Treatment of Madoff Losses Under GIT Explained

The New Jersey Division of Taxation has revised a previously reported notice clarifying how taxpayers should report losses from the Bernard Madoff Ponzi scheme for purposes of the gross (personal) income tax.

In a recent ruling, the IRS stated that the investment losses resulting from the Madoff Ponzi scheme should be written off in the 2008 tax year as a theft loss. New Jersey requires taxpayers to claim losses in accordance with federal accounting methods including federal basis rules. The theft loss deduction is equal to the original investment plus income reported in prior years minus distributions received in prior years.

New Jersey does not follow federal law regarding carryforward losses and carryback losses and the loss on the 2008 New Jersey return is limited to the category of “Net Gains” or income from the disposition of property. Therefore, the loss cannot be taken on a prior year’s New Jersey gross income tax return.

The investment income reported by the taxpayer in prior years is considered to be constructively received and therefore, a Madoff investment adjustment is not available for New Jersey gross income tax returns for prior tax years. Because Madoff investment income reported in prior years is included in the IRS theft loss deduction allowed in the tax year 2008, there is no basis for filing amended returns for prior years.

Taxpayers who have already filed their 2008 New Jersey gross income tax returns and need to amend the returns to include Madoff theft loss deductions, should send amended returns to: New Jersey Division of Taxation, Office of the Director, PO Box 240, 50 Barracks Street, Trenton, NJ 08646. The taxpayer should indicate “MADOFF” at the top of the amended return.