To amend the Internal Revenue Code of 1986 to provide special rules for investments lost in a fraudulent Ponzi-type scheme.

Summary: Amends the Internal Revenue Code to: (1) allow an enhanced tax deduction for losses sustained from a fraudulent Ponzi-type scheme; (2) extend the carryback period for net operating losses attributable to such schemes; (3) waive certain limitations on the charitable tax deduction for contributions to charities with losses from fraudulent Ponzi-type schemes; and (4) restore the gift tax unified credit for gifts of an interest in a fraudulent Ponzi-type scheme. Defines "fraudulent Ponzi-type scheme" as any fraudulent investment operation that provides investors with returns that are derived substantially from investments made by other investors rather than from profits.

SECTION 1. TREATMENT OF INVESTMENT LOSSES IN FRAUDULENT PONZI-TYPE 
              SCHEME.

    (a) In General.--Section 165 of the Internal Revenue Code of 1986 
(relating to losses) is amended by redesignating subsection (m) as 
subsection (n) and by inserting after subsection (l) the following new 
subsection:
    ``(m) Treatment of Investment Losses in Fraudulent Ponzi-Type 
Scheme.--
            ``(1) In general.--If--
                    ``(A) a taxpayer has a loss on an investment in a 
                fraudulent Ponzi-type scheme, and
                    ``(B) the amount of such loss (without taking into 
                account any potential recoveries) can reasonably be 
                estimated as of the close of the taxable year,
        then the taxpayer may elect to treat the amount so estimated as 
        a theft loss described in subsection (c)(2) incurred during the 
        taxable year.
            ``(2) Fraudulent ponzi-type scheme.--For purposes of this 
        subsection, the term `fraudulent Ponzi-type scheme' means any 
        fraudulent investment operation which was managed in a manner 
        that provided investors with returns (or purported returns) 
        derived substantially from investments made by other investors 
        rather than from profits.
            ``(3) Treatment of subsequent recoveries.--If the aggregate 
        estimated losses to which an election under paragraph (1) 
        applies with respect to a fraudulent Ponzi-type scheme for all 
        prior taxable years exceeds the aggregate actual losses by 
        reason of a recovery received or accrued during any taxable 
        year, the amount of such recovery shall be included in gross 
        income for such taxable year to the extent of such excess. 
        Proper adjustments shall be made in the application of the 
        preceding sentence for additional recoveries in subsequent 
        taxable years.
            ``(4) Perpetrators of fraud not covered.--Paragraph (1) 
        shall not apply to any person who perpetrated the fraud.''.
    (b) Extension of Net Operating Loss Carryback Period.--Paragraph 
(1) of section 172(b) of such Code is amended by adding at the end the 
following new subparagraph:
                    ``(K) Losses attributable to investments in 
                fraudulent schemes.--
                            ``(i) In general.--Subparagraph (A)(i) 
                        shall be applied by substituting `the 
                        applicable number of taxable years' for `2 
                        taxable years' with respect to the portion of 
                        the net operating loss for the taxable year to 
                        which an election under section 165(m) applies.
                            ``(ii) Applicable number of taxable 
                        years.--For purposes of clause (i), the 
                        applicable number of taxable years is any whole 
                        number elected by the taxpayer which is more 
                        than 2 but not more than the lesser of--
                                    ``(I) 10 years, or
                                    ``(II) the period that the taxpayer 
                                had amounts invested in the scheme to 
                                which such election applies.
                            ``(iii) Ordering rule.--For purposes of 
                        this subparagraph, the portion of the net 
                        operating loss for any taxable year which is 
                        attributable to a loss to which an election 
                        under section 165(m) applies shall be the 
                        excess of--
                                    ``(I) the net operating loss for 
                                such taxable year, over
                                    ``(II) the net operating loss for 
                                such taxable year determined without 
                                regard to the amount allowed as a 
                                deduction by reason of an election 
                                under section 165(m).
                            ``(iv) Coordination with paragraph (2).--
                        For purposes of applying paragraph (2), a loss 
                        to which an election under section 165(m) 
                        applies for any taxable year shall be treated 
                        in a manner similar to the manner in which a 
                        specified liability loss is treated.''.
    (c) Waiver of Contribution Base Limitation on Charitable 
Contributions.--Subsection (b) of section 170 of such Code is amended 
by adding at the end the following new paragraph:
            ``(4) Waiver of limitation on contributions to charities 
        with losses from fraudulent ponzi-type scheme.--
                    ``(A) In general.--Paragraphs (1) and (2) shall not 
                apply to any charity restoration deduction.
                    ``(B) Charity restoration deduction.--
                            ``(i) In general.--For purposes of this 
                        paragraph, the term `charity restoration 
                        deduction' means the amount of charitable 
                        contributions made by the taxpayer during the 
                        taxable year to an organization described in 
                        subsection (c) which are designated by such 
                        organization for purposes of this paragraph.
                            ``(ii) Limitation on amount designated.--
                        The aggregate amount which may be designated by 
                        an organization for purposes of this paragraph 
                        for all taxable years shall not exceed the 
                        aggregate deduction which would be allowed to 
                        such organization under section 165(m) were 
                        such organization a taxpayer to which section 
                        165(m) applies.
                    ``(C) Overall limitation.--In no event shall the 
                amount allowed as a deduction under this section for 
                the taxable year by reason of this paragraph exceed the 
                excess of the taxpayer's taxable income (determined 
                without regard to this paragraph) for such year over 
                the deduction allowed under this section without regard 
                to this paragraph.''.
    (d) Restoration of Unified Credit in Certain Cases.--Section 2505 
of such Code (relating to unified credit) is amended by adding at the 
end the following new subsection:
    ``(d) Restoration of Unified Credit in Certain Cases.--
            ``(1) In general.--If--
                    ``(A) during any preceding calendar year, a 
                taxpayer made a gift of an interest in an investment 
                operation later determined to be a fraudulent Ponzi-
                type scheme (as defined in section 165(m)(2)),
                    ``(B) the taxpayer reported the amount of such gift 
                on a timely filed return under this chapter, and
                    ``(C) the taxpayer subsequently makes a gift to the 
                donee which received the gift referred to in 
                subparagraph (A),
        the amount under subsection (a)(2) for the calendar year in 
        which the gift referred to in subparagraph (C) is made and 
        subsequent calendar years (determined without regard to such 
        gift) shall be reduced by the gift restoration amount.
            ``(2) Gift restoration amount.--For purposes of paragraph 
        (1), the gift restoration amount is the lesser of--
                    ``(A) the amount of credit allowable under this 
                section with respect to the gift described in paragraph 
                (1)(C) (or would be allowable without regard to the 
                limitation in subsection (a)(1)), or
                    ``(B) the amount of credit which would be so 
                allowable with respect to a gift equal to the amount of 
                the donee's loss on such interest (without taking into 
                account any potential recoveries) which can reasonably 
                be estimated as of the close of the calendar year in 
                which the gift described in paragraph (1)(C) was made.
            ``(3) Adjustments.--Proper adjustments shall be made in the 
        application of paragraph (2) with respect to gifts and 
        recoveries in subsequent calendar years.''.
    (e) Effective Dates.--
            (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall apply to taxable years 
        ending during 2008 or thereafter.
            (2) Gift treatment.--The amendment made by subsection (d) 
        shall apply to gifts referred to in section 2505(d)(1)(C) of 
        the Internal Revenue Code of 1986 (as added by this section) 
        made after December 31, 2008.