     ----------------------------------------------------------------------

     ------------------------------------------------------------------------------------------------------------
     ------------------------------------------------------------------------------------------------------------
     ------------------------------------------------------------------------------------------------------------
     ------------------------------------------------------------------------------------------

In ------, the ---------------------------------------------------------- --------------------ruled in favor of
the --------on all counts and ordered -----------------------------------against each of the --------
--------------------------------------------------------------------------------------------------found that the
investments promoted by ----------------------------. This conclusion was based on the
POSTF-109423-14 4

following findings: the investors invested money in -------------------------------------------------

--------------------. This finding was based on evidence of ------------------------------------------

---------------------------------------------------------------------------------------------------------------------

------------------------------------------------------------ --------------------------------------------------------

-------------------------------1 ------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------------------------

POSTF-109423-14 5

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LAW AND ANALYSIS

Section 165(a) of the Internal Revenue Code ("Code") allows a deduction for losses
sustained during the taxable year and not compensated for by insurance or otherwise. A
loss from criminal fraud or embezzlement in a transaction entered into for profit is a theft
loss under section 165(c)(2). See Rev. Rul. 2009-9, 2009-14 I.R.B. 735.

Revenue Procedure 2009-20

The Service and the Treasury Department issued Revenue Procedure 2009-20, which
provides an optional safe harbor for taxpayers who experience losses in certain
criminally fraudulent investment arrangements, or so-called "Ponzi" schemes. The
procedure provides investors with uniform and simplified methods for determining the
timing and amount of a theft loss deduction.

Rev. Proc. 2009-20 allows a “qualified investor” to take a theft loss deduction for a
"qualified loss" resulting from a specified fraudulent arrangement. See sections 4, 5 of
Rev. Proc. 2009-20. A qualified investor is defined in the procedure as a U.S. person
that generally qualifies to deduct theft losses under §§ 165 and 1.165-8 that did not
have actual knowledge of the fraudulent nature of the investment arrangement prior to it
becoming known to the general public, provided the U.S. person transferred cash or
property to a specified fraudulent arrangement. Section 4.03 of Rev. Proc. 2009-20. In
addition, section 4.03(4) provides that a qualified investor does not include a person that
invested solely in a fund or other entity (separate from the investor for federal income
tax purposes) that invested in the specified fraudulent arrangement, and that the fund or
entity itself may be a qualified investor within the scope of the revenue procedure. The
procedure defines a qualified loss as a loss resulting from a "specified fraudulent
arrangement" in which, as a result of the conduct that caused the loss, the lead figure
(or lead figures) of the scheme is criminally charged under state or federal law with the
commission of fraud, embezzlement, or a similar crime that, if proven, would meet the
definition of theft for purposes of section 165.2 Section 4.02 of Rev. Proc. 2009-20. The
procedure provides that a qualified investor may deduct the theft loss in the discovery
year, generally defined as the year in which the criminal charge is filed. Sections 4.04
and 5.01(2) of Rev. Proc. 2009-20.

2
Section 4 of the revenue procedure contains additional requirements with respect to the type of criminal charge, whether an
admission by the lead figure is alleged, and the appointment of a receiver or trustee with respect to the fraudulent arrangement or
assets of the arrangement being frozen.
POSTF-109423-14 6

Revenue Procedure 2011-58

The Service recognized that the deaths of lead figures in certain Ponzi schemes
prevented government authorities from charging them with criminal theft. In these
cases, qualified investors would have been unable to meet the definition of a qualified
loss in Rev. Proc. 2009-20 solely due to the death of the lead figure. Therefore, the
Service and Treasury issued Rev. Proc. 2011-58 to address those cases.

Rev. Proc. 2011-58 modified the definition of a qualified loss in Rev. Proc. 2009 -20 to
include the situation in which the lead figure or an associated entity involved in the
specified fraudulent arrangement was the subject of one or more civil complaints or
similar documents (such as a notice or order instituting administrative proceedings or
other document the Internal Revenue Service designates) filed by a state or federal
governmental entity with a court or in an administrative agency enforcement
proceeding, and all of the following requirements are satisfied:

(a) The civil complaint or similar documents together allege facts that comprise
substantially all of the elements of a specified fraudulent arrangement conducted
by the lead figure;

(b) The death of the lead figure precludes a criminal charge by indictment,
information or criminal complaint against that lead figure; and

(c) A receiver or trustee was appointed with respect to the arrangement or the
assets of the arrangement were frozen. Section 4.01 of Rev. Proc. 2011-58.

In addition, the procedure modified the definition of discovery year in section 4.04 of
Rev. Proc. 2009-20 to include the later of either the year in which the civil complaint or
similar document which alleges facts that comprise substantially all the elements of a
specified fraudulent arrangement is filed, or the year in which the lead figure dies.
Section 4.02 of Rev. Proc. 2011-58.
POSTF-109423-14 7

The Restatement Third of Agency defines agency as: “the fiduciary relationship tha t
arises when one person (a ‘principal’) manifests assent to another person (an ‘agent’)
that the agent shall act on the principal's behalf and subject to the principal's control,
and the agent manifests assent or otherwise consents so to act. 3 In Huff, the Tax Court
found that “An agency relationship is created when by mutual consent, either implied or
expressed, one party (i.e., the agent) agrees to act on behalf of the other (i.e., the
principal) and be subject to the principal's control.” 4

---------------------------------------------------------------------------------------------------------------------

Accordingly, because ---------------------were found to be -------------------------------------------

-----------for federal tax purposes. Because -----------------------------------------------------------
-----------------------------------------------------------------------------the losses realized with
respect to investments ------------are properly attributable to Investor and not ---------------
-------------. -----------------------------------------------------------------------------------------------------
should properly be viewed as agents of Investor because ----------------------------------------
-----------------------------------------------------------------------------------------------------------were
acting on behalf of, and --------------------------to, Investor. In addition, --------------------------
------------, which sets forth that ---------------------------------------------------------------------------

---------------Having chosen their form as agents of Investor and ---------------------------------

------------------------------------------------------------------------------------may not participate in
the realized losses, which are properly attributable to Investor. Investor should be
viewed as transferring cash or property to the ---------specified fraudulent arrangement
and --------------------------------should be viewed as acting as agents of Investor, ------------
-------------------------------------, consistent with their chosen form as set forth in ---------------
--------------------------------and the conclusions of law reached ------------------and -------------
-------.5

3
RESTATEMENT (THIRD) OF AGENCY § 1.01 (2006) (Restatement).
4
Huff v. Commissioner, 138 T.C. 258, 266 (2012). See Esmond Mills v. Commissioner, 132 F.2d 753, 755 (1st Cir. 1943).

5
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

POSTF-109423-14 8

Rev. Proc. 2009-20 indicates, however, that a qualified investor does not include a
person that invested solely in a fund or other entity (separate from the investor for
federal income tax purposes) that invested in the specified fraudulent arrangement. In
such a case, the fund or entity itself may be a qualified investor within the scope of the
revenue procedure. This provision would allow equity owners in pass-through entities
to claim losses allocable to them as owners of the pass-through entity. This provision
was not intended to preclude investors who would otherwise qualify for a theft loss
under the revenue procedure from recognizing such loss. This provision should not
apply here because attributing the loss to --- will not result in the loss being allocated to
Investor----------------------------------------------------------------------------------------------------------

---------------------------------------------------------------- Thus, Investor is the qualified investor
for purposes of Rev. Proc. 2009-20.

CASE DEVELOPMENT, HAZARDS AND OTHER CONSIDERATIONS

This writing may contain privileged information. Any unauthorized disclosure of this
writing may undermine our ability to protect the privileged information. If disclosure is
determined to be necessary, please contact this office for our views.

Please call (202) 317-7011 if you have any further questions.

--------------------------------------------------------------------- By contrast, and consistent with Huff and the Restatement, the analysis in this
memorandum looks at the relationship between --------------------- and Investor in analyzing whether Investor is entitled to a federal
tax theft loss under Rev. Proc. 2009-20, as modified by Rev. Proc. 2011-58.

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Apply this to your situation

This page covers one taxpayer's ruling from 2014, which can't be cited as precedent. Ask about your situation and see what the current Code and IRS guidance say, with citations.

On this page

Document type

Chief Counsel Advice

IRS subject

Limitations on Losses of Individuals - Casualty and Theft

Topics

Income and deductions

Code sections

§ 165

Ruling dated

June 6, 2014

Publicly released

November 7, 2014

View Official PDF