Business Investment or Theft

[Pookie]

Everytime I go here to type up a question I spend at least 30 minutes reading all the good info. I have to make myself stop or I would be here all day. Thanks for your tips. Now I need some help.
Taxpayer and his wife, are both Schedule C filers and are independent newspaper contractors. They both have OIH and split income and expenses and pay separate people as contract labor. I found a paper with Edward Jones that has the t/p name with LLC. This is just to familiarize you. The t/p and spouse "met" an investor "aha" and set up a company, ABC Holdings, LLC. They wrote checks, gave him cash, set up a credit card for the company, and signed a lease for a building. There were others involved in this also.
After giving the investor $49,000 at various times to make purchases, lease, etc they went to the building and it was locked up with the merchandise they had purchased. They had also charged about $15,000 on the credit card and are still paying this off. They and the others finally figured out the money was going right in the investors pocket so they filed charges and he is in jail.
On the 2003 tax return the preparer filed a theft of the $49,000 on Sch A under personal loss. This created an NOL. They did not elect to carry it forward. In 2005, Another preparer amended and carried it back and changed it to a business theft on Sch B. They lost some EIC over this which makes them owe even more.
When they came in with 2005 to prepare they had listed donations of 'new clothes' of $10,000 to a charity. After further conversation, these clothes were part of the business loss. They had not included this as a prior loss. They just want to forget it since they don't know about the exact cost.
The other thing is the credit card that they have cancelled but are still paying on the note and the interest each year. It was used strictly for the business dealings. They never start the business but spent all this to set it up. They owe about $8,000.
My question is Should I amend the 2003 year to amortize the start up expenses on Schedule C and amend the 2001, 2002 since the carryback was of no benefit to them.
They have the payments they are still making and the interest. What about the clothing?

[Roland Slugg]

Theft loss

Dear Pookie

Whew! The longer I read, the confuseder I got.

Based on what I think you wrote, the T/P appears to have suffered a business theft loss of about $64,000 in 2003 ... $49k given to the crook and another $15k charged on the credit card. This assumes, of course, that the purchases were all for legitimate business expenses. If only $49k was claimed, either on the original return or the amended return filed in 2005, wasn't the additional $15k omitted?

Regarding the clothing, if it wasn't mentioned until 2005, I'd be skeptical that it was somehow related to the 2003 fiasco. Were the people going into the clothing business? Deal with that issue on its own merits and based on the relevant facts.

The payments the T/Ps are now paying on the CC debt are not deductible, except for the portion of the interest that relates to the original theft stuff.

If the stolen funds were poured into what would have been a "business," then the theft loss was fully deductible via F-4684, then to F-4797, then to F-1040, line 14. It did not belong on Schedule A, and it certainly didn't belong on Schedule B, where you said the preparer put it when he prepared an amended return. Did you mean Schedule C?

The year 2003 is still an open year, but if an NOL was carried back to 2001/2002, I believe it is too late to change that election. If I'm not mistaken the election to forego the carryback must be made on the original return and is not revokable. However, it is not too late to correct the calculations, of both the loss occurring in 2003 as well as the affect on 2001's and 2002's taxable income ... and even later years if some of the NOL remains.