In a recent court case an estate gets a theft loss for assets invested with Bernie Madoff. The decedent who owned 99% of a limited liability company whose only asset was an account with Madoff.
After his death and before the filing of the estate return, the LLC-owned account became worthless when Madoff was arrested and pleaded guilty to running his Ponzi scheme and other crimes. The estate took a theft loss deduction.
The IRS was not satisfied with this action and disallowed the deduction, on the basis that the LLC incurred the loss and not the estate.
The Tax Court allowed the loss because the worthlessness of the estate’s interest in the LLC arose directly from Madoff’s theft .
Est. of Heller, 147 TC No. 11