Windjammer Timeshare is loss deductible?

[Zee]

I know the loss on the sale of a personal timeshare isn't deductible, this is a different situation. Windjammer Cruises sold timeshares on a pre-construction basis for tall ships that were supposed to be converted to timeshare units. Like a timeshare, people purchased weeks to be used when the ship was complete. So, these weren't really sold as investments, rather for personal use.

Windjammer went bankrupt. The ships were never converted and have been repossessed by creditors. They are rotting in port somewhere in the Caribbean. It appears fraud was involved.

IMHO, the loss isn't deductible because they were purchased as personal assets for entertainment purposes. However, if it's proven fraud was involved, is it possible this is deductible theft loss?

I'd appreciate any opinions.

[erchess]

I don't see

why a timeshare on quarters aboard a ship should be different from a timeshare on quarters anchored to real estate or from a house. I am spelling all that out in case someone with more knowledge than I have wants to give us a cite to the contrary. It seems to me that in all these situations if there is fraud proven then you would have the basis for a casualty loss.

I do wonder in what country the fraud charges will be brought. Your best hope obviously is the US and probably your next best hope would be Europe. I personally have no knowledge of or opinion about court systems in the Caribbean Islands but I have a feeling that our Internal Revenue Service would look down on most of them especially if doing so allowed the service to disallow a tax deduction.

The other problem I see is that in a complex case such as this things may move slowly. You may get your court decision after the taxable year has closed.

[Zee]

Update

After reading more on this situation, I'm not sure "fraud" is going to be that easy to prove. There just doesn't seem to be enough evidence of "fraud"...bozo decisions, yes...

As such, IMHO no deduction is available.

[erchess]

Yes

Let's make sure we are on the same page here. Is Windjammer a corporation ? Before the timeshare business did they operate sailing yachts to carry tourists around the Caribbean and allow interested tourists to serve as crew? So did they then start taking money for timeshares aboard boats which they commenced to build? And then either these timeshares were a legally separate venture and it went under or the whole of Windjammer went under because it couldn't pay its debts due to bonehead business decisions?

If the story is something like that Fraud charges would be possible but unusual. I believe it would be necessary to prove that someone in the company wanted to take your client's money for himself or for the company without delivering the timeshare. If there was not fraud then there can be no tax recovery of the loss unless the purchase was made for business or investment purposes - he intended to take business clients on vacation or let them go without him or he intended to sell the timeshare at a profit. I believe you have said none of that applies.

Btw even if there is proven fraud it's only a personal casualty so that $100 gets subtracted from each distinct personal casualty and 10% of AGI gets subtracted from the aggregate of the remaining personal casualties. I can only remember one client who got any savings from a personal casualty. He had a mobile home, a dock with a covered boat slip and a large boat all totaled by Hurricane Fran in the late 90s. He was happy but I don't remember the details. Probably he ended up not paying tax on an amount equal to most of his loss.

[Zee]

Fraud would qualify as a theft loss, not a casualty loss and the rules are very different:

THEFT LOSS VS. CAPITAL LOSS

A Sec. 165 theft-loss deduction can be more advantageous than a mere capital loss:

* A theft-loss deduction is an ordinary deduction that is not subject to the limitations imposed by Sec. 1211.

* A theft-loss deduction is not a miscellaneous itemized deduction subject to the 2 percent floor imposed by secs. 67(a) and 67(b)3.

* A theft loss is excluded from the phase-out of itemized deductions required by Sec. 68(b).

* A theft loss that exceeds a taxpayer's gross income gives rise to a net operating loss that is not subject to the limitation imposed on nonbusiness deductions of individual taxpayers [Sec. 172(d)(4)(C)]. A net operating loss resulting from a theft loss may be carried back three years or carried forward for 20 years [Sec. 172(b)(1)(A) and 172(b)(1)(F)].

* A theft loss can be used to reduce a taxpayer's tax liability to zero without resulting in any liability for alternative minimum tax [Sec. 56(b)(1)(A)(i) and 67(b)(3)].

The Windjammer situation is very complex. There were various trusts involved and the incorporation is in some Caribbean location or sovereignty not subject to US laws. Other parts of the business offered the Windjammer cruises. If you'd like to learn more there lots online. It's a sad situation. Many people weren't even notified of the company's problems and countless flew to the Caribbean for their cruise only to be told it was cancelled with no renumeration. The timeshares were to be on one of the ships that was to be refurbished with the others. The founder's family inherited the business, and there was lots of family squabbling. There aren't enough assets to pay the creditors, and very poor communication. But, all ships have been seized by governments.

[Bees Knees]

Fraud would qualify as a theft loss, not a casualty loss and the rules are very different:

THEFT LOSS VS. CAPITAL LOSS

A Sec. 165 theft-loss deduction can be more advantageous than a mere capital loss:

A theft loss and a casualty loss are one in the same. Your comparison list with citations was between a theft/casualty loss vs. a capital loss.

[Zee]

A theft loss and a casualty loss are one in the same. Your comparison list with citations was between a theft/casualty loss vs. a capital loss.

Yes, of course, you're correct! What was I thinking? Thanks.

I asked the Windjammer question out of interest. I don't have a client with the Windjammer problem, but I'm a member of a timeshare group where I'm sure many invested in the Windjammer timeshares. A magazine article about the problem suggested the loss might be deductible.

I would agree it's a personal loss subject to those rules, if anything at all can be deducted. I don't think investor's in the timeshares purchased them to resell, rather to use them each year.

The situation isn't much different than that of many folks her in Florida (and elsewhere) that deposited money with a builder and signed a contract to build a home only to have the builder file for bankruptcy before the home was started, or in-process.

So, that might be an easier question. Is the loss deductible on money deposited to a home builder in a bankruptcy situation? I don't think so.

But,often those home builder bankruptcies seem to be tainted with fraud. So, at what point does it become fraud, and a theft loss? After adjudication, or determination by the courts that fraud was involved?

[gkaiseril]

Do Not Forget State Income Tax

There might not be much of a difference in federal taxes as whether this is a capital gain/loss item or theft/casualty. But the choice for claiming the loss can affect the state income tax as may states with an income tax start at or before the AGI so any schedule A items would not affect the state income tax but a schedule D item could lower it.

Of course was this an investment or personal item? If personal, you will not get the Schedule D loss.