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Lane
Lane, JD, CFP, MBA, CRPS
Category: Finance
Satisfied Customers: 10149
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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As on the Gepco stock I received notice from justice

Customer Question

As a follow up on the Gepco stock I received notice from justice department That the main person involved in fraud case has pleaded guilty to fraud Sentencing is scheduled for November I sent scheduled of losses to them in case there is any retribution
Question is I have losses on stock I own that is valued best zero Can I tell broker to sell and take as an ordinary loss under the fact it was fraud and ponzy scheme
Submitted: 1 year ago.
Category: Finance
Expert:  Tax.appeal.168 replied 1 year ago.

Please advise as to what question this is a follow up to.

Customer: replied 1 year ago.
I had asked other questions regarding Gepco if you look at my history you will see
Expert:  Tax.appeal.168 replied 1 year ago.

You requested me to answer this "follow up" question. As for your question history, I do not have access to that. In addition, I do not remember answering any questions relating to Gepco stock. Correct me if I am wrong by providing a link to the initial question. If I did not answer a question relating to Gepco stock, this would not be a follow up question for me and I decline to answer this question.

Expert:  Lane replied 1 year ago.

Hi,

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I can help here.

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The answer is actually twofold:

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If you sell for loss then this is simply a capital loss and treated that way for tax purposes

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If you treat this as a ponzi scheme loss you will claim this as a theft loss

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Then subsequently, if there IS restitution. under a provision of law known as the tax benefit rule, a taxpayer must include in income the recovery of any amount deducted in a prior taxable year to the extent the prior year’s deduction reduced the taxpayer’s tax liability for that year (or created a net operating loss carryback or carryover). For example, if a taxpayer properly deducts a $100 theft loss in 2009, and the deduction reduces the taxpayer’s 2009 income tax liability, a recovery of $100 received in 2011 is includible in full in the taxpayer’s income in 2011 under the tax benefit rule. Similarly, if the 2009 theft loss exceeds the taxpayer’s 2009 taxable income and creates a net operating loss carryback or carryover, a recovery of $100 received in 2011 is includible in full in the taxpayer’s income in 2011. The recovery is ordinary income and not capital gain.

Customer: replied 1 year ago.
Sorry
How do I send you the previous related questions
My question is if in fact the justice department has concluded this was fraud and part of a ponzu scheme shouldn't I take the loss as a ordinary loss
The defendants have pleaded guilty
Expert:  Lane replied 1 year ago.

Let me see if I can search by our user name

Expert:  Lane replied 1 year ago.

OK, yes, an ordinary loss (but subject to a specific process).

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You can complete Form 4684, Section C: Theft Loss Deduction for Ponzi-Type Investment Scheme. This is called the safe harbor method.

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The loss, or “qualified investment,” includes:

  • Cash and the basis of other property you invested in the fraudulent scheme
  • Plus "phantom" income on which you paid tax in prior years
  • Minus any cash or property you withdrew from the arrangement

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To find the deductible theft loss:

  • Start with 95% of the qualified investment (or 75% if the investor is pursuing any potential third-party recovery).
  • Subtract these:
    • Actual recovery
    • Potential insurance
    • Securities Investor Protection Corp. (SPIC) recovery

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Here's an excellent overview: http://www.hrblock.com/tax-answers/services/jsp/article.jsp?article_id=56972

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The safe harbor rule simply refers to the fact that IRS will automatically accept Ponzi-type theft losses.

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Under this rule, the IRS will deem the loss to be the result of theft if: (1) the scheme’s promoter was charged under state or federal law with fraud, embezzlement, or a similar crime; or (2) the promoter was the subject of a state or federal criminal complaint alleging commission of such a crime, and (3) either there was some evidence of an admission of guilt by the promoter or a trustee was appointed to freeze the assets of the scheme.

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But yes in using the 4684, you be calculating an ordinary loss.

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Hope this helps

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Lane

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If this HAS helped, and you don't have additional questions on this, I'd appreciate a positive rating (by clicking the stars or smiley faces on your screen) ... that's the only way I'll be credited for the work here.
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Expert:  Lane replied 1 year ago.

Did you see my answer?

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I think I've addressed everything

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Let me know if you need more here

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Lane

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If this HAS helped, and you don't have additional questions on this, I'd appreciate a positive rating (by clicking the stars or smiley faces on your screen) ... that's the only way I'll be credited for the work here.
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