A state tax court ruled there is no legal reason John and Cathy Dalton should be forced to pay taxes on what the judge termed "phantom income."
Tuesday's ruling overturned a decision from the New Jersey Division of Taxation that the profits deserved to be taxed because they were available to the Monmouth County couple at the time.
The court ruling allows the couple to get back $5,000 in taxes they paid on the earnings, which later proved to be bogus.
The Star-Ledger of Newark reports the couple invested nearly $700,000 with Bernard L. Madoff Investment Securities, but eventually got their money back. The couple was able to withdraw $572,900 over the course of their investment with Madoff, and got a check for the remainder from the bankruptcy trustee appointed to liquidate the Madoff estate.
Rich Sackin, a senior partner for EisnerAmper, an accounting firm in Edison, told the newspaper the decision could allow other fraud victims to claw back taxes they paid New Jersey in similar circumstances.
"Anybody who's got an open year can go back and file a refund claim," he said. The statute of limitations allows taxpayers to amend returns only for the previous three tax years, he said.
Calls to the Daltons' home were met Thursday with a recording saying the number is no longer in service. The couple represented themselves in tax court.
The state's Division of Taxation and Attorney General have not yet decided whether to appeal, spokesmen for both agencies told the newspaper.
"We're evaluating to see if there are any long-term ramifications for other tax refund cases," said Andrew Pratt, a spokesman for the Department of Treasury, which oversees the Division of Taxation.
Lee Moore, a spokesman for the Attorney General's Office, said there are six other tax cases pending before the tax court related to the Madoff matter, though he said the issues present in these cases are different than the ones in the Dalton matters.
Madoff stole billions of dollars in the largest Ponzi scheme in history and is serving a 150-year prison term in Butner, N.C. He pleaded guilty in 2009 to 11 criminal charges, including securities fraud.
Information from: The Star-Ledger, http://www.nj.com/starledger