Loeb & Loeb LLP announced an important litigation victory in U.S. Tax Court for the estate of a deceased victim of the massive fraud perpetrated by Bernard Madoff. The Court ruled that, pursuant to Internal Revenue Code section 2054, the estate was entitled to a $5 million estate tax deduction related to a theft loss suffered after investing in the now infamous Bernard L. Madoff Investment Securities.
When he died in 2008, the decedent owned an interest in an LLC. The only asset of the LLC was an account with Madoff, which became worthless a few months after the decedent’s death when the Madoff fraud was uncovered.
After Madoff pled guilty to various federal crimes, including securities fraud, investment adviser fraud, money laundering and perjury, the decedent’s estate claimed a deduction of $5.17 million on its federal estate tax return tied to a theft loss relating to the value of its interest in the LLC on the date of the decedent’s death. The IRS denied the deduction on the ground that there was no theft or that, if there was, the theft was from the LLC and not the estate. The estate challenged the determination and petitioned for summary judgement.
Tax Court Judge Maurice Foley issued the opinion, which stated: “The theft extinguished the value of the estate’s [LLC] interest, thereby diminishing the value of property available to [decedent’s] heirs. Thus, the estate’s entitlement to a section 2054 deduction is consistent with the overall statutory scheme of estate tax.”