Tag: Connecticut

You’re a Victim of a Ponzi Scheme, But What About Your State Taxes?

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You missed the warning signs and got suckered into a Ponzi scheme. The IRS offered some tax relief for long-term Ponzi scheme investors (like some of the Madoff victims) who have paid taxes on gains from the investment. The IRS clarified the federal tax law governing the treatment of losses in Ponzi schemes. They also set out a safe harbor method for computing and reporting the losses.

The revenue ruling (2009-9) addresses the difficulty in determining the amount and timing of losses from Ponzi schemes and the prospect of recovering the lost money. The revenue procedure (2009-20) simplifies compliance for taxpayers by providing a safe-harbor for determining the year in which the loss is deemed to occur and a simplified means of calculating the amount of the loss.

But what about state taxes?

California: On March 25, 2009, the California Franchise Tax Board announced that the federal guidance (Revenue Ruling 2009-9 and Revenue Procedure 2009-20) regarding the treatment of Madoff-related or other Ponzi scheme losses would be generally applicable for California purposes.

Connecticut: On April 9, 2009, the Connecticut Department of Revenue Services released Connecticut Announcement No. 2009(7), which describes the effect for Connecticut income tax purposes of the reporting of Madoff-related or other Ponzi scheme losses under the Revenue Procedure 2009-20 safe harbor and under Revenue Ruling 2009-9. In general, Connecticut does not allow federal itemized deductions for Connecticut income tax purposes. Thus, any theft loss deduction claimed by a taxpayer under the Revenue Procedure 2009-20 safe harbor will not affect a taxpayer’s 2008 Connecticut income tax liability. However, if the amount of a taxpayer’s theft loss deduction allowed under Revenue Ruling 2009-9 or Revenue Procedure 2009-20 creates an NOL, then the taxpayer must file amended Connecticut income tax return(s) for the year(s) to which such NOL may be carried back for federal income tax purposes.

Massachusetts: On March 20, 2009, Massachusetts issued: “Notice—Individual Investors; Investments in Criminally Fraudulent Ponzi-type Schemes and Reporting of Fictitious Investment Income.” Massachusetts did not adopt the Revenue Procedure 2009-20 safe harbor in the case of individual investors since Massachusetts tax law does not recognize the theft loss deduction provided under federal tax law.

New Jersey: On April 2, 2009, the New Jersey Division of Taxation had issued guidance on the treatment of Madoff-related
or other Ponzi scheme losses for New Jersey gross income tax purposes. Under this guidance, taxpayers are allowed a theft
loss deduction for New Jersey gross income tax purposes in an amount equal to the original investment plus the income
reported in prior years minus distributions received in prior years. New Jersey does not allow NOL carrybacks or carry
forwards.

New York: On May 29, 2009, the New York State Department of Taxation and Finance issued guidance TSB-M-09(7)I (.pdf) on the
reporting of Madoff-related or other Ponzi scheme losses. In general, New York State will recognize the Revenue Procedure
2009-20 safe harbor.

For more information, Seyfarth Shaw put together some information: Some States Have “Weighed In” on Tax Treatment of Madoff-Related and Other Ponzi Scheme Losses (.pdf)

Connecticut Hedge Fund Regulation

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The folks over at the Hedge Fund Compliance Blog point out that the Connecticut legislature has three bills pending that would regulate the hedge fund industry in that state. It seems strange that a state with such a big hedge fund industry would make their businesses more difficult. But these are strange economic times. It is too early tell if any of these will be passed and how they may be changed in legislative process. But it is worth keeping an eye on them.

Disclosure of Financial Information to Prospective Investors

Hedge funds domiciled in the state and with Connecticut-based pension fund investors need to disclose to prospective pension investors certain financial information, including detailed portfolio information. The act does not bother trying to define a hedge fund. [Raised Bill No. 6480]

An Act Concerning Hedge Funds

This one has a few things going on:

    • Connecticut-based hedge funds would have to meet higher accreditation standards for their investors. To qualify, the investor would have to have not less than $2,500,000 in investment assets and institutional investors would have to have not less than $5,000,000 in assets.
    • hedge fund managers would have to disclose to investors any conflicts before making an investment.
    • Hedge fund managers would have to disclose to investors any changes in investment strategy and the departure of key employees.
    • Hedge fund managers would have to disclose to investors any major litigation or investigation of the fund.

This act does not define hedge funds and leaves it up to the Connecticut Banking Commissioner to figure that out. [Raised Bill No. 953]

Licensing of Hedge Funds and Private Capital Funds

All Connecticut- based hedge funds would need to be licensed by the state. This act does not define hedge funds and leaves it up to the Connecticut Banking Commissioner to figure that out.[Raised Bill No. 6477]

Connecticut’s Pay-to-Play Law

Connecticut’s law imposes a contribution and solicitation ban on state contractors, prospective state contractors, and their principals. A few, but not all, of the principals now covered under the law are as follows:

  • Members of the company’s Board of Directors;
  • Individuals owning 5% or more of the company’s stock;
  • Individuals at the company living or working in Connecticut with the title of president, treasurer, or executive vice president;
  • Spouses, civil union partners, and dependent children (age 18 or older and living at home) of the above; and
  • A political committee established or controlled by an individual described above or by the state contractor or prospective state contractor.

On December 19, 2008, the U.S. District Court for the District of Connecticut upheld Connecticut’s  pay-to-play law. The court found the pay-to-play and accompanying lobbying contribution and solicitation bans to be narrowly tailored to prevent corruption or the appearance of corruption, which, the court said, was significant given Connecticut’s recent history with corruption at the highest levels of state government. Green Party of Connecticut v. Garfield, No. 3:06cv1030 (D. Conn. Dec. 19, 2008).

On December 7, 2005, the Connecticut General Assembly passed “An Act Concerning Comprehensive Campaign Finance Reform for State-Wide Constitutional and General Assembly Offices.” The law, codified at Conn. Gen. Stat. § 9-600, et seq., became effective on December 31, 2006 (formerly codified at 9-333).

§ 9-612(f) prohibits investment services firms with state contracts from contributing to the campaigns for the State Treasurer.

§ 9-612(g) places limitations on campaign contributions by state contractors.

Six States Now Require Social Security Number Protection Policies

Miriam Wugmeister, Nathan D. Taylor of Morrison & Foerester wrote the December Privacy and Data Security Update: Six States Now Require Social Security Number Protection Policies.

  • Connecticut – Ct. H.B. 5658.
  • Massachusetts – 201 Mass. Code Regs. §§ 17.01 – 17.04.
  • Michigan – Mich. Comp. Laws § 445.84.
  • New Mexico – N.M. Stat. §§ 57-12B-2 – 57-12B-3.
  • New York – N.Y. Gen. Bus. Law § 3990dd(4).
  • Texas – Tex. Bus. & Com. Code § 35.581 (effective through March 31, 2009); Tex. Bus. & Com. Code § 501.051 – 501.053 (effective April 1, 2009).

These state SSN protection policy requirements highlight the importance of maintaining up-to-date privacy policies that comply with the evolving requirements under applicable state laws.  To get started, an organization should consider taking the following steps:

  • determine if you collect or maintain SSNs;
  • review your policies and procedures that are employee-facing to determine if you have sufficient policies to meet the obligations under the various state laws;
  • update your policies and procedures as needed;
  • train employees on the new policies and procedures; and
  • audit your employees to ensure that they are complying with your policies and procedures.