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Judge Grants Madoff Victim a Refund on Estate Taxes


July 20, 2012
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A victim of Bernard Madoff’s Ponzi scheme will be refunded the full amount of estate taxes he paid that corresponded with funds managed by Madoff’s company, a New Jersey state judge ordered. New Jersey resident Theodore Warshaw passed away in 2006, and left behind an estate that was valued at roughly $1.8 million. New Jersey estate tax law requires that residents whose estates exceed $675,000 pay taxes, and Warshaw’s executors paid approximately $88,677 in taxes. Court documents reveal that the majority of Warshaw’s assets were held in an individual retirement account managed by Bernard Madoff Securities, which claimed the contributions were being invested in stocks, bonds and other investment vehicles. The IRA fund, which was transferred to a trust for Warshaw’s widow, was valued at $1.4 million. Following Madoff’s arrest in 2008, it was discovered that the $1.4 million in IRA assets were actually valued at $0. Warshaw’s executors appealed to the New Jersey Division of Taxation, and argued that the estate fell below the $675,000 threshold because the IRA actually had no value at the time of Warshaw’s death. The state tax division denied the refund request, citing a 1929 Supreme Court case that ruled the value of assets in a taxable estate cannot be calculated by events that take place following the estate holder’s death. The appeal was taken to the Tax Court of New Jersey. The court ruled that Warshaw’s estate should be refunded the $88,677, explaining that the Madoff Ponzi scheme was relevant to the valuation of the funds at the time of Warshaw’s death. The court said in its opinion that “subsequent events may be considered to establish evidence of fair market value as it existed on the date of death.”