Losses on a bad investment?

I haven't checked "Provident Royalties" in particular, but you are allowed a theft loss in the year of discovery. A safe harbor election for the year of discovery is the year of indictment, or the year the bankruptcy receiver was appointed. If you expect or are seeking third-party recovery, you can claim, as a safe harbor election, 75% of your balance amount; if not, 95%. The "balance amount" (my term) is investments plus taxed returns less actual payments less expected SIPC recovery. The definition of "third-party recovery" is fairly clear, the definition of whether you are seeking third-party recovery is less so.

See Revenue Ruling 2009-09 and Revenue Procedure 2009-20 for more details.

I see from a Google search that Provident Royalties declared bankruptcy in 2009. If that is correct, you would have had to have filed an amended 2008 or 2009 return to claim the loss; as those years are closed, I think you have no tax recovery left.

It's possible that you can claim a theft loss in the year of final settlement; some have had success in cases where the amount of recovery is undetermined, but the law and your observation that recovery seems unlikely weigh against it.

-- Arthur L. Rubin, CRTP, AFSP Brea, CA

If the investment became worthless in 2009, that year is still open for amendment. You get 7 years for a worthless security, not the usual 3. (This is not a comment on whether "worthless security" is the appropriate claim in this situation.)

Ira Smilovitz

declaring bankruptcy does not necessarily mean a final determination of zero value.

I agree, but I was addressing your comment that an amended return couldn't be filed for 2008 or 2009 because those years were closed. They're still open for claims due to worthless securities. And... filing for bankruptcy would only be the first step in "achieving" worthlessness. Any final determination would have been more recent and certainly in an open year.

All that said, the casualty loss claim is probably more beneficial than the worthless security claim.

Ira Smilovitz

I confess that I don't understand everything above. I didn't imagine it was so complicated and that there were limitations based on when the loss occurred.

I had thought that the losses couldn't be declared until the case was resolved and it was decided what the loss was - since there could have been assets that remained to be distributed to the holders of the security. However I didn't follow the case closely and don't know whether or when there was any final resolution.

In further searching yesterday I read that the creator of the security faked his own death in 2012, disappearing after leaving a suicide note, but was found and arrested by the FBI in 2014.

I will do more research, trying to figure out what "casualty loss" means and how to claim it, the meaning of "worthlessness" and so on.

Sometimes I think I'd rather scrape my skin with sandpaper and roll in salt (a line from Wally in the Dilbert cartoon that seems particularly apt) than read IRS publications.

Thank you very much for your help. If anyone has any more information, ideas, references, or opinions, please don't hesitate to chime in. I'll keep monitoring the thread.

Alan

To my surprise, it turns out that there are special rules for victims of Ponzi schemes. I never imagined that. However, following up on Mr. Smilovitz's lead on casualty loss, I came across the Ponzi scheme materials.

Searching irs.gov for "ponzi" gets a bunch of hits.

Thanks.

Alan

I agree, but I was addressing your comment that an amended return couldn't be filed for 2008 or 2009 because those years were closed. They're still open for claims due to worthless securities. And... filing for bankruptcy would only be the first step in "achieving" worthlessness. Any final determination would have been more recent and certainly in an open year.

All that said, the casualty loss claim is probably more beneficial than the worthless security claim. ============= Without knowing the taxpayer's situation, claiming that a casualty loss is more beneficial than a worthless security write-off is a claim that can't be known.

A casualty loss will get a $100 and 10% of AGI trims. A worthless security will eventually be recovered in full, although it may take many years.

Without knowing the taxpayer's AGI and age (therefore life expectancy, to see if full recovery in one's lifetime is probable) as well as the amount lost, one cannot compute which choice is better.

This is more complicated than what is in the replies. This was an oil and gas private placement ponzi scheme. The executives involved were ultimately sentenced to prison in 2013. The company went into bankruptcy. Investors should have been notified and asked to file a claim with the bankruptcy court. 7786 investors did. Typically this is an opt-in offer. I.e., you fill out some forms that tells the trustee handling this the dates of your investments and the dates you received payments and how much you lost (what you invested less any distributions). Over time, as the trustee files suits and collects money, the investors would get back some of their stolen money (yes this is a theft loss). Think Bernie Madoff. The IRS published a revenue ruling regarding how one can claim a theft loss for these types of Ponzi schemes without having to wait for resolution and without having to come up with all the documentation typically required for a theft loss. Theft losses are reported in the year of the theft. This was known as a safe harbor. Effectively, you could take the loss in the year of discovery. If you didn't take the safe harbor, then you would have to use the normal theft loss rules. Distributions to the claimants have been made by the trustee. There is still one open suit that could generate more of a recovery.

is the website for the trustee handling the case for the 7786 investors in Provident Royalties bogus oil and gas investments. I advise you read the information on their site. There is a contact us page.

Thank you Alan.

I contacted the liquidating trust and was referred to the tax info on their FAQ page - which I'm studying.

I appreciate the efforts of everyone who has replied.

(another) Alan