The Ponzi Scheme Tax Losses and Clawbacks, Trusts and Estates

Trusts, Estates And The Rights Of Individual Beneficiaries

By Richard S. Lehman, Esq.

The general rules limit the deduction of net operating losses available to estates and trusts to the taxpayer sustaining the loss. Net operating losses of an ongoing estate or trust are not typically deductible by its beneficiaries.

However, there is an exception in the general rule for estates and trust that are terminated. The exception applies to a terminating estate or trust that has a net operating loss carryover from prior taxable years of the estate or trust, if the carryover would be deductible in subsequent taxable years after the termination. The exception for net operating loss carryovers of terminating estates and trusts also applies to capital loss carryovers under Section 1212.

An estate or trust that incurs a net operating loss during its administration may carry the loss back and forward under the rules of Section 172. Similarly, an estate or trust may carry capital losses forward as provided in Sections 1211(b) and 1212(b). In the year of its termination, however, an estate or trust may have loss carryovers from prior tax years that are no longer of value to the estate or trust even though the losses could still be carried forward. Under Section 642(h)(1), the remaining unused carryovers can be allowed to the beneficiaries succeeding to the property of the estate or trust. 

These losses that can be carried over have the same character in the hands of the beneficiary as in the hands of the estate or trust. The carryover is a deduction for the beneficiary in the taxable year of the beneficiary in which, or with which, the estate or trust terminates. Furthermore, for purposes of determining the length of a beneficiary’s carryover period, the terminating year of the estate or trust and the beneficiary’s first carryover year are each treated as separate tax years.

The beneficiaries succeeding to the property of the estate or trust are the beneficiaries who can benefit from the losses for which a carryover is allowed if there is a termination of that estate or trust. Read this full article on Richard S. Lehman’s personal website : LehmanTaxLaw.com


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In today’s world, financial scams can be found in many forms. One of the most typical financial schemes is the Ponzi scheme – financial fraud in which funds are collected by a perpetrator who does not invest the funds but pays them out as false profits to lure in more investors. Investors eventually suffer financial harm from lost funds and many who profited from the fraud are forced to repay their profits. In both cases, tax refunds may be available and can be maximized for the loss or repayment of Ponzi scheme funds.