What's the Estate Tax on a “$4.8 Million” Madoff Account?

Many Madoff investors lost their shirts. Some didn't. As you'll read here, death has led to tricky estate tax questions.

Through a personal pension plan, in 1992 Bernard Kessell started investing millions with Bernie Madoff. Kessell died in 2006. Madoff's firm told Kessel's executor that the date of death value of the account was more than $4.8 million. That value was reported on Kessel's federal estate tax return.

After Madoff's massive Ponzi scheme was exposed in 2008, Kessel's estate filed an amended return valuing the Madoff account at zero and claiming a refund. The IRS balked. Now the question of value has gone to Tax Court.

In a way, Kessel and his heirs were lucky. Before the roof fell in, they were able to withdraw more than he had invested. But not really so lucky. The Madoff trustee has sought to claw back such faux profits, using them to reimburse Bernie's less lucky investors.

What was the true value of Kessel's Madoff account? Apparently the Tax Count will have to decide.