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Situation: An individual receives estate monies from

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Situation: An individual receives...
Situation: An individual receives estate monies from retirement accounts due to the death of the last remaining parent. The individual then loans the money to a wholly (personally) owned C Corp to investment in the business. The business is then the victim of fraud, when a hired professional provides fake invoices for work done that never occurred. Both Civil (full amount, plus legal fees, plus compensatory damages) and Criminal judgments (full amount paid, and defendant sent to jail) are won.
Can the losses due to fraud be written off on the personal return?
Submitted: 2 years ago.Category: Tax
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Answered in 12 minutes by:
10/26/2015
Tax Professional: Lev, Tax Advisor replied 2 years ago
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 30,150
Experience: Taxes, Immigration, Labor Relations
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Sorry for such situation.

These are two separate transactions.
Distributions from retirement accounts are taxable for the beneficiary. That situation is classified as IRD - income in respect of the decedent.

.

Please be aware that while inheritance itself is not taxable - distributions from retirement accounts (including death benefits) are classified as income is respect of the decedent (IRD) and as such is taxable.Income in respect of the decedent is gross income that the decedent would have received had death not occurred and that was not properly includible in the decedent s final income tax return. Income in respect of a decedent realized AFTER the death is taxable the same way as it were taxable decedent.

.

The loss because of a fraud is deductible on the personal tax return as a Casualty and Theft loss.

There are some limitations though...

First of all - based on your information - that is a business loss of C-corporation. C-corporation is a separated business entity. So that deduction is reported on C-corporation income tax return and may not be transferred to shareholders.

However - as you stated that the full amount of damages was actually paid back - then we do not have any loss - is that correct understanding?

On the personal tax return the loss may be deducted only as a bad debt - if C-corporation is not able to pay back the loan.

Otherwise - there is no personal losses.

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Tax Professional: Lev, Tax Advisor replied 2 years ago

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If you still have any doubts, need clarification - please be sure to ask.

I am here to help you will all tax related issues.

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