This is a situation where, in practice, I would ask for permission to speak directly to your attorney and obtain any official court records. I would look to determine the true and rightful owner of the home and investments at the time of the estate and proceed accordingly.
Your attorney's fees in this case should be deductible under IRC 212:
In the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year-
(1) for the production or collection of income;
(2) for the management, conservation, or maintenance of property held for the production of income; or
(3) in connection with the determination, collection, or refund of any tax.
As far as your theft loss goes, IRC 165 above would apply.
Now for the tricky part. NOL (net operating losses) apply to theft and casualty losses. Let's start with an IRS pub, here (bolding mine):
"Net operating loss (NOL). If your casualty or theft loss deduction causes your deductions for the year to be more than your income for the year, you may have an NOL. You can use an NOL to lower your tax in an earlier year, allowing you to get a refund for tax you have already paid. Or, you can use it to lower your tax in a later year. You do not have to be in business to have an NOL from a casualty or theft loss. For more information, see Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts."
The tax code behind the above can be found here, in IRC 172:
"(ii) Eligible loss For purposes of clause (i), the term "eligible loss" means- (I) in the case of an individual, losses of property arising from fire, storm, shipwreck, or other casualty, or from theft,"
Finally, if you can get a 1099C in your aunts' hands, that might be good. 1099C is for forgiveness of debt (ie... you don't sue for the house, but if you at least recognize a debt owed to you by your aunts, you can forgive that debt, solidifying a deductible bad debt loss for you and forgiveness of debt income to your aunts). If you don't claim this as a theft or other loss, the IRS could actually construe this as a gift too, in which case you would have to file a gift tax return (probably just a reportable, and not a taxable, gift, pending you specific facts and circumstances).
Does it seem like you have a deductible loss over JustAnswers? Absolutely. While I realize you have spent $ already, I can assure you, it is worth a little more at this point to have a quality tax professional assist you. Schedule an appointment and come with your code sections handy (IRC 212, IRC 165, IRC 1014, and IRC 172 all above).
I am very sorry for your loss... Hopefully you are are able to find some resolution.
Thank you again for your question too!
Edited by BK-CPA on 1/7/2011 at 12:58 PM EST