Hi all, I need your help. Unfortunately, I have several clients that were invested in the Medical Capital Notes program that failed and was seized by the SEC and turned over to a Receiver in 2009 and was considered a Ponzi-scheme investment. After various recoveries from asset sales and class-action suits against the trustees, Wells Fargo and Bank of NY, all investors ended up losing about 34% of their investment.

Special rules were created in 2009 following the Madoff scam that allows investors to deduct their losses as casualty/theft losses as opposed to capital losses. This is huge for investors that held their investment outside of retirement accounts, like IRA’s and 401(k)’s. There was a lot of outrage because of these losses and Senator Schumer submitted bipartisan legislation that would’ve allowed an IRA participant to deduct up to 50% of their losses but the legislation died in committee. Then in 2010 the legislation was brought in by a Representative of the House but the legislation died again.

In July of 2010 Senator Mitch McConnell wrote to the IRS Commissioner asking for clarification on this issue and the response from the IRS was that these losses are not deductible from IRA’s. I have not seen anything after that in response to this type of loss.

In December of 2016, the Receiver in the Medical Capital case formally closed the investigation, filed his summary and paid out all remaining claims. My question is, now that this is closed does anyone have any information that differs from what I’ve listed above? Is anyone aware of any method to create the deduction going forward? All of these IRA’s are pre-tax contributions so their basis is zero (0). Any suggestions or comments would be greatly appreciated. Thanks.

Paul