Theft loss

[Kram BergGold]

My client lost money in the Madoff Ponzi scheme. There is a chance he will recover some of his investment. If in a later year he were to recover more than we anticipated he would report the extra as income. If he receives less than we anticipate how does he claim this extra loss?.

[David1980]

Worthless securities are treated as sold on the last day of the tax year that they become totally worthless. If not completely worthless I don't think there's any loss to claim yet.

[Kram BergGold]

Theft loss

As Madoff never invested the money there is a theft loss not an investment loss.

[veritas]

Generally the loss

is taken in the year the theft is discovered.

The rub is what are the chances of recovery and what amount might your client expect to recover?

[Jesse]

See The Tax Book page 4-22

The loss is deductible in the year it is discovered that no reimbursement will be received for the loss. Reg. 1.165-1(d)(2).

[veritas]

I don't think

See The Tax Book page 4-22

The loss is deductible in the year it is discovered that no reimbursement will be received for the loss. Reg. 1.165-1(d)(2).

that is exactly the case. If I knew I had a loss and the limits of my insurance were less than the amount of the loss, I'm taking the difference in the year of discovery.

In this instance however what are the chances of recovery and what is the likely amount each claimant can expect?

[BOB W]

that is exactly the case. If I knew I had a loss and the limits of my insurance were less than the amount of the loss, I'm taking the difference in the year of discovery.

In this instance however what are the chances of recovery and what is the likely amount each claimant can expect?

Have you heard about the "Claw Back" letter? Everybody that had an investment with him is, or will be, receiving a letter requiring them to return all money they received from him. This money will be returned to investors' according to some formula or something. ??????????? Probably 10 cents on the dollar???????

[S T]

Lots of Info on Madoff

For what it is worth you can google something to the effect "Ponzi schemes theft or embezzlement tax losses" Most all of the foreground "hits" are on Madoff, I actually was looking for a prior one in Calif a few years back that I could not remember the name.

At any rate, this is from Web CPA so might give you some insight http://www.webcpa.com/article.cfm?articleid=30250 then also http://stopcon.org/Tax%20Relief.htm

Sandy

[veritas]

I had a client

who was sucked in by a ponzi scheme a few years ago. I think the scammer got away with 24 million dollars from multiple individuals and has been found guilty in federal court. His modis was a carbon copy of Madoff. The case has gone on for years now and I don't believe anyone has received any recompense. Plus this crook has still not been sentenced.

Anyhow my client came in early following discovery the following year excited about the prospect of claiming a large theft loss. I knew it was coming and had determind I had no interest in preparing the return. He of course tried to argue and then had another tax professional contact me claiming a partial loss could be taken.

I told the professional he was welcome to prepare the return. I wasn't willing to do it because of the large amount the taxpayer would claim and since there was some possibility of the individual being reimbursed.

I believe a storage rental which was full of watches and such which wasn't disclosed to the court was discovered and the crook lives in a house in his wife's name. Sound familiar?

Reg. Section 1.165-1(d)(3)

3) Any loss arising from theft shall be treated as sustained during
the taxable year in which the taxpayer discovers the loss (see
Section 1.165-8, relating to theft losses). However, if in the year
of discovery there exists a claim for reimbursement with respect to
which there is a reasonable prospect of recovery, no portion of the
loss with respect to which reimbursement may be received is
sustained, for purposes of section 165, until the taxable year in
which it can be ascertained with reasonable certainty whether or not
such reimbursement will be received.


The way I read this is if you had a theft loss of $10,000 and you knew there was $2,000 of assets you could reasonably expect to get from the theif you could take an $8,000 loss in the year you discovered the loss.

In the case of Madoff what can one reasonably expect to get once the attorneys go to work?

[S T]

Post

Veritas,

I believe that is the longest reply that you have ever posted, with a lot of details.

Good info.

Sandy

[veritas]

Thanks

Sandy. I did edit and shorten the original.

Having once been accused of being pedesrtian my hope is I won't be found pedantic.

[Kram BergGold]

Veritas you confused me

Your post starts off by saying you declined to do the return because of the large amount of the loss and the possibility of recovery. Then you go on to say that if the loss was 10k and the possibility of recovery was $2k you should deduct $8k. Was the issue that the client wanted to deduct 100% of the loss not allowing for any possible compensation?

[Jesse]

Quote:
Originally Posted by Jesse
"See The Tax Book page 4-22
The loss is deductible in the year it is discovered that no reimbursement will be received for the loss. Reg. 1.165-1(d)(2). "

I don't think......that is exactly the case. If I knew I had a loss and the limits of my insurance were less than the amount of the loss, I'm taking the difference in the year of discovery.

In this instance however what are the chances of recovery and what is the likely amount each claimant can expect?

You would be correct in regards to the initial loss, but in answer to the actual question:

.........If he receives less than we anticipate how does he claim this extra loss?.

If they lost $10,000, but for some reason anticipate only $8,000 loss in the year of discovery, then down the road for whatever reason it is discovered they are not going to receive the other $2,000 they would claim this difference in the the year of this new discovery. Correct?

[veritas]

I apologise

Your post starts off by saying you declined to do the return because of the large amount of the loss and the possibility of recovery. Then you go on to say that if the loss was 10k and the possibility of recovery was $2k you should deduct $8k. Was the issue that the client wanted to deduct 100% of the loss not allowing for any possible compensation?

My response was confusing because the whole situation was confusing. At the time of the loss it was not clear as to recovery by my client. I just did not want to be involved in a nebulous situation and it seemed to me the IRS most likely would challenge the loss. I decided to let a larger firm take the risk.

[veritas]

The answer

[QUOTE=Jesse;70735]Quote:
Originally Posted by Jesse
"See The Tax Book page 4-22
The loss is deductible in the year it is discovered that no reimbursement will be received for the loss. Reg. 1.165-1(d)(2). "




You would be correct in regards to the initial loss, but in answer to the actual question:




If they lost $10,000, but for some reason anticipate only $8,000 loss in the year of discovery, then down the road for whatever reason it is discovered they are not going to receive the other $2,000 they would claim this difference in the the year of this new discovery. Correct?[/QUOTE


However, if in the year
of discovery there exists a claim for reimbursement with respect to
which there is a reasonable prospect of recovery, no portion of the
loss with respect to which reimbursement may be received is
sustained, for purposes of section 165, until the taxable year in
which it can be ascertained with reasonable certainty whether or not
such reimbursement will be received.