scammed in Ponzi scheme

[Daisy]

A client gave $15,000 last year to an "investor" who promised to double his money every 30 days, by investing in the forex market.

By December 2006, the "investor" was arrested, but not yet convicted, of operating this ponzi scheme. Last week, April 07, the "investor" was convicted and sentenced to 10 years in prison and as much as he can pay back over the course of his life.

The judge said he wanted to give him the max of 40 years, but then he wouldn't be able to work to be making the money to pay these people back.

They sold all of his stuff, cars, etc, and have about 1 million, that they are going to use to pay back some of these people. The total outstanding loss, for all of the people scammed, is about 4 million.

Any insight on the tax treatment for this client? Can he claim the $15,000 as a loss and then each year he gets money back, he will need to claim it as income?

If so, he paid the $15,000 in 2006, but the "investor" wasn't convicted until 2007, so would he take the loss on this 2006 return? Or 2007?

Thanks for your help!

[Luis Mopeo]

A client gave $15,000 last year to an "investor" who promised to double his money every 30 days, by investing in the forex market.

By December 2006, the "investor" was arrested, but not yet convicted, of operating this ponzi scheme. Last week, April 07, the "investor" was convicted and sentenced to 10 years in prison and as much as he can pay back over the course of his life.

The judge said he wanted to give him the max of 40 years, but then he wouldn't be able to work to be making the money to pay these people back.

They sold all of his stuff, cars, etc, and have about 1 million, that they are going to use to pay back some of these people. The total outstanding loss, for all of the people scammed, is about 4 million.

Any insight on the tax treatment for this client? Can he claim the $15,000 as a loss and then each year he gets money back, he will need to claim it as income?

If so, he paid the $15,000 in 2006, but the "investor" wasn't convicted until 2007, so would he take the loss on this 2006 return? Or 2007?

Thanks for your help!

Casualty and theft losses, pages 4-20 to 4-23 of TheTaxBook. A theft loss is deductible in the year the theft was discovered. Sounds like 2006 in this situation. I wouldn't count on the reimbursement. If the guy's in prison for 10 years it's not like an expected insurance reimbursement. Take the deduction then report income in future years if reimbursement ever happens.

[Daisy]

Ponzi scheme

Casualty and theft losses, pages 4-20 to 4-23 of TheTaxBook. A theft loss is deductible in the year the theft was discovered. Sounds like 2006 in this situation. I wouldn't count on the reimbursement. If the guy's in prison for 10 years it's not like an expected insurance reimbursement. Take the deduction then report income in future years if reimbursement ever happens.

That's what I thought, but wasn't sure if it would be when he was arrested for the crime, 2006, or convicted of the crime, 2007.

I appreciate your reply!

[ChEAr$]

Investment or theft?

You spoke of the 15000 as an investment in forex. (I had same apprehensions for one
of my clients, too, but it turned out okay.)

What's the difference between an investment and a theft? Oh, about 10% of AGI.
Whereas a capital loss, while limited to 3000 per year, at least can be totally
recouped.

[Daisy]

You spoke of the 15000 as an investment in forex.

What's the difference between an investment and a theft? Oh, about 10% of AGI.
Whereas a capital loss, while limited to 3000 per year, at least can be totally
recouped.

He thought it was an investment (I told him, always run from any "investment" that guarantees to double your money every 30 days).

As far as I'm concerned and the FBI and judge, it's a theft, at his sentencing, he was apologizing to his "clients", the judge said, 'those aren't your clients, they are your victims'.

Could this be considered enough of a gray area, where maybe we can treat it as either an investment or a theft? I always see things in black and white, but maybe I will look into treating it as an investment, I was immediately under the assumption it had to be treated as a theft.

By the way, for any of you in Virginia, this is the James Brown Investments situation in Richmond. Anyone know Virginia treatment of this? He doesn't live there anymore, but I may try to find him a Virginia preparer.

[Jade06]

This is definately theft. He was even arrested in December of that same tax year.

Jade!!

[Roberts]

I didn't read it all...

but if this guy was able to double their money every 30 days that sounds like a wonderful investment for my golden years. Do you have his phone number?

Wait, maybe I better read the entire thread.... oh heck, no time for that.

[GIMoe]

Phone Number

but if this guy was able to double their money every 30 days that sounds like a wonderful investment for my golden years. Do you have his phone number?

Wait, maybe I better read the entire thread.... oh heck, no time for that.

His number used to be 1-800-Looking-4-A-Sucker.

But he recently had it changed to 1-800-Busted-And-Doing-Time.

[Daisy]

but if this guy was able to double their money every 30 days that sounds like a wonderful investment for my golden years. Do you have his phone number?

Wait, maybe I better read the entire thread.... oh heck, no time for that.

At least this guy just lost his savings, his buddy took out a large 401K loan to invest, now has to pay back the 401K loan!

Why are people thinking? The FBI did say this guy was good and really convincing, and since he had already paid out people before, it looked really legit. These guys got to talk to people whose money really did double.