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The Vast Amount That We Don't Know About The Madoff Matter.

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Then there are the questions about the IRS. Why did it approve Madoff as a so called nonbank custodian for IRAs in June of 2004 when he was in serious violation of crucial regulations the IRS itself had established to insure that persons with IRAs will not lose their money because of misconduct by or unfortunate events occurring to nonbank custodians? How did Madoff get the IRS to approve his company as a nonbank custodian despite his serious violations of the IRS own regulations, and despite the fact that inspection of Madoff by the IRS to insure that its regulations were met would have disclosed the fraud? Was there criminal conduct on the part of the members of the IRS -- acceptance of bribes, for example? Was there only simple gross negligence, incompetence and gross dereliction of duty (as, perhaps, by failing to inspect Madoff to be sure he complied with the regulations)? Right now nobody knows -- and the mass media, though informed of the matter, doesnt care about it and doesnt investigate it. Imagine: the mass media neither cares nor investigates how the countrys federal tax service aided the commission of the biggest fraud in history.

And if you, Mr. or Mrs. Average citizen, make inquiries of the IRS as to how it came to assist the fraud, as I did, the answer you will likely get back, as I did, is that the IRS will give you no information because Madoffs company was a taxpayer and the affairs of the taxpayer are confidential unless Madoff or his authorized representative consent to their release. Can you beat that? Madoff is literally the biggest crook by dollar figures in the history of the world, but you cannot be told how he obtained the cooperation of the IRS because his company was a taxpayer and therefore its IRS affairs are confidential.

You know, the IRS is quite a piece of work in the Madoff scandal. For decades it has gotten a total of untold billions of dollars in taxes paid on phantom income from victims of Madoff. It is not telling us how much it got, though I imagine this would not be very difficult to determine in this age of supercomputers. But I suspect that the total tax it received on phantom income must be in the tens or scores of billions of dollars over the years. If people paid tax over twenty or thirty years on as little as 30 billion dollars of phantom income, that would amount to approximately ten billion dollars in taxes. If 20 billion of the 65 billion dollars shown on the November 30, 2005 statements was principal (was cash-in), so that the remaining 45 billion was phantom profit, the income tax on the final numbers alone was about 15 billion dollars minus amounts not owed because the phantom profits went to tax-free entities or because money went to foreigners who may not have been liable for or may simply have evaded tax.

But one way or another, and even though it so far wont disclose the amount, over the course of 20 or 30 years, or maybe even longer, the IRS received billions upon billions of dollars in taxes on phantom income -- taxes on money it had no constitutional right to tax because the Sixteenth Amendment allows it only to tax income, not phantom income. But now the IRS will give you a refund of only a few years of those taxes -- money which we now know you were cheated out of from the beginning, to put the matter candidly -- and the IRS relies on the courts and Congress to agree that you dont have to be paid back the taxes you were cheated out of, since letting taxpayers get refunds of all such taxes might be hurtful to the federal fisc. Nor will you get back more than a small fraction of your losses by virtue of the IRS new theft deduction rule, which, as has been said here from the beginning (and as others are coming to agree), is quite inadequate for many people and will extensively benefit only the obscenely wealth, who will receive scores of millions of dollars worth of tax deductions (with the word on the street being, rightly or wrongly, that the IRS rule was initially drafted for the wealthy by a white shoe Wall Street law firm that has represented huge money for over a century). All in all, one might paraphrase the statement made with regard to the Barbary pirates 200 and some years ago by saying, Trillions to bail out the bankers who brought down the economy, but not one cent, or at least very little, for average people who were cheated and defrauded by Madoff and governmental agencies who were his defacto accomplices.

You know, when you look at the whole thing systemically, it is quite a picture. People got sucked into a Ponzi scheme by the affirmative 1992 statement of one federal agency, the SEC. They remained sucked in because of the SECs incompetence when it was told of the fraud in later years, and by the incompetency of FINRA and its predecessors too. Meanwhile the IRS benefitted to the tune of untold billions of dollars and, when the fraudster in effect asked it to help him by approving him as a nonbank custodian, the IRS did this even though he was in gross violation of its own regulations. Subsequently the IRS will give back only a fraction of the taxes you have been cheated out of -- unconstitutionally, no less. To put icing on the cake, SIPC, as all know, is screwing people out of money they have a right to. And when people seek to sue the SEC or the IRS for their horrendous misconduct that enabled Madoff to succeed for decades or for the billions in taxes to which the government had no right, the defrauded plaintiffs will be met with claims by the government -- which always makes these claims -- that you cannot sue the government, and/or that statutes of limitations have run regardless of how horrible the governments misconduct was. Joe Nocera will love it since he thinks it was all the (stupid) victims fault anyway.

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Lawrence R. Velvel is a cofounder and the Dean of the Massachusetts School of Law, and is the founder of the American College of History and Legal Studies.
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