Discussion:Theft loss/ponzie scheme
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Discussion Forum Index --> Tax Questions --> Theft loss/ponzie scheme
Nancyshoemake (talk|edits) said: | 28 April 2008 |
| I have a client that had invested in "pay phones" in the 1990s. It turned out to be a theft/ponzie scheme and the auditor is treating it as a loss limited to 10% of agi. There had been depreciation taken back in the 1990s and she thinks it is a personal loss. Can anyone help me out regarding that this business/investment loss should be at 100% | |
| April 28, 2008 | |
| Sure sounds like either investment or biz loss depending on level of activity by the investor. Maybe auditor just trying to toss it with the first throw. | |
RoyDaleOne (talk|edits) said: | 28 April 2008 |
| Nancy, how did you report the loss on the return? | |
RoyDaleOne (talk|edits) said: | 28 April 2008 |
| If the pay phones were on Schedule C or E that is were you should have taken the theft loss.
See code Section 165 it is very clear. Business loss. From what type of activity did the loss arise? Business - Business -- Personal - Personal. | |
Nancyshoemake (talk|edits) said: | 29 April 2008 |
| RD1...the loss arrived from a Schedule C business loss back in the late 90's through about 2003. Then there was no business. This auditor has been ridiculous - initially telling me I can't take any loss because there was no basis in the phones since he received money from an inheritance to purchase them... YEP! That is what I am dealing with...So now she is saying that it is a personal loss and that is how she is treating it. I told her this is ludicrous and want to find some type of "substantiation" for my point. But to answer your question, Schedule C. | |
Nancyshoemake (talk|edits) said: | 29 April 2008 |
| JR - I agree! | |
Death&Taxes (talk|edits) said: | 29 April 2008 |
| What did he buy? Depreciable assets? A route? A franchise? That he operated it in the late 90s through 2003 indicates it did produce revenue, so he must have received assets to depreciate. So besides the write down of the remainder of the assets, what comprises the loss? Could this have been deducted on Form 4797 without raising the issue of theft? | |
Nancyshoemake (talk|edits) said: | 29 April 2008 |
| pay phones! Yes I took it as a 4797 loss but the auditor is saying this is a ponzi scheme limited to 10% of agi. I just sent her a fax wanting to discuss this with the manager because even if they want to go that route it is under 165 (c)(2) not subject to 10%. | |
Death&Taxes (talk|edits) said: | 29 April 2008 |
| Now I understand: it was the auditor who classified it as a Ponzi, not you. You might send along this from Wikipedia. It shows that the term "Ponzi" does not only include widows and orphans but businesses:
"For the next few months he worked at a number of businesses, before hitting upon an idea to sell advertising in a large business listing to be sent to various businesses, an idea which others would later, independently, invent as the Yellow Pages. Ponzi, unfortunately, was unable to sell this idea to businesses, and his company failed soon after. A few weeks later Ponzi received a letter in the mail from a company in Spain asking about the catalog. Inside the envelope was an international postal reply coupon (IRC), something which he had never seen before. He asked about it and found a weakness in the system which would in principle allow him to make money. The purpose of the postal reply coupon was to allow someone in one country to send it to a correspondent in another country, who could use it to pay the postage of a reply. For use within the same country, postage stamps would be sent; but stamps issued by one country cannot be used in another. IRCs were priced at the cost of postage in the country of purchase, but could be exchanged for stamps to cover the cost of postage in the country where redeemed; if these values were different, there was a potential profit. Inflation after the First World War had much decreased the cost of postage in Italy expressed in U.S. dollars, so that an IRC could be bought cheaply in Italy and exchanged for U.S. stamps to a higher value. The process was: send money abroad; have IRCs purchased by agents; send the IRCs to the U.S.A.; redeem the IRCs for stamps to a higher value; sell the stamps. Ponzi claimed that the net profit on these transactions, after expenses and exchange rates, was in excess of 400%. This was a form of arbitrage, or buying low and selling high, which is not illegal. Ponzi canvassed friends and associates to back his scheme, offering a 50% return on investment in 45 days. The great returns available from postal reply coupons, he explained to them, made such incredible profits easy. He started his own company, the Securities Exchange Company, to promote the scheme" What this auditor is doing is slandering Ponzi, a man who is probably related to my Valerio side of my family way back when.....like my great uncle who business was wiped out in the Crash of '29. Seems a broker jumped out a window and landed on his pushcart. | |
Nancyshoemake (talk|edits) said: | 29 April 2008 |
| love it...thanks David. | |
| 30 April 2008 | |
| Nancy, suppose you went along with the auditor and classified the loss as a loss from a Ponzi scheme. As you noted above, a loss from a Ponzi scheme is not subject to the 10% or $100 floors. Internal Revenue Code §§ 165(c)(2), 165(h)(1), 165(h)(2), and 165(h)(3).
In addition, a loss from a Ponzi scheme is not subject to the 2% miscellaneous itemized deduction floor. Internal Revenue Code § 67(b)(3). Thus, you really wouldn't be losing very much by agreeing to treat this as a nonbusiness transaction. | |
