Commodity customers of failed futures broker MF Global, Inc., face several tax issues relating to the broker’s liquidation. First, the customers must determine what tax items relating to their MF Global accounts to include in the preparation of their 2011 tax returns. Second, the customers may need to decide when and whether they can deduct a loss for any amounts not recovered.
Normally, commodity customers of an FCM receive from the FCM Forms 1099-B (which generally report trading gains and losses) and 1099-INT (which report interest income) that indicate what items the customers should include in their tax reporting. The SIPC trustee administering MF Global’s liquidation currently indicates on the trustee’s website that he has requested an extension of the deadline for filing and mailing Forms 1099 to mid-March. Notably, the trustee faces challenges in preparing the Forms 1099-B. For customers that traded on foreign exchanges, the trustee must calculate the gain or loss for contracts on such exchanges that were open at the time of the bankruptcy filing, however, the necessary information to make that calculation may simply not be available to the trustee because such contracts were generally held in offshore MF Global affiliates that had those contracts liquidated, are in their own insolvency proceedings and have not communicated the liquidation prices to the trustee. The trustee is also in the process of determining the amount of commodity customer claims and faces the same issue in making those determinations; it is possible that the trustee will use an alternate method in determining the value of positions on foreign exchanges and apply that method to both claim amount determination and calculation of taxable gain or loss for Form 1099-B preparation. Indeed, the trustee could decide to issue all Forms 1099-B based on claim determination amounts, which are not yet finalized. Unfortunately, MF Global’s commodity customers face upcoming reporting deadlines of their own and must decide how to proceed without yet having received MF Global’s Forms 1099-B.
MF Global customers may also need to determine whether and when they can deduct losses in their MF Global accounts resulting from the broker’s collapse and any shortfall in customer segregated funds. If customers can show that such losses resulted from a taking of property that was illegal and that was done with criminal intent then they would be able to take “theft loss” deductions that are ordinary in character and not subject to certain limitations. There are reportedly federal investigations under way that may shed light on whether such an illegal taking or criminal intent existed. However, theft loss deductions may not be taken until the tax year when there is no longer a “reasonable prospect” of recoverability for the lost assets. At the current time there is clearly a reasonable prospect of recoverability for all MF Global commodity customer assets so this is an issue customers will not need to consider unless and until it becomes more clear there will be losses.
Neal R. Stevens
312 565.1045 tel (chi) | 212 334.7948 tel (nyc)
Schuyler, Roche & Crisham, P.C