Accepted Answer

You can claim this as a loss of capital investment and so a capital loss. Since the settlement was decided in 2006, the loss would be first recognized in 2006.

Capital losses can only be deducted to the extent of capital gains for the year, plus another $3,000 ($1,500 if you use married filing separate status). Any balance capital losses get carried forward to the following year, and is subject to similar limitation in future years.

There is a possibility that this may also be considered as a business loss however that would be an aggressive move. You may want to get a tax opinion from a professional or an Attorney with full detailed information on your case before you claim it as a business loss. Business loss can offset your other income without any limitation.

Let me know if you have any question.

Please note: This advice is provided with the understanding that all the relevant facts have been provided by you. Any change in facts might affect the advice given and hence may not be relied on in such cases. Nothing contained in this reply was intended or written to be used, can be used by any taxpayer, or may be relied upon or used by any taxpayer for the purposes of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code of 1986, as amended.

 

Expert:	RD
Pos. Feedback:	99.4 %
Accepts:
Answered:	11/6/2009

Certified Public Accountant (CPA)

CPA, MBA, Over 10 yrs of experience in tax planning and business consulting..