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FTB Offers Tax Guidance for Ponzi Scheme Victims

May 2009 - On March 27, 2009, we announced we now offer guidance on theft-loss deductions for California taxpayers who had losses from investment schemes.

Tax remedies are available for victims of Ponzi schemes,” said State Controller and FTB Chair John Chiang.

State and Federal law allow taxpayers to deduct some uncompensated losses on their tax returns. A recent IRS ruling, Revenue Ruling 2009-9, clarifies the treatment of losses from investment schemes, including the nature of such losses (theft losses), the amount of such losses to be allowed, and the year of deductibility. The IRS also plans to follow a new procedure, Revenue Procedure 2009-20, which provides an optional “safe-harbor” for determining the year in which the losses occurred and a simplified method of computing the amount of the loss. A “safe-harbor” allows taxpayers to avoid later IRS challenges.

California will follow this guidance, and we will accept the form provided in Appendix A of Revenue Procedure 2009-20 for those taxpayers who choose to participate in the safe harbor provision for California purposes. However, a taxpayer that takes advantage of the safe harbor for federal purposes is not required to do so for California purposes.

State law differs from the Federal law in two key areas. In these areas, State law controls:

  • Statute of limitations for filing a claim for refund.
  • Deductibility of net operating loss (NOL) carryforwards or carrybacks. (NOL carryforwards are suspended for most taxpayers for 2008 and 2009. Carrybacks are allowable but only for NOLs attributable to 2011 or later.)

We will soon offer more detail on the differences in a FTB Taxpayer Notice. Interested taxpayers should check our website at ftb.ca.gov for updates.