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recovered their initial “investments” during the same taxable
year as the Ponzi distributions. In the exceptional case,
Parrish, the taxpayer, an officer and director of the scheme’s
corporate vehicle, did not introduce evidence to show either the
amounts he invested or received, nor did he prove he was a victim
of fraud.
In two other cases, the taxpayers had not recovered their
initial investments during the same tax year as the Ponzi
distributions. Greenberg v. Commissioner, T.C. Memo. 1996-281;
Taylor v. United States, 81 AFTR 2d 98-1683, 98-1 USTC par.
50,354 (E.D. Tenn. 1998). In those cases, the courts held that
the distributions were a return of investment funds, not income.
In Greenberg, the taxpayers transferred funds to a Ponzi
scheme that purported to be a legitimate mortgage company. The
taxpayers were passive investors and were paid monthly payments
from the company’s bank account. They presented sufficient
evidence to establish that the amount they received did not
exceed the amount they paid. This Court found that the payments
the taxpayers received were not interest because the payments
were not compensation for the use or forbearance of money. See
Deputy v. duPont, 308 U.S. 488, 498 (1940) (interest is
compensation for the use or forbearance of money). Instead, we
found that the payments constituted nontaxable return of capital
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