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IRS gives Ponzi scheme victims a tax break
Federal change helps those with losses from Spells ploy
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The Internal Revenue Service has given victims of criminal fraud an opportunity to claim most of their losses on this year’s tax return.

The IRS issued an opinion earlier this year that allows those who have suffered such losses to write off 95 percent of them.

Though the ruling came on the heels of the nationwide Ponzi scheme led by New York financier Bernard Madoff, Gainesville accountant Barclay Rushton said it is welcome news to some of his clients who lost money in investments with local businessman Wendell Spell and his heavy equipment scam.

“It is perfect,” Rushton said. “The Lord sometimes looks after us.”

The provision gives victims a “safe harbor” to take ordinary deductions for 95 percent of what was lost.

Spell, who has entered a guilty plea to wire fraud charges, is alleged to have defrauded investors of more than $60 million. Spell has reportedly disputed that amount.

Spell, 50, pleaded guilty March 23 to one count of wire fraud. He faces a sentencing hearing June 26 in federal court in Gainesville.

“In the current market, you might have been better off to have invested in a Ponzi scheme and lost it than to invest in the stock market and lost it,” Rushton said.

Under IRS regulations, only $3,000 of a capital loss can be written off in a given year.

To take advantage of the safe harbor, the investor must multiply the amount of the qualified investment by 95 percent for a qualified investor that does not pursue any potential third-party recovery, or by 75 percent for a qualified investor that is pursuing or intends to pursue any potential third-party recovery.

The investor then subtracts from this product the sum of any actual recovery and any potential insurance recovery.

None of the losses in the Spell case were insured.

“This was a Godsend, because Congress wasn’t going to do anything about North Georgia Equipment (Spell’s company) but Madoff’s victims lost $50 billion and that made them sit up and take notice,” Rushton said. “People with some real money made some noise.”

He said that clients using the safe harbor provision give up any right to go back and amend a return on which they claimed a gain from their investments with Spell.

“They reported these gains and paid taxes on them,” he said. “A lot of people would roll their investments over and leave them in the scheme,” he said.

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