Old theft loss. Can he take it now?

[sandigi]

I had a new client come in today. He has been asking his previous CPA about taking this loss and was told "oh, let's just wait a while and see what happens."

That "a while" has turned into years. I'm looking at amending previous year, but am concerned with the tardiness of it all, and trying to find a way to help him claim this loss that I think should have been taken earlier. Any help will be so appreciated!!

Here are the details, years and dollars:

2005 TP writes check for $30,000 to contractor as deposit to build his home.
It is evidenced on a "Residential Construction Agreement."

Contracter never commenced work and TP hired a lawyer.
Florida Dept of Business and Professional Regulation went after the contractor.

2007 Contractor lost license.
Was ordered to make restitution to TP "in the amount of $37,585 for consumer harm suffered."
(TP original 30,000 plus additional construction loan cost and attorney fees.)

Now loss is $37,585

Bad Builder has lots of other hopeful homeowners and subcontractors also after him.
My TP gets no money.

I think it should have been deducted as a theft loss in 2007. Or he could have held out hope and taken the loss in 2008.

Is it too late to deduct the loss?

[geekgirldany]

I believe it would not be a theft loss since there was a judgement against the contractor, it would be a nonbusiness bad debt. You need to determine when the debt was considered worthless. When it was considered worthless is when it should be deducted.

[Roland Slugg]

If the $30k (now $37.5k) was a theft loss, your client is out of luck. If it was a bad debt, there is hope. The statute of limitations for refund claims, which is normally three years, is extended for bad debt losses to seven years from the due date of the return for the year in which the bad debt occurred. (Code §6511(d)(1)) Thus, it comes down to the year. If the bad debt occurred in 2005, when the $30k was advanced, the T/P is too late. If it was in 2006, when the contractor lost his license, your client has about two week left to file his refund claim. If it was in 2007, when the court ordered the contractor to make restitution, your client has about a year left to file. In order for the loss to be deductible in a year later than the year the funds were advanced, the T/P must be able to show that the funds were reasonably expected to be recovered up until that later year.

So the issues here are: (1) Was this a bad debt ... or a theft loss? ... and (2) If it was a bad debt, in which year did it become worthless?

Added Info: IRS employees who process refund claims are surprisingly unaware of the special seven-year statute of limitations for bad debt losses. If your client files a claim, his initial response from the IRS may well be a letter saying his claim was filed too late ... that he only had three years. He will then need to write back explaining the special seven-year provision, citing the IRC section referred to above.

[Nashville]

Amount is in Question

Interesting and informative comments as to the timing of this loss, but I haven't seen where the loss would be $37K. That might be the amount of the award, but the taxpayer only advanced $30K.

I'm assuming there may be some collection expenses involved, but they were not mentioned. These may increase the amount.

[sandigi]

Bad Debt or Theft?

Thank you Roland for the thoughtful response. I've been reading and wonder now if I have my brain wrapped around any of this right?

(1). If Bad Debt, and was for his own house, then it is a nonbusiness bad debt? Short-term capital loss and subject to $3000 max per year. Deductible when it is totally worthless. Can amend 7 years from worthless date. And then would we have to amend all years after that to adjust his Capital Loss carryovers that he already cannot use?

(2). If Bad Debt, and was for a rental house, then it is a business bad debt?

(3). If Theft, he is out of luck?

TP had a claim with the Construction Industry Licensing Board "Recovery Fund" of which he never got any money. But I will clarify that with him. I think he said he could have gone after the 3 partners but they already had too many suits against them and he was considering whether it was worth it. Then in the meantime, the main crook died. His sister held the building license and there were lots of people after her. They took money and didn’t even put a shovel in the ground on many of the jobs. TP was the one responsible for having their license yanked (that’s what he said the State man from Tallhassee told him.)

TTB 4-22 When to Deduct a Casualty of Theft Loss:
· The tax year casualty occurred or the theft was discovered.
· The tax year the reimbursement amount (if any) can reasonably be determined, or it is determined that no additional reimbursement will be received. (Reg.$1.165-1(d)

Do you think he has any chance of calling it a theft in the year he disovered he would not recover anything from the construction recovery fund and/or the year he decided not to sue?

I’m really looking for a way to claim this for him as I think his previous preparer (of 35 years!) did him a disservice.

[sandigi]

Restitution amount

Interesting and informative comments as to the timing of this loss, but I haven't seen where the loss would be $37K. That might be the amount of the award, but the taxpayer only advanced $30K.

I'm assuming there may be some collection expenses involved, but they were not mentioned. These may increase the amount.

What I'm looking at may not be the final order. It is State of Florida Division of Administrative Hearings "Recommended Order" which took a while to find in my google search. The Dept of Business and Professional Regulation, Construction Industry Licensing Board is Petitioner vs Lady License Holder Respondent. (I've renamed her and will call her LLH).

In this Recommended Order, TP is one of 2 witnesses Petitioner called as witnesses. TP is main witness and his facts are presented how contractor took his 30,000, then asked him for an additional 20,630 because labor and material were going up. Still no work started!

The addditional amount of restitution for TP were $5085 construction loan costs and $2500 attorney fees.

The specific wording in this Recommended Order (along with revoking her license and imposing fines for violations of law) says " . . . requiring her to make restitution to TP in the amount of $37,585.15 for consumer harm suffered; . . . "

[geekgirldany]

I am really leaning towards this being a non business bad debt since there was a judgement against the contractor. Roland covered it pretty good in his post. Read up on non business bad debt and the rules on determine when it is worthless. This should really help you with deciding the year that it because worthless and when it can be deducted.

[Burke]

I agree. Non-business bad debt. And it would not have been deemed worthless until some time after the judgment was rendered by the court. Check to see if the contractor filed bankruptcy. That would do it. The fact that he died would be material, especially if he left no estate.

[sandigi]

Great tax court case on THEFT Loss

Thank you to all of you for the terrific input. You had me searching all over the globe for answers.

It can be Theft

I found a Tax Court Case on a construction Theft Loss. Mr & Mrs Urtis took a theft loss for $188,070 on their 2007 tax return. They had paid a contractor to remodel their home and he took the money and died. After using the money for some drugs first. The IRS said TP couldn’t take the loss, and gave them an accuracy related penalty on top of it. The Urtis’ won in Tax Court and were entitled to the deduction for Theft Loss.

The 22 page case can be found here for those of you who want to bookmark it.

http://www.ustaxcourt.gov/InOpHistoric/UrtisMemo.TCM.WPD.pdf

Page 10 says what Theft is intended to mean in Section 165. and clarifies some of the discussion on do they have to get a judgment in court, and discusses false pretences, and is it a crime under state law.

IRS also challenged the year they took the deduction and that is discussed in the case also.

However, my guy can’t take theft loss because his previous cpa ignored his question “Why can’t I take a loss somewhere on this money that contractor stole from me?” Now it is too late.

Roland pointed out that we can go back 7 years and claim the non-business bad debt. Off the top of my head, I’m thinking that might not make sense. TP now has ($287,154) of capital loss carryover. I don’t know how far back it is coming from.

The only thing that would make sense to amend back to 2007 or 2008 is if TP had a big capital gain in one of those years. What do you think?

[Burke]

I don't know that you can pick or choose a year which would benefit him the most. You have to go by what the code says, and that is in the tax year when it can be definitively deemed worthless.

[sandigi]

Towards end of one year

I don't know that you can pick or choose a year which would benefit him the most. You have to go by what the code says, and that is in the tax year when it can be definitively deemed worthless.

Late in 2007 when the Administrative Hearing of the construction industry licensing board (CILB) ordered restitution be paid TP. Then TP's lawyer tried to get some money from the CILB recovery fund but TP said they later found out the recovery fund was broke from this builder and several others who took the money and ran. Then they considered suing the 3 partners on the license and one died, and one or two of the others were filing bankruptcy. I'm fuzzy on some of these details, but his lawyer basically said; don't bother suing because you aren't going to get anything.

I have looked at our official records in my county and some other victims have judgments against the lady license holder for 67,000 another for 111,000 (2 houses) and more that I didn't bother to pull up.

I think TP might be able to say 2007 or 2008 was the year he deemed the debt worthless. Especially, if he was still considering going after the lady license holder personally.

Again, thank you for your input. I truly appreciate it!

[taxea]

This is not a business bad debt...it is a criminal theft of services. If the client can show dilligent attempts at collecting maybe he can justify the delay in reporting the theft loss. I doubt it but I strongly suggest you run this by IRS Special Counsel for a definitive answer.
I am of the mind his prior CPA didn't know how to do it but didn't 1. want to admit lack of knowledge and/or 2. didn't want to lose the income he was getting in client fees.
There otta be a way to recoop his losses from the CPA.

[sandigi]

How?

This is not a business bad debt...it is a criminal theft of services. If the client can show dilligent attempts at collecting maybe he can justify the delay in reporting the theft loss. I doubt it but I strongly suggest you run this by IRS Special Counsel for a definitive answer.
I am of the mind his prior CPA didn't know how to do it but didn't 1. want to admit lack of knowledge and/or 2. didn't want to lose the income he was getting in client fees.
There otta be a way to recoop his losses from the CPA.

Thanks for your answer. I think he ought to be able to do something too. I thought it was theft but most others said non-business bad debt. I don't know how he could claim the theft loss, though, with the 3 year statute. He'd have to say he thought he could recoup up until 2010 (and he pretty much knew in late 2007 or 2008 that he wasn't gonna get any $) and I'd have to get 2010 amended by 04/15/14.

How do I run this by IRS Special Counsel?

[sandigi]

No money from CPA

There otta be a way to recoop his losses from the CPA.

He's dead.

[taxea]

Thanks for your answer. I think he ought to be able to do something too. I thought it was theft but most others said non-business bad debt. I don't know how he could claim the theft loss, though, with the 3 year statute. He'd have to say he thought he could recoup up until 2010 (and he pretty much knew in late 2007 or 2008 that he wasn't gonna get any $) and I'd have to get 2010 amended by 04/15/14.

How do I run this by IRS Special Counsel?

Call PPL and ask for Chief Counsel Office. They are the ones to talk with when you have questions about tax law and they are more upper level than most that we deal with at the IRS.Run the scenario by them for options on how this would be possible in recooping the loss.