Bernard Madoff's Ponzi scheme stole money from an awful lot of investors, and even those people who thought they were making money with Madoff turned out to have nothing more than phantom profits. To add insult to injury, some people even paid taxes on those nonexistent profits. But a couple from Middletown who paid New Jersey state taxes on those phantom profits has successfully gotten that money returned to them.
John and Cathy Dalton had invested about $700,000 with Madoff. For several years, Madoff reported sizable capital gains to the Daltons, who dutifully paid taxes on it. After Madoff's scheme collapsed in 2008, the Daltons were only able to get $572,000 of their money back. They then filed amended tax returns to recoup the taxes they had paid on those phony capital gains.
At first, they were told no, they couldn't get a refund, because they technically could have cashed out their positions at any time before the Madoff scheme collapsed and enjoyed their gains. Finally, this week, a court ruled that the Daltons shouldn't have had to pay taxes on investment income that never really existed. The reward: a refund of $5,000 in capital gains taxes from the state of New Jersey.
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