Christopher S. Pascucci and Silvana B. Pascucci, T.C. Memo. 2024-43, filed 4/15/24 (get those returns to the post office or PDS, if you haven’t e-filed or gotten an extension) were victims of the late Bernie (“The Bandit”) Madoff. Chris and Silv got $200K from the Fund for the Plundered, but their combined $17.2 million loss only yields a $9 million Section 165 theft loss for the cash they directly gave The Bandit’s phony hedgefund.

Chris and Silv had a bunch variable life insurance policies (hi, Judge Holmes) with two (count ’em, two) insurers that were both acquired by Met Life. But the choice of investment vehicles that funded the policies was limited to nonpublic hedgefunds, and how those funds in turn invested the money was totally out of Chris’ and Silv’s control. In order to prevent taxation of the gains from the funds, Chris and Silv could exercise zero command and control over what the funds invested in. And though the fund at issue (Tremont) funneled cash to Rye, which funneled in turn to The Bandit, that wasn’t enough to let Judge Gustafson decide that Chris and Silv were the victims of theft, even though the Fund for the Plundered said they were.

The key is investor control. See my blogpost “Keep Your Hand Upon the Dollar,” 6/30/15. These policies were structured so that Chris & Silv had no command and control, because only if they didn’t have such control could they defer tax on their gains. Both State law (NY and MO) and the policies themselves said the insurance companies owned shares in the the funds in which the premiums were invested.  If a neon was robbed, it was the insurance companies.

True, Chris’ and Silv’s insurance policies were worth a lot less, but they still had them, and the terms thereof hadn’t changed. And to let Chris and Silv avail themselves of favorable tax treatment on gains, while giving them a write-off for losses, doesn’t move Judge Gustafson.

“The Pascuccis cannot have it both ways: They cannot simultaneously enjoy the tax deferral benefit of not owning assets in the separate accounts and also claim a tax deduction that is a benefit available only to someone who did own the assets.” T. C. Memo. 2024-43, at p. 25.