The US Internal Revenue Service has refunded $326 million to the trustee acting on behalf of the investors in Bernard Madoff’s firm. This is a significant recovery by the trustee which will eventually be distributed. According to Irving Picard this refund from the tax authorities is due to the 30% withholding tax paid on income paid out to non-resident aliens and foreign corporations which, since the beginning of 2003, amounted to about $330 million paid out on behalf of 145 foreign accountholders who reportedly received dividends. However, because the scheme was fraudulent, no actual dividends were paid and therefore there was no liability for the tax. The payments made to the IRS identified as income tax withholding was made presumably to give Madoff’s firm, Bernard L. Madoff Investment Securities, an air of legitimacy and to avoid enquiries from the IRS. The outside world was given to believe that real dividends had been paid.

The trustee, however, will continue with claims against a handful of foreign investors to whom the IRS erroneously paid $4.2 million in tax refunds. Further refunds are likely to be made as Mr. Picard is pursuing for the return of money fraudulently paid out to investors; this includes more than $44 million that Merrill Lynch Bank (Suisse) S.A., received from the Madoff ‘feeder fund’ Fairfield Sentry Ltd. The feeder fund Fairfield Sentry Limited filed its own action against Merrill Lynch last year seeking the return of $22.7 million but the Picard action targets payments made over a longer period.