How do I take this loss?

Question

I am aware I am foolish; it will not be helpful to tell me that...

13 years ago I lent a company $100,000. They gave me $200,000 worth of gems as collateral; our agreement was that a jeweler I had know for years was to sell them off. I would get half the proceeds as repayment of the loan. She sold about $40,000 worth and then 9/11 happened and the gems decreased dramatically. Shortly after the company went out of business, leaving me with the gems. Since then she has sold another $20,000 that I got, since the company defaulted on the loan. I was told that I couldn't take any kind of loss on the whole mess until the gems were liquidated. Now the jeweler has disappeared. Her shop is closed and her telephone is disconnected.

So what do I do now? I got back about $40,000 of my $100,000, so my loss is $60,000. How do I claim this on my tax return?

ira smilovitz · Accepted Answer

I believe you have two losses each claimed differently. The first loss is the loss on the loan which is $100K less any amounts received from the sale of gems less the value of the remaining gems on the date the jeweler vanished. This loss is a long term capital loss (non-business bad debt).

That said, I would take the position that the loan was liquidated on the date the company folded AND there was no possibility that you would recover anything other than the value of the gems. On that date, you should have recognized the non-business bad debt for the difference between the loan principal less any payments already received and the appraised value of the gems as of that date.

As to the gems which were sold between the date the original loan became worthless/you assumed ownership of the gems and the date the jeweler vanished, each of those sales should have resulted in a capital gain or loss based on the difference between the sale price and the value on the date you "acquired" them.

The second loss is the value of the gems which the jeweler still held when she vanished. This is a casualty loss (theft) subject to the usual rules for claiming such losses.

The one thing I don't understand about this whole situation is why the gems suddenly decreased in value after 9/11. I wonder if there might not be more to this story.

Ira Smilovitz

Stuart A. Bronstein · Answer

If you file a police report you may be able to take a casualty loss.   Do you have a reliable value for the gems that disappeared?

Arthur Kamlet · Answer

I'm glad not be be associated with this case. Without taking a position, if you choose to go with any portion being nonbusiness bad debt, that would be reported as short term capital loss, regardless of dates involved.

It may take a while to recover that loss.

Alan · Answer

TS has posted this various times on this board. I now have to assume TS  keeps posting it to show how many different answers he can accumulate.

How do I take this loss?

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