Los Angeles, CA – Madoff Victims Push for Tax Refund

Los Angeles, CA – Robert Horowitz estimates that in the 10 years since he moved to California, he has paid the state “north of $500,000” in income taxes due to the constant success of one investment. The return on that investment was so steady that Horowitz, a successful and now retired pharmacist, eventually placed all his eggs in one basket.

But now all that money, which was invested with Bernard L. Madoff Investment Securities, is gone — and Horowitz, 80, is losing his Brentwood house and wondering how he and his wife are going to scrape by.

He’s also one of about 400 Californians lobbying state legislators to get some of those Madoff-related income taxes back.

“It’s heartbreaking. We know that the state of California has lots of problems. But it’s our money,” Horowitz said. “If they don’t want to go back all the way, at least mirror the feds.”

The federal Internal Revenue Service has published guidelines stating that Madoff investors can recover 95 percent of the federal taxes paid on Madoff income during the previous five years. But California’s Franchise Tax Board has no such provision. As of now, victims are permitted only to declare their losses on their next two years’ state tax returns.

“Most of these people don’t have future income,” said Richard Shapiro, 56, of Calabasas. “They’ve been wiped out.”

Shapiro, a developer currently building the middle school at Stephen S. Wise Temple, said he lost almost his entire life savings — “multiple millions of dollars.” A former head of the California Horse Racing Board, he now finds himself living without the luxuries he’d gotten used to and working as much as he can.

He has been leading the lobbying effort, working closely with state Senate Majority Leader Dean Florez’s office and helping organize a public hearing that will be held at 7 p.m. on May 28 at the Skirball Cultural Center. The hearing — to be attended by Florez, a handful of other area state representatives and officials from California’s Franchise Tax Board — is intended to give legislators a better sense of how Madoff investors are hurting and to determine whether the Franchise Tax Board will move to refund Madoff-related income taxes on its own or whether the Legislature needs to take action.

“We should be on par with the federal government,” Florez said. “The question is really, why aren’t we? That is the question for the hearing.”

Brenda Voet, a spokeswoman for the tax board, said they are awaiting directions from the Legislature.

Madoff, who admitted to running a $50 billion Ponzi scheme and pleaded guilty in March to 11 counts of fraud, awaits sentencing in New York. His scam cut a broad swath. The Jewish community was particularly hard hit, with countless nonprofits and individuals losing millions of dollars each. (Charities, like The Jewish Federation of Greater Los Angeles, which earned about $2 million on its $4.5 million investment, don’t pay taxes and therefore would not benefit from the refunds.) Individual members of the L.A. Jewish community, however, could collectively recover tens of millions of dollars.

But exactly how much is at stake, and whether California can afford to part with funds at a time when its credit rating is the lowest in the country and its budget seems stuck in the red, is unclear.

But what is clear, Madoff investors say, is that the state doesn’t have the right to keep revenues it received on taxes for income that never existed — “phantom profits.”

“The IRS shouldn’t have the right to force people to pay taxes when they get a 1099 and it is later proven they never got that income. It shouldn’t matter how long ago it happened. There should be some fairness,” said Peter Moskowitz, 66, of Corona.

A retired dentist, Moskowitz first invested with Madoff in 1992, after the fund he had invested in, Avellino and Bienes, was shut down by the Securities and Exchange Commission. Moskowitz said the SEC told him that the Madoff investment was safe, so he moved all his IRA savings over. Six years later he converted that retirement account into a Roth IRA, requiring him to pay taxes on the $400,000 in gains.

Now, in addition to the $1.15 million he lost with Madoff, he’s out a yet-unconfirmed amount in taxes paid on those earnings.

“If people are victimized in a crime — they got falsified or fraudulent information and they acted on that in good faith — then the state got money it didn’t deserve. And why should the state keep it? Unless it just wants to profit from the crime. People have committed suicide, so in that sense it is blood money,” he said. “I don’t think that you should call it blood money, but the government should do what is right.

“For people who have been victimized by crimes, it should give them back what they paid.”