Madoff Ponzi Scheme Victims Seek California Tax Refunds

April 27, 2009

From the Los Angeles Times:

According to victims, Madoff for decades used the lure of steady, solid earning to entice investors. As a result, his fund grew exponentially, with money from new customers being paid out as dividends to earlier clients until the structure suddenly collapsed late last year under the strain of a deep recession.

Now, more than 400 of his victims who live in California are seeking passage of a bill that would give them the right to get back tax payments on so-called phantom income — profits that appeared on their annual account statements but didn’t actually exist and were never paid to the investor — from the last five years.

Such refunds currently are allowed by the U.S. Internal Revenue Service but not by the California Franchise Tax Board, which collects state income taxes.

Senator Dean Florez (D) is looking at the pros and cons of recoupling the state’s tax code to the federal income tax:

The senator also asked the Legislature’s lawyers to research the effects of conforming state tax laws to federal rulings and determine what effect such a change could have on revenues at a time when the state government faces continuing budget deficits.

The state’s refusal so far to make its income tax rules conform with federal law is inherently unfair, complains Paul Allen, 89, who lives with his 86-year-old wife in a retirement facility in Thousand Oaks. “We paid taxes on something we were not supposed to pay taxes on because it wasn’t there,” he said. “I know the state needs money, but by the same token so do we.”

Recoupling is a good idea, and not just in this case. Forcing taxpayers to comply with two different sets of tax rules (one federal, one state) produces a year-after-year administrative and compliance burdens that undermine long-term business investment and revenue growth. States that decouple also signal that the state’s tax system is unfriendly to entrepreneurs and business investment. Recoupling helps fix those problems.

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