A taxpayer who finds that he/she has performed services for which he/she was supposed to be paid but for which payment is not to be received most often believes he/she “obviously” should be able to claim a loss on their return.
In the case of Haff v. Commissioner, TC Memo 2015‑138, the taxpayer felt doubly so, as the entity that he claimed owed him money turned out be a fraudulent investment scheme in which the taxpayer had invested over $1.3 million and which owed the taxpayer, in the taxpayer’s view, over $700,000.
The taxpayer in this case had invested funds into what proved to be an investment that met the requirements for the treatment under Revenue Procedure 2009‑20, the revenue procedure the IRS issued in response to the Madoff investment fraud case. The taxpayer claimed a loss for the invested amount under that revenue procedure—but he also claimed a loss deduction under that ruling for the amounts he claimed the entity owed him but did not pay him.
Unfortunately for the taxpayer, Revenue Procedure 2009‑20 may affect the timing of claiming a theft loss (it allows a claim for a portion of the loss even though the taxpayer still has a claim on file for whatever funds may finally become available to investors) but it won’t create one where there is no basis.
The opinion notes that Revenue Procedure 2009‑20 only allows a loss deduction for the total of:
- Cash invested
- Basis of property invested plus
- Amounts of net income included in the victim’s taxable income in the past
Such a loss would be reduced by any amounts actually received from the entity.
In this case none of those categories would allow the creation of an amount that could be deducted as a loss. The amount in question did not represent cash or property contributed to the entity and, as the taxpayer was on the cash basis of accounting, no amount had been previously reported as income.
As such, the taxpayer’s loss was properly limited to the amounts invested in the enterprise.