Senate Bill SB 157, sponsored by State Senator Joel Anderson (R-Alpine) was recently defeated by the California State Senate Governance and Finance Committee in a vote of 4-2-3, with three abstentions.
Five votes were needed to pass the measure.
The proposed legislation would have provided relief to California victims of the fraudulent Bernie Madoff Ponzi investment scheme. States such as New York and New Jersey have already passed similar legislation.
Senate Bill SB 157, sponsored by State Senator Joel Anderson (R-Alpine) was recently defeated by the California State Senate Governance and Finance Committee in a vote of 4-2-3, with three abstentions.
Five votes were needed to pass the measure.
The proposed legislation would have provided relief to California victims of the fraudulent Bernie Madoff Ponzi investment scheme. States such as New York and New Jersey have already passed similar legislation.
“The state should not gain from a criminal act perpetrated against the victims of a swindle,” Anderson said.
The defeat of the measure prompted the following statement from Anderson: “It is a sad day in California where some senators vote to benefit from crimes committed against Californians.”
Opponents of the bill argued that many people have been victims of scams and have been cheated of their money. Those people have not received the tax benefits granted by the IRS and proposed in Bill SB 157.
Senators Mark De Saulnier (D-Concord), and Lois Wolk, (D-Stockton), chairwoman of the committee were the two dissenting votes.
According to Wolk, this law does not benefit all Californians who suffered financial losses due to a fraud.
“Madoff investors were victims of a terrible fraud, and were not protected by the federal agencies charged to do so,” she said.
“However, many other Californians have seen their hopes and dreams ruined in recent years, having lost their homes, savings, and retirement accounts, due to similar fraud and neglect. I opposed this bill because it allowed unique tax benefits solely for Madoff investors, when tax laws should apply equally to everyone.”
She also questioned the equity of providing a “unique benefit” to one set of taxpayers to the exclusion of others.
It was argued that the bill benefited only those who suffered from the Madoff Ponzi scheme, that these victims were selected for special federal tax treatment, while neither the victims of the AIG stock investments, real estate frauds nor, victims of other types of fraud stood to benefit from this bill.
“The tax code has far too many special carve-outs, and benefits for the few always have to be paid for by higher taxes or reduced services for everyone,” Wolk said.
Anderson’ s office did not have a specific figure on how many Californians would benefit from the bill nor, had knowledge of any taxpayers in the senator’s 76th district who stood to benefit from the favorable deductions afforded under the measure.
They did confirm, however, that “several hundred” would have probably been affected by this legislation.
Under the provisions of this law, California taxpayers who suffered financial loss as a direct result of Madoff’s fraud would have been legally permitted to deduct some of their losses under the Internal Revenue Service “net operating loss carry-over” procedures.
The proposed bill which would have benefited several hundred people was written to “conform state law to federal law” by incorporating the provisions of the IRS issued Revenue Ruling 2009-9 and Revenue Procedure 2009-20.
This ruling provides that financial losses suffered as a result of fraudulent investments schemes can be interpreted as “business” losses rather than “capital” losses for state and federal tax purposes.
This would allow the victim to apply those losses as “net operating losses in their income tax returns.
The passage of the Bill would have barred the state Franchise Tax Board (FTB) from challenging the mitigating formula that would apply under the provisions of SB 157 in conformity with federal law.
Under general California tax law, the victim’s losses would be considered “capital losses” and would be subject to the applicable tax deduction limitations.
Revenue Procedure 2009-20 provides victims an option to take advantage of its “ safe harbor ” provision as an alternative tax computation formula that mitigates against unfavorable tax consequences.
Taxpayers, who without fault of their own in their investments fell victim to criminal fraud and suffered substantial financial losses such as in the Madoff case would be eligible to take advantage of this option.
Under this procedure, the taxpayer can apply the losses to past taxable years and receive refunds for previous taxes paid.
He may carry back up to two years and forward up to 20 years the portion of the net operating loss attributable to the criminal investment.
According to the state Franchise Tax Board, the passage of the bill would have result in a loss of revenue to the state at a time of great financial crises.
The stated losses would have been approximately $20.4 million in the years 2010-11; $6.9 million in 2011-12; $4.3 million in 2012-13; and $900,000 in 2013-14.
Although, more recent analysis forcast only a $500,000 loss in state tax revenue.
State Treasurer Bill Lockyer, who supported the measure, disagreed with the dissenters.
“It is important to recognize this is a matter of fairness, what is fair to Californians who in good faith invested with criminal swindlers, and what the state can do to lessen the damage for those whose finances and future have been wrecked by scams,” he said.
