I have a client who inherited her mother's estate and realized about $1.7 million at the sale of the family home. The man who purchased the place was "so nice" and after a lot of wining and dining, he invited her to invest in his real estate "empire". She gave him $1.1 million. For about 3 years she has been receiving $16,000 a month that he called interest. She was real happy about this, but recently she was visited by an investigator from the IRS Criminal team who was asking her questions about this man. Turns out that he had set up two corporations for her that were for the purposes of buying and selling properties. She found out that he had his name on her bank account and that the corporations had not filed tax returns since their inception. They were corporations formed in Wyoming. His name was on the corporation as well as her name. She discovered that the corporations also had not paid their yearly taxes to the state of Montana and so had gone dormant. She now is receiving $10,000 and believes that he is just paying her principal and not interest and she got him to sign a document stating such. She is wanting to claim the loss of the interest she expected. Can you help me support the denial of her request.
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"She is wanting to claim the loss of the interest she expected. Can you help me support the denial of her request."
I'm not sure I follow all the prologue you related, but if you are asking simply, how do you get her to understand that you can't claim a loss on something for which you never reported the income in the first place, that will probably be an uphill battle given her apparent lack of understanding of other financial matters.
Maybe this will help: suppose she bought a lottery ticket and expected to win a prize (otherwise, why buy it?). But it turns out she does not win anything. Ask her if she should be able to deduct the value of the lottery prize she expected to receive but did not.
She has already gotten back about half of her $1.1 million investment (36 months times $16,000), but if she paid tax on all of that, what a shame. Did she really think that over 17% annual interest, for 3 years without interruption, was normal or legitimate?"You said it, they'll never know the difference. Come on, we'll paint our way out!" - Moe Howard -
I don't know all the workings of a Ponzi Scheme but isn't she a victim of one?This post is for discussion purposes only and should be verified with other sources before actual use.
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"She is wanting to claim the loss of the interest she expected. Can you help me support the denial of her request."
The other approach is that if she still can't understand it, show the not-received interest as income, and then offset it with a negative number and tell her, there is her deduction, plain as day."You said it, they'll never know the difference. Come on, we'll paint our way out!" - Moe HowardComment
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