When Wall Street financier Bernard Madoff was carted off to prison in disgrace last week, he left behind thousands of investors in financial ruin. His estimated $65 billion global Ponzi scheme – which the court called "extraordinarily evil" – robbed individuals, banks, universities, even charities.

It also left about 450 Californians with a vexing tax headache.

Richard B. Shapiro is one of them. The Southern California real estate developer had nearly all of his retirement and investment income wiped out overnight when Madoff's massive swindle was revealed in December.

"Life has taken a horrible turn for me and many, many others," said Shapiro last week, speaking from his Hidden Hills home in Los Angeles County. The 56-year-old developer said his Madoff losses are in the "seven figures." Unable to sell their luxury home in this market, the family has cut back on all discretionary spending, he said. Even his 8-year-old son refers to "Madoff the Monster."

But Shapiro, after initially falling into a "deep depression" and losing 30 pounds over his family's finances, has rallied to become one of California's most vocal anti-Madoff crusaders.

In March, he wrote the New York judge hearing Madoff's case, likening Madoff to "a rapist" who deserved to spend his remaining life in prison "with real criminals, not Club Fed members." In May, Shapiro spoke at a state Senate committee hearing in Los Angeles on behalf of Madoff victims.

Last week, Shapiro sent letters to the governor and legislative leaders asking that Madoff investors be allowed to seek immediate refunds on millions in California back taxes they unwittingly paid for years on income they assumed was real.

The California taxes paid on that so-called "phantom income" have been estimated as high as $20 million.

Shapiro said he's in touch with dozens of fellow Madoff victims "who are in truly desperate situations." The average Madoff investor "is not a super-wealthy person," he said. "These are people who worked their whole lives, had maybe $200,000 … $400,000 invested. Their sole source of income was Madoff, and many are elderly. That's why they're so desperate."

Shapiro figures he's young enough to recoup some of his losses over time. But elderly victims, he said, don't have that option.

But what really incenses him are the hurdles they face trying to recover back taxes from the state.

The IRS makes it relatively easy for taxpayers to go back five years and receive tax refunds based on losses from so-called "phantom income." In California, it's far more complicated.

If Madoff victims have already filed their 2008 state taxes, they can file an amended return to reduce their taxable income based on their Ponzi scheme losses. Any losses can be claimed as an itemized deduction but can only be used to reduce future income. And even then, not until 2010 because the state's budget woes have suspended such "theft loss" deductions for two years.

Taxpayers also must decide if they want to follow the federal government's "safe harbor" rules that govern how to compute theft losses. If they elect to bypass the safe harbor route, they can seek refunds for the "phantom income" reported – but for no more than four years.

Even the Franchise Tax Board admits it's a "very burdensome" process. (Due to the complexity, state tax officials suggest that Ponzi victims seek advice from tax professionals before proceeding.)

State Sen. Dean Florez, D-Shafter, who launched the Senate Select Committee on Investment Malfeasance in the wake of Madoff's undoing, held a May hearing on possible changes to California's tax laws. A second hearing, scheduled for mid-June in Sacramento, was postponed due to the state's budget negotiations.

"There is a state debt owed to Madoff victims," said Florez, who is considering legislation to align the state tax code with IRS rules and allow five years of recovery.

The state shouldn't profit from "taxes paid on incomes that were never realized," he said. "At minimum we should hold to that moral standard."

Brenda Voet, an FTB spokeswoman, said state tax officials' hands currently are tied. "We're bound by the law as written for any theft loss from an investment."

The situation is unconscionable, according to Shapiro.

"These people are victims of crime. Why should the state hold on to stolen money?"

But given the magnitude of the state's $26 billion budget shortfall, Shapiro knows that asking for millions in back taxes is a long shot.

"I understand the state is facing a horrible, daunting task balancing this budget," he said. "But our money should not be part of the solution. Nobody should re-victimize victims."

Have a personal finance question? Contact The Bee's Claudia Buck at (916) 321-1968.