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payment by Legal settlement on Ponzi scheme

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    payment by Legal settlement on Ponzi scheme

    Hi need your advice on the payment by by Legal settlement.
    My client lost around $700,000 (!!!) due to a investment fraud ( Ponzi scheme ). She has been working with lawyers to get them back as much as possible.
    last year she had a settlement with the brokerage company on $28,500 and 1098-MISC for that.
    Does she need to include $28,500 as other income ? or anyway to exclude it as nontaxable income ?
    Thank you

    #2
    Was the loss ever taken?

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      #3
      yes, only $3,000/year as a capital loss for 2 years ( by the previous tax preparer )

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        #4
        Originally posted by Will610 View Post
        yes, only $3,000/year as a capital loss for 2 years ( by the previous tax preparer )
        What have you researched so far?

        https://www.irs.gov/newsroom/help-fo...stment-schemes
        Always cite your source for support to defend your opinion

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          #5
          TAXNY , I read the site but no mentioning on the settlement fee.
          MDEA, 6,000 loss has been used as a capital loss. but I think she should claim it as a theft loss.
          What I can't figure out is if 1098-misc was issued for the settlement payment has to be included in income.

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            #6
            Originally posted by Will610 View Post
            TAXNY , I read the site but no mentioning on the settlement fee.
            MDEA, 6,000 loss has been used as a capital loss. but I think she should claim it as a theft loss.
            What I can't figure out is if 1098-misc was issued for the settlement payment has to be included in income.
            Did you read the q & a ?
            Always cite your source for support to defend your opinion

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              #7
              Based on your statements about taking a capital loss of $3K for 2 years, the TP apparently did not claim a Ponzi scheme theft loss. If it is still within the 3 yr amended period, then it appears they would have to amend to claim the required safe harbor amount for the year in question (IMO based on reading the IRS ruling/procedures mentioned above.) If the TP qualifies for the 95% deduction, that would be $665K, a difference of $35K, which is less than the amount received of $28,500, so the amt received would not be taxable until the recovery amount exceeds $35K. Non-taxable amt remaining for future years would be $6,500. (I think you mean a 1099MISC form was received to be reported as income, not 1098.) I would think such a large loss would generate an NOL.
              Last edited by Burke; 07-07-2019, 02:49 PM.

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