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Arthur Rubin
Arthur Rubin, Tax Preparer
Category: Tax
Satisfied Customers: 1561
Experience:  22 years of tax preparation experience, including individual, trust, and estate returns.
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Hello! By inheritance, I received church bonds. These were

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By inheritance, I received church bonds. These were investments held by the Alanar Group which went into receivership some years ago for fraud and theft of investments. The receivership has been making payments to church bond investors of 11% per year of the principle, no interst.

My question is regarding the Fraud Recovery Group, Inc. They want to file the IRS 165(c)(2) for years 2005-2008. In talking with them, it is the return of all taxes paid for the above years.

Before continuing any further inquiries with them, I need sound tax advise that this group is on the up and up. If it sounds to good to be true, it usually is.

Appreciate your help.

Nancy Dunn
Centre, Alabama
Submitted: 7 years ago.
Category: Tax
Expert:  Arthur Rubin replied 7 years ago.
Thank you for using Just Answer.

I have not been able to verify whether your "Fraud Recovery Group" is a scam. (I'm a tax preparer, not a scam investigator.) However, a group by that name has an "F" rating with the Better Business Bureau, and the Department of Justice has sued Tobias Elsass of Columbus, Ohio, and the Fraud Recovery Group, a Worthington, Ohio, company, to prevent them from filing tax returns, claiming that many of the section 165(c)(2) returns they filed were improper.

In spite of the group being questionable, it may be that you may claim a section 165(c)(2) loss on your return.

The basic idea of using section 165(c)(2) is that an investment loss induced by fraud may be considered a "business theft loss" under the Tax Code. (It also applies if the money you requested to pay for bonds was actually diverted for other purposes.) You (the person or entity who owned the bonds at that time) may declare the difference between your basis in the investment, and the expected amount of recovery, as a "casualty of theft loss" as an itemized deduction on the 1040 Schedule A in the year of discovery. This loss is not subject to AMT, or the itemized deduction phase-outs; and, if it reduces your income in the year of discovery to less than 0, it may produce a Net Operating Loss (NOL), which can be carried back 2 (or more) years against income in those years, or carried forward to later years. (If it's the estate, the loss, logically, could be carried forward to the beneficiaries' returns, as excess deductions on the estate's final income tax return, but I'm not sure it retains the characteristics of an NOL, so that it might only be allowed against that return, not against returns in later years. If that's your situation, I'd need to research the matter further.)

Additional points, though: As the payout schedule has apparently been set, you know the amount of recovery, although, for tax purposes, some of the recovery has to be assigned to interest, increasing the loss, but adding additional taxable intrest in future years.

If the discovery was less than 7 years ago, you may amend the return of whoever owned the bonds at the time of discovery; it could be you, the person you inherited the bonds from, or his/her estate.

Edited by Arthur Rubin on 5/4/2010 at 7:45 PM EST
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