Theft loss revisited

[Jesse]

So in 2008 the year of the loss we will clain a theft loss of some amount and defer some due to expected recovery. Then in 2012 when it becomes clear what the recovery is we will either file an addiitonal claim if less was recovered than we anticipated or report some income if mroe than anticipated was received. Now her eis the $60,000 quesiton, in 2012 how do I prepare the return so my client is not subject to a second $100 floor and 10% deductible on formn 4684?

Hope you don't mind Kram, I am just curious to the answer to your question. I'm not debating whether or not it is a bonafide loss, but let's just say it is, IF we have a loss which was reduced by an anticipated recovery in 2008 and in 2012 it is discovered that the anticipated recovery will not take place, the taxpayer is subject to a second $100 floor and 10% deductible on form 4684?

[erchess]

I don't remember seeing the original thread

but I thought you had to wait to file a Casualty Loss until you reasonably believed that it was absolutely clear how much was lost and how much would be reimbursed. I thought specifically that a long court fight in which you sought reimbursement could let the tax year close and stop you from ever claiming the casualty.

I would suggest that if you file a Casualty and later find out that it was incorrect the thing to do is to amend the return for that year.

How badly am I misinformed? I have to say that what few casualties I have done were open and shut cases where any reimbursement was received during the same year as the casualty.

[Jesse]

Try this example.......

A taxpayer's automobile is completely destroyed in 2007 as a result of the negligence of another person and there exists a reasonable prospect of recovery on a claim for the full value of the automobile against such person, the taxpayer does not sustain any loss until the taxable year in which the claim is settled.

If the automobile had an adjusted basis of $15,000 and the taxpayer finally secures a judgment of $10,000 in 2008, $5,000 is deductible for the taxable year 2008.

The taxpayer has been collecting payments of $1,200 a year, but in 2012 the payor of judgement died, no estate and it becomes certain that only $6,000 will ever be collected on such judgment, so $4,000 is deductible for the tax year 2012.

How do I deduct the $4,000?

[erchess]

My Answer

Is that if a car is damaged or destroyed in 2007 only the 2007 return plus amendments made while 2007 is still open offer recovery from the loss of the car. Thus in your scenario there is no recovery of the $4,000 of the judgment that will never be paid. I believe that what you have is a non business bad debt, which I believe is without tax consequences.

Please understand that I dislike this answer and when someone dies and makes me grand pooh bah of US Taxes I will change this but until then I am stuck as a taxpayer and tax professional with the law as it actually is.

[Kram BergGold]

What I ahve decided to do

In the Madoff Ponzi scheme my client has lost much more than he can deduct in 2008. W\en he carries back the loss to 2005-2007 he still will have plenty of loss left to use up. So I am going to claim the entire loss. There is no way to predict what if anything he will get from Madoff. His chance of recovering any of his investment is slim and even if he does he will still not have used up all of the loss on any tax returns. So if he does get a small sum, I will just reduce the loss that is being carried forward in say 2011 or 2012 when the whole mess is settled. My guess is my client will have lossees running till 2015 or so.

[JohnH]

Asuming 2015 is about right for the time frame, which do you think will come first -> your client runs of of tax carry-forward write-offs, or Madoff moves out of his penthouse? (counting appeals & fancy lawyering)

[taxea]

You don't file the loss if there is an anticipated recovery...you file the loss after the settlement.
Hard to believe that the person who died before paying off the settlement had absolutely no assets. Client should have placed a lein on assets while payer was still alive. taxea

[joanmcq]

Kramberg, I really don't think you can claim the loss until the amount unrecovered is certain.

[Jesse]

A taxpayer's automobile is completely destroyed in 2007 as a result of the negligence of another person and there exists a reasonable prospect of recovery on a claim for the full value of the automobile against such person, the taxpayer does not sustain any loss until the taxable year in which the claim is settled.

If the automobile had an adjusted basis of $15,000 and the taxpayer finally secures a judgment of $10,000 in 2008, $5,000 is deductible for the taxable year 2008.

The taxpayer has been collecting payments of $1,200 a year, but in 2012 the payor of judgement died, no estate and it becomes certain that only $6,000 will ever be collected on such judgment, so $4,000 is deductible for the tax year 2012.

How do I deduct the $4,000?

Secures a judgement = Settled

You don't file the loss if there is an anticipated recovery...you file the loss after the settlement.
Hard to believe that the person who died before paying off the settlement had absolutely no assets. Client should have placed a lein on assets while payer was still alive. taxea

It may be hard to believe, but in this real world we live in it happens. What do you put a lien on if there are no assets? Perhaps this person paid their bills and whatever was left was spent at the local pub – it’s a mute issue – no assets - no recovery! The loss is deductible in the year it is discovered that no reimbursement will be received.
See tax book page 4-22;
or from the Tax Almanac:

Sec. 1.165-1 Losses
________________________________________
(a) Allowance of deduction. Section 165(a) provides that, in computing taxable income under section 63, any loss actually sustained during the taxable year and not made good by insurance or some other form of compensation shall be allowed as a deduction subject to any provision of the internal revenue laws which prohibits or limits the amount of the deduction. This deduction for losses sustained shall be taken in accordance with section 165 and the regulations thereunder. For the disallowance of deductions for worthless securities issued by a political party, see §1.271–1.
(b) Nature of loss allowable. To be allowable as a deduction under section 165(a), a loss must be evidenced by closed and completed transactions, fixed by identifiable events, and, except as otherwise provided in section 165(h) and §1.165–11, relating to disaster losses, actually sustained during the taxable year. Only a bona fide loss is allowable. Substance and not mere form shall govern in determining a deductible loss.
(c) Amount deductible. (1) The amount of loss allowable as a deduction under section 165(a) shall not exceed the amount prescribed by §1.1011–1 as the adjusted basis for determining the loss from the sale or other disposition of the property involved. In the case of each such deduction claimed, therefore, the basis of the property must be properly adjusted as prescribed by §1.1011–1 for such items as expenditures, receipts, or losses, properly chargeable to capital account, and for such items as depreciation, obsolescence, amortization, and depletion, in order to determine the amount of loss allowable as a deduction. To determine the allowable loss in the case of property acquired before March 1, 1913, see also paragraph (b) of §1.1053–1.
(2) The amount of loss recognized upon the sale or exchange of property shall be determined for purposes of section 165(a) in accordance with §1.1002–1.
(3) A loss from the sale or exchange of a capital asset shall be allowed as a deduction under section 165(a) but only to the extent allowed in section 1211 (relating to limitation on capital losses) and section 1212 (relating to capital loss carrybacks and carryovers), and in the regulations under those sections.
(4) In determining the amount of loss actually sustained for purposes of section 165(a), proper adjustment shall be made for any salvage value and for any insurance or other compensation received.
(d) Year of deduction. (1) A loss shall be allowed as a deduction under section 165(a) only for the taxable year in which the loss is sustained. For this purpose, a loss shall be treated as sustained during the taxable year in which the loss occurs as evidenced by closed and completed transactions and as fixed by identifiable events occurring in such taxable year. For provisions relating to situations where a loss attributable to a disaster will be treated as sustained in the taxable year immediately preceding the taxable year in which the disaster actually occurred, see section 165(h) and §1.165–11.
(2)(i) If a casualty or other event occurs which may result in a loss and, in the year of such casualty or event, 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 it can be ascertained with reasonable certainty whether or not such reimbursement will be received. Whether a reasonable prospect of recovery exists with respect to a claim for reimbursement of a loss is a question of fact to be determined upon an examination of all facts and circumstances. Whether or not such reimbursement will be received may be ascertained with reasonable certainty, for example, by a settlement of the claim, by an adjudication of the claim, or by an abandonment of the claim. When a taxpayer claims that the taxable year in which a loss is sustained is fixed by his abandonment of the claim for reimbursement, he must be able to produce objective evidence of his having abandoned the claim, such as the execution of a release.
(ii) If in the year of the casualty or other event a portion of the loss is not covered by a claim for reimbursement with respect to which there is a reasonable prospect of recovery, then such portion of the loss is sustained during the taxable year in which the casualty or other event occurs. For example, if property having an adjusted basis of $10,000 is completely destroyed by fire in 1961, and if the taxpayer's only claim for reimbursement consists of an insurance claim for $8,000 which is settled in 1962, the taxpayer sustains a loss of $2,000 in 1961. However, if the taxpayer's automobile is completely destroyed in 1961 as a result of the negligence of another person and there exists a reasonable prospect of recovery on a claim for the full value of the automobile against such person, the taxpayer does not sustain any loss until the taxable year in which the claim is adjudicated or otherwise settled. If the automobile had an adjusted basis of $5,000 and the taxpayer secures a judgment of $4,000 in 1962, $1,000 is deductible for the taxable year 1962. If in 1963 it becomes reasonably certain that only $3,500 can ever be collected on such judgment, $500 is deductible for the taxable year 1963.
(iii) If the taxpayer deducted a loss in accordance with the provisions of this paragraph and in a subsequent taxable year receives reimbursement for such loss, he does not recompute the tax for the taxable year in which the deduction was taken but includes the amount of such reimbursement in his gross income for the taxable year in which received, subject to the provisions of section 111, relating to recovery of amounts previously deducted.