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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...)
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