Loss or Theft?

[lsmith]

Arrangements are made with a contractor to build a house on the lot that you owned. The
subcontractors are contacted for cement, electrical, etc and the contractor skips with the monies that he has drawn down with paying any one else. Mechanics liens result. We have a theft and liens that must be paid.

Can any of this go on a schedule D or is it all to be on a 4684, casualty or theft. I believe that in this instance, if a 4684 is used that the basis of the house could be boosted by both the theft and liens.

If a schedule D could be used (which I am unsure if it can be) then annual relief is given by the reduction of annual taxes of 3.000.

Any thoughts?

[taxea]

Loss or Theft

I had the same issue a few years back 100k in loss..I took it as a theft by fraud with carryback and carryover until it was eliminated.

Instructed the clients to be sure and claim as income in the future any money they received from the conviction of the contractor. Of course, as usually is the case, he had no money to pay them back. Even a lien doesn't guarantee they will ever get paid back.

[jainen]

all goes to basis

>>Arrangements are made with a contractor<<

Apparently those arrangements didn't include a performance bond. Well, with luck maybe they will include a bail bond someday.

I would hesitate to call it a theft without more information. Was the contractor paid a portion as work was performed? Then he was only paid what he was due, and the theft, if any, was from the subcontractors. Although the taxpayer was hit with double costs, it probably all goes to basis.

[Bonnie Ann Clyde]

4684

This is a theft and goes on 4684, flows to schedule A as an itemized deduction.

[jainen]

What was stolen?

>>This is a theft<<

What was stolen, Bonnie Ann Clyde? The taxpayer agreed in writing to give that money to the contractor, and did so willingly because the contractor arranged for the work to be done as promised. Nothing in the original post indicates fraud--there could be any number of reasons why the subcontractors didn't get paid. The taxpayer's obligation to those subcontractors was a normal part of his contract as a matter of law. He should have included insurance or a bond in the contract to lessen his risk, instead of accepting a lower bid. He is lucky nobody got hurt, or he would have really found out the risks of such poor business sense.

Form 4684 is for a sudden, unexpected loss of property due to an identifiable event, not an ongoing failure to pay workers over weeks or months of construction. There was perhaps a breach of contract, but nothing was stolen.

[Jiggers]

Theft

The original message says that the contractor skipped with the money without paying anyone. Since mechanic liens have been filed, the subcontractors will have to be paid for the work performed. The money paid to the contractor who skipped out is the theft. The taxpayer should have filed theft charges with the local law, if they haven't done so already. You take this off on a 4684 that flows to Schedule A as an itemized deduction. The money paid to the subcontractors will be the cost of the house. I had one similar to this. The taxpayer paid a contractor who skipped without performing any service. No subcontractors were involved. Taxpayer filed charges and the contractor was arrested. No resitution has been received, even though it has been ordered by the courts. I took a deduction on the 2004 return, Form 4684 and Schedule A. If and when restitution has been received, the taxpayer will have some taxable income. I don't know what Bonnie Ann Clyde is commenting about, but I would suspect that it is similar to what I am said.

[jainen]

Your case is different

Your case is different. In the original post, the work WAS performed. The money given to the contractor was what was owed under the contract. That is not theft--it is normal, everyday business. The contractor then stiffed HIS subcontractors. Even that's not a theft because he didn't take anything from them. He wasn't, for example, holding pass-through or trust funds.

The subs filed liens to protect their interests, and the homeowner was liable the way a cosignor is liable for a loan. That's not a theft. The homeowner was legally obligated to pay the contractor because the contractor arranged for the work to be done, which is exactly what the contract called for. The homeowner was also legally obligated to pay the subcontractors. When you pay what you are legally obligated to pay, that's not a theft. If he didn't choose a bonded contractor, he has only himself to blame.

Form 4684 is for losses resulting from a specific event. The homeowner's obligation to the subcontractors did not begin when the contractor skipped or when the liens were recorded. It existed from the moment he inked the contract. He may have paid his debts all at once but they arose gradually as the construction work proceeded, not from a specific casualty. He paid extra for the construction, but it is all added to basis because there was no theft.

[Jiggers]

I stand corrected

Read the original message too quick. Add the payments to the subcontractors as added cost of the house. Any recovery from contractor would reduce the basis.

[Gretel]

If he didn't choose a bonded contractor, he has only himself to blame.

Jainen, would you please be so kind to explain the "bonded" to me? I have I hard time understanding what this exactly means. What would have happened in the situation had the contractor been bonded?

Thanks.

[jainen]

A bond is an insurance policy

A bond is an insurance policy that the contractor purchases to guarantee he fulfills the contract. If he fails to deliver, the bond company will pay up. A bail bond works the same way, and the bond company is just as aggressive in tracking down the skip and getting their money back.

Performance bonds are very common in many industries. Even tax preparers must post a $5000 bond in order to conduct business in California.

[Gretel]

Thanks a million.