- 33 - made to conceal the fraudulent misappropriation of the taxpayers’ investment. In Taylor, the taxpayers’ law partner was operating a Ponzi scheme, providing cash to investors, including the partnership and its clients, with other clients’ money, rather than providing true returns on real investments. The taxpayers, the other partners in the partnership, filed returns for the tax year in which they had reported their shares of the partnership “phantom profit” from the scheme. Afterwards they filed amended returns eliminating that income and claiming refunds of tax. The taxpayers established that the partnership received less from the scheme that year than it delivered to the partner in that year and that the partner made no investments on behalf of the partnership. The court held that, for those reasons, the taxpayers were entitled to the refunds. We conclude that the “interest” label given to the payments petitioners received in 1998 through their investments with Little and Rowe was patently erroneous. These payments were not for the use and forbearance of their money but, rather, were made to conceal the fraudulent misappropriation by Little and Rowe of the money petitioners entrusted to them.12 Accordingly, the 12We note that this Court has held that losses from investments that turn out to be Ponzi schemes give rise to a theft loss deduction in the taxable year in which the taxpayer discovers the loss. Sec. 165(c)(3), (e); Jensen v. Commissioner, (continued...)Page: Previous 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 Next
Last modified: May 25, 2011