Madoff Trustee Seeks Approval of $326 Million Settlement With IRS

The trustee overseeing the liquidation of Bernard Madoff's $65 billion Ponzi scheme announced that he had reached a settlement with the Internal Revenue Service that, if it receives judicial approval, will add $326 million to the funds recovered for Madoff's victims. If approved, the settlement will bring the total amount of assets recovered thus far to over $9 billion - roughly half of the $17.2 billion of principal that trustee Irving Picard has determined was lost to Madoff's fraud.  If approved, the settlement marks a strong end to an admittedly difficult year for Picard, who saw 

The settlement stems from the recovery of payments made by Madoff pursuant to certain provisions of the Internal Revenue Code (the "Code") requiring the withholding of certain portions of profits paid to foreign citizens. Sections 1441 and 1442 of the Code require persons paying income to non-resident aliens and foreign corporations to withhold tax equal to thirty percent.  In his investigation of Madoff's brokerage records, Picard identified 145 foreign accountholders from which Madoff withheld approximately $330 million (the "Payments") that was subsequently sent to the IRS.  After accounting for $4 million of erroneous refunds paid by the IRS, Picard arrived at the amount of $326 million.  Picard theorized that Madoff's compliance with the withholding statutes was meant to give the scheme an air of legitimacy:

by making the "withholding" payments, it would appear to the outside world that real stock was held in the accounts at BLMIS and real dividends.

Under the proposed settlement, the IRS will make a payment of $326 million (the "Settlement Amount") in return for a release of any claims Picard may have against the IRS relating to payments made by Madoff and/or Madoff's brokerage firm.  The Settlement Amount represents over 98% of the total funds paid to the IRS by Madoff, and will begin to accrue interest if the IRS does not tender complete payment to Picard within 180 days of the date the settlement agreement is approved (the "Approval Order").  Under the settlement, Picard agreed to reserve approximately $103 million to satisfy any potential future administrative decisions or judgments against the IRS or the Trustee that might be entered with respect to the Payments.  Upon the passage of two years and sixty days after the Approval Order, the funds shall be available for distribution to Madoff victims. 

United States Bankruptcy Judge Burton Lifland will consider the motion at a December 21, 2011 hearing.  

A copy of the Motion is here.