Discussion:Invest in mutual fund with insured/guaranteed principle - Large loss and bankrupted insurance company. Now what?

Company B's mutual fund performed very poorly and due to the polcies of Company A, all money was pulled from the fund. The value of the initial investment was far smaller then it started at.

Due to the large decline in value, Company C (the insurance company) was unable to cover the difference. In 2005, Company C filed Chapter 11.

Company A, was able to obtain 10,000 of the principle from Company C, and has entered into a lawsuit which is currently pending ... but has not received anything else at this time.

Between 2000-2004 a net loss of 9,900 was documented within the respective tax returns.

My questions: 1. What are the tax consequences? I believe she is entitled to claim a loss deduction, but how much? (I think its 60,000 - 10,000) 2. Is it correct to claim a loss if the laqsuit has not been settled yet? 3. If the initial principle resulted in a net loss of 9,900, then wouldn't the 9,900 be accounted for and no further tax consequences would be realized?

This situation sounds a bit like the schemes in the early nineties where someone would invest in a CD recording artist and be guarenteed xxxxxx dollars, but then lost every penny and then tried claiming the full loss on their return. From what I recall, the IRS did not like this too much.

Was the client actually the owner of the mutual fund and some sort of insurance policy, or did she just own a variable annuity or something?

And you are correct, Company A filed chapter 11, not the insurance company.

The client merely gave money to company a to invest in a particular mutual fund of Company B.

So to recap: Comppny A invested clients money in Company B, which was insured by Company C. Company A lost a ton of money and has yet to receive the rests of the insured principle from Company C. Company A then bankrupted, and has lawsuits filed against them.

All the documentation I have references the fund as being a "mutual fund". The fund was made into Rydex Nova Fund amd Rydex OTC funds.

Additionally, identify who A is: a brokerage firm or money manager? Maybe your client still owns the mutual fund, in which case no loss is recognized yet until disposition of the shares.

Kevin .. I understand that, but nevertheless that is what all the documentation references.

Company A managed the mutual fund investment program, which was invested into Company B. Company A purchased a Registered Investment Advisor's Liability Insurance Policy ("Policy") from Company C. The Policy, in essence, insures against a net loss in principal to mutual funds under Company A's control that result from a failure of the risk management strategy (i.e., Company A's investment strategy).

Was Company A obligated to return the full 60,000 to the client and failed to do so? Or, was Company C obligated to directly pay the client the difference and failed to do so?

Company A did not have the money to fufill there warranty at the date of maturity. Thus they had to go thru Company C to obtain additional funding. The difference (less the 10,000 received) has not been disbursed yet.

In any event, if the client has sold all of their shares in the fund (assuming it was not in a qualifed plan or IRA), then they can take the loss between what they received and their basis.

If they haven't sold the shares of the fund yet, they have no deductible loss.

All shares were sold. 9,000 net loss was already recognized over the course of 5 years ... so I believe it would be the 60k - 10k received = 50k net principle loss.

Also Company A did many screwy things! It was essentially a mom and pop operation with a bunch of glittery and shiny brochures to real its clients in.

and what exactly WAS the whole loss?

I don't believe that the mutual fund went to zero.

(I also think that the '$10,000' claim paid is related to the $9,900 lost. In which case the taxpayer has absolutely no loss.)

in fact, he has to claim the '$10,000' recovery as income if he has previously claimed the loss.