Tax Relief for Ponzi Schemes Such as the Madoff Case

This blog post does not directly related to 1031 tax deferred exchanges, but it might have some bearing or provide some guidance on how to handle 1031 exchange transactions that involve Qualified Intermediaries that either embezzled clients' 1031 exchange funds or filed for bankruptcy protection while holding clients' 1031 exchange funds or failed for other reasons. 

IRS Issues Revenue Ruling and Revenue Procedure

The Internal Revenue Service issued Revenue Ruling 2009-9 that addresses the income tax effects of a fraudulent investment scheme resulting in theft losses from an investment in securities such as the Madoff case. 

Revenue Procedure 2009-20 was also issued by the Internal Revenue Service that provided a safe harbor for deducting losses from a criminal investment scheme.

Not Applicable to 1031 Exchanges

Rev. Rul. 2009-9 and Rev. Proc. 2009-20 do not address losses suffered by clients involved in a 1031 tax deferred exchange either due to a bankruptcy filing by their Qualified Intermediary or the failure of their Qualified Intermediary.  However, the Revenue Rulings may provide guidance to clients that have suffered losses through fraudulent acts by a Qualified Intermediary.