After MF Global filed for bankruptcy protection just over a month ago, investigators discovered that approximately $1.2 billion of assets in customers’ accounts had somehow disappeared. Although no one at the firm has confirmed where the money went, news reports have suggested that the money may have been used to cover bad trades and debts to other financial institutions. For example, the New York Times recently reported that investigators believe MF Global, in a frantic attempt to remain solvent, may have paid at least $200 million in customer funds to JPMorgan Chase. Also, late yesterday afternoon on Capitol Hill, after the firm’s top executives repeatedly and unequivocally denied knowing where the money went, murky allegations arose that the executives knew that the firm was loaning customer money to related parties.
It remains to be seen whether and to what extent MF Global’s customers will receive a return of their accounts. Although only a full recovery of the missing $1.2 billion would make the customers whole, tax planning may help ameliorate their financial losses. Section 165 of the Internal Revenue Code provides taxpayers relief to deduct casualty or theft losses that are not compensated by insurance. Revenue Ruling 2009-9, issued to clarify section 165 issues related to the Bernie Madoff Ponzi scheme, offers useful guidance regarding the timing and character of deductions for losses that are due to theft or fraudulent investments (should MF Global’s actions turn out to meet either of those conditions). The Ruling, however, reflects a trap for the unwary buried in section 165: in which year does the deduction arise? (more…)