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Does this sound too good to be true?
http://www.165services.com/
Relief May Be At Hand.
Write off your investment losses under Section 165(c)(2) as "Ordinary Losses"
rather than as "Capital Losses," limited to $3,000 per year.
Maybe it is too good to be
true:
IRS Notice 2004-27 regarding the quality of Section 165 Theft Loss
advice:
http://www.irs.gov/irb/2004-16_IRB/ar09.html
Notice 2004-27, 2004-16 I.R.B. 782 (4/19/2004)
Part III -- Administrative,
Procedural, and Miscellaneous
Loss Deductions for Diminution in
Value of Stock Attributable to Corporate Misconduct
Notice 2004-27
The Internal Revenue Service
and Treasury Department are aware that some taxpayers who acquired stock
on the open market for investment have been advised that they may be
able to deduct as a theft loss the decline in market value of their
stock caused by disclosure of accounting fraud or other illegal
misconduct of the officers or directors of the corporation that issued
the stock. The purpose of this notice is to advise taxpayers that the
Service intends to disallow such deductions and may impose penalties
under section 6662.
Sec. 6662. Imposition Of Accuracy-related Penalty
On Underpayments.
6662(a) Imposition Of Penalty. --
If this section applies to any portion of an underpayment of tax
required to be shown on a return, there shall be added to the tax an
amount equal to 20 percent of the portion of the underpayment to which
this section applies.
Section 165(a) of the Internal Revenue Code allows a deduction for any
loss sustained during the taxable year not compensated for by insurance
or otherwise. Under section 165(c) losses for individuals are limited to
(1) losses incurred in a trade or business, (2) losses incurred in any
transaction entered into for profit, though not connected with a trade
or business, and (3) losses of property not connected with a trade or
business or a transaction entered into for profit, if such losses arise
from fire, storm, shipwreck, or other casualty, or from theft. Section
1.165-1(b) of the Income Tax Regulations generally provides that, to be
allowable as a deduction under section 165(a), a loss must be evidenced
by a closed and completed transaction, fixed by an identifiable event or
events, and actually sustained during the taxable year.
Section 1.165-4(a) provides that
no deduction shall be allowed under section 165(a) solely on account of
a decline in the value of stock owned by the taxpayer when the decline
is due to a fluctuation in the market price of the stock or to another
similar cause. However, a deduction is allowed under section 165(a) if
the stock is worthless and has no recognizable value. A decline in the
value of stock owned by the taxpayer is not allowed as a deduction under
section 165(a) until the taxable year in which the loss is actually
sustained as a result of the sale or exchange of the stock or the stock
becoming wholly worthless.
Section 165(f) provides that
losses from sales or exchanges of capital assets shall be allowed only
to the extent allowed in sections 1211 and 1212. Stock held for
investment is a capital asset under section 1221. Sections 1211 and 1212
limit the amount that individual taxpayers may deduct for losses from
sales or exchanges of capital assets and provide rules for carrying
forward to subsequent years the amount of any excess capital loss.
Under section 165(g)(1), if any
stock that is a capital asset in the hands of a taxpayer, such as stock
purchased as an investment, becomes worthless during a taxable year, the
resulting loss is treated as a loss from the sale or exchange of a
capital asset (i.e., a capital loss). Section 1.165-5(c) explains that
if the stock becomes wholly worthless during a taxable year, the
resulting loss may be deducted under section 165(a) subject to the
limitations imposed on capital losses under sections 1211 and 1212 and
the regulations thereunder.
Therefore, under section 165(a),
subject to the limitations of sections 1211 and 1212, a taxpayer who
owns stock that was acquired on the open market for investment and that
has declined in value is allowed a deduction for a capital loss in the
taxable year in which the stock is sold or exchanged or becomes wholly
worthless.
Sections 165(e) and 1.165-8(a)(2)
provide that, in general, a loss arising from a theft shall be treated
under section 165(a) as sustained during the taxable year in which the
taxpayer discovers the loss. Section 1.165-1(d)(3) provides that if in
the year of discovery there exists a claim for reimbursement with
respect to which the taxpayer has a reasonable prospect of recovery, the
portion of the loss that may be reimbursed is not treated as sustained
until the tax year in which it can be ascertained with reasonable
certainty that reimbursement will not be received.
Whether a loss constitutes a
theft loss is determined by examining the law of the state where the
alleged theft occurred. Edwards v. Bromberg, 232 F.2d 107, 111 (5th Cir.
1956); Viehweg v. Commissioner, 90 T.C. 1248, 1253 (1988). Thus, to
claim a theft loss, the taxpayer must prove that the "loss resulted from
a taking of property that is illegal under the law of the state where it
occurred and that the taking was done with criminal intent." Rev. Rul.
72-112, 1972-1 C.B. 60.
In cases involving stock
purchased on the open market, the courts have consistently disallowed
theft loss deductions relating to a decline in the value of the stock
that was attributable to corporate officers misrepresenting the
financial condition of the corporation, even when the officers were
indicted for securities fraud or other criminal violations. In Paine v.
Commissioner, 63 T.C. 736, aff'd without published opinion, 523 F.2d
1053 (5th Cir. 1975), the taxpayers claimed a theft loss deduction for a
decline in value of stock stemming from misrepresentations of the
financial status of the corporation by corporate officials. The court
noted that the taxpayers did not purchase the stock from the corporate
officers who made the misrepresentations, but on the open market. In MTS
International Inc. v. Commissioner, 169 F.3d 1018 (6th Cir. 1999), an
individual taxpayer sold at a loss stock that was acquired on a public
stock exchange and argued that the substantial decline in value was due
to criminal conduct by the corporation's officers. The Sixth Circuit
concluded that the loss was not a theft loss. See also Crowell v.
Commissioner, T.C. Memo. 1986-314; DeFusco v. Commissioner, T.C. Memo.
1979-230; Barry v. Commissioner, T.C. Memo. 1978-215; and Rev. Rul.
77-17, 1977-1 C.B. 44.
Accordingly, the Service will
disallow a deduction for a theft loss under section 165(a) relating to a
decline in the value of stock that was acquired on the open market for
investment. If the stock is sold or exchanged or becomes wholly
worthless, any resulting loss is a capital loss.
DRAFTING INFORMATION
The principal author of this
notice is Norma Rotunno of the Office of Associate Chief Counsel (Income
Tax and Accounting).
Legitimate way to qualify for the
Section 165(c)(2) deduction:
http://www.aicpa.org/pubs/jofa/apr2005/siegel.htm
Internal Revenue Regulations:
1.165-4(a) Deduction disallowed.
No deduction shall be allowed under section 165(a) solely on
account of a decline in the value of stock owned by the taxpayer when
the decline is due to a fluctuation in the market price of the
stock or to other similar cause. A mere shrinkage in the value of stock
owned by the taxpayer, even though extensive, does not give rise to a
deduction under section 165(a) if the stock has any recognizable value
on the date claimed as the date of loss. No loss for a decline in the
value of stock owned by the taxpayer shall be allowed as a deduction
under section 165(a) except insofar as the loss is recognized under
§ 1.1002-1 upon the sale or exchange of the stock and except as
otherwise provided in § 1.165-5 with respect to stock which becomes
worthless during the taxable year.
1.165-4(b) Stock owned by banks.
1.165-4(b)(1) In the regulation of banks and certain other corporations,
Federal and State authorities may require that stock owned by such
organizations be charged off as worthless or written down to a nominal
value. If, in any such case, this requirement is premised upon the
worthlessness of the stock, the charging off or writing down will be
considered prima facie evidence of worthlessness for purposes of section
165(a); but, if the charging off or writing down is due to a fluctuation
in the market price of the stock or if no reasonable attempt to
determine the worthlessness of the stock has been made, then no
deduction shall be allowed under section 165(a) for the amount so
charged off or written down.
1.165-4(b)(2) This paragraph shall not be construed, however, to permit
a deduction under section 165(a) unless the stock owned by the bank or
other corporation actually becomes worthless in the taxable year. Such a
taxpayer owning stock which becomes worthless during the taxable year is
not precluded from deducting the loss under section 165(a) merely
because, in obedience to the specific orders or general policy of such
supervisory authorities, the value of the stock is written down to a
nominal amount instead of being charged off completely.
1.165-4(c) Application to inventories.
This section does not apply to a decline in the value of corporate stock
reflected in inventories required to be taken by a dealer in securities
under section 471. See § 1.471-5.
1.165-4(d) Definition.
As used in this section, the term "stock" means a share of stock in a
corporation or a right to subscribe for, or to receive, a share of stock
in a corporation.
Internal Revenue Code:
165(a) General Rule
There shall be allowed as a deduction any loss sustained during the
taxable year and not compensated for by insurance or otherwise.
165(b) Amount Of Deduction
For purposes of subsection (a), the basis for determining the amount of
the deduction for any loss shall be the adjusted basis provided in
section 1011 for determining the loss from the sale or other disposition
of property.
165(c) Limitation On Losses Of Individuals
In the case of an individual, the deduction under subsection (a) shall
be limited to--
165(c)(1) losses incurred in a trade or business;
165(c)(2) losses incurred in any transaction entered into for profit,
though not connected with a trade or business; and
165(c)(3) except as provided in subsection (h), losses of property not
connected with a trade or business or a transaction entered into for
profit, if such losses arise from fire, storm, shipwreck, or other
casualty, or from theft.
165(d) Wagering Losses
Losses from wagering transactions shall be allowed only to the
extent of the gains from such transactions.
165(e) Theft Losses
For purposes of subsection (a), any loss arising from theft shall be
treated as sustained during the taxable year in which the taxpayer
discovers such loss.
165(f) Capital Losses
Losses from sales or exchanges of capital assets shall be allowed
only to the extent allowed in sections 1211 and 1212. [the lower
of $3,000 ($1,500 in the case of a married individual filing a separate
return), or the excess of such losses over such gains.]
165(g) Worthless Securities
165(g)(1) General Rule
If any security which is a capital asset becomes worthless during the
taxable year, the loss resulting therefrom shall, for purposes of this
subtitle, be treated as a loss from the sale or exchange, on the last
day of the taxable year, of a capital asset.
165(g)(2) Security Defined
For purposes of this subsection, the term "security" means--
165(g)(2)(A) a share of stock in a corporation;
165(g)(2)(B) a right to subscribe for, or to receive, a share of stock
in a corporation; or
165(g)(2)(C) a bond, debenture, note, or certificate, or other evidence
of indebtedness, issued by a corporation or by a government or political
subdivision thereof, with interest coupons or in registered form.
165(g)(3) Securities In Affiliated Corporation
For purposes of paragraph (1), any security in a corporation
affiliated with a taxpayer which is a domestic corporation shall not be
treated as a capital asset. For purposes of the preceding sentence, a
corporation shall be treated as affiliated with the taxpayer only if--
165(g)(3)(A) the taxpayer owns directly stock in such corporation
meeting the requirements of section 1504(a)(2), and
165(g)(3)(B) more than 90 percent of the aggregate of its gross receipts
for all taxable years has been from sources other than royalties, rents
(except rents derived from rental of properties to employees of the
corporation in the ordinary course of its operating business),
dividends, interest (except interest received on deferred purchase price
of operating assets sold), annuities, and gains from sales or exchanges
of stocks and securities. In computing gross receipts for purposes of
the preceding sentence, gross receipts from sales or exchanges of stocks
and securities shall be taken into account only to the extent of gains
therefrom.
Internal Revenue Code:
1244. Losses On Small Business Stock
1244(c)(1) In General
For purposes of this section, the term "section 1244 stock" means stock
in a domestic corporation if--
1244(c)(1)(A) at the time such stock is issued, such corporation was a
small business corporation,
1244(c)(1)(B) such stock was issued by such corporation for money or
other property (other than stock and securities), and
1244(c)(1)(C) such corporation, during the period of its 5 most recent
taxable years ending before the date the loss on such stock was
sustained, derived more than 50 percent of its aggregate gross receipts
from sources other than royalties, rents, dividends, interests,
annuities, and sales or exchanges of stocks or securities.
more on Section 1244
Internal Revenue Regulations:
1.543-1(b) Definitions--
1.543-1(b)(5) Gains from the sale or exchange of stock or securities.
1.543-1(b)(5)(i) Except in the case of regular dealers in stock or
securities as provided in subdivision (ii) of this subparagraph, gross
income and personal holding company income include the amount by which
the gains exceed the losses from the sale or exchange of stock or
securities. See section 543(b)(1) and § 1.543-2 for provisions relating
to this limitation. For this purpose, there shall be taken into account
all those gains includible in gross income (including gains from
liquidating dividends and other distributions from capital) and all
those losses deductible from gross income which are considered under
chapter 1 of the Code to be gains or losses from the sale or exchange of
stock or securities. The term stock or securities as used in section
543(a)(2) and this subparagraph includes shares or certificates of
stock, stock rights or warrants, or interest in any corporation
(including any joint stock company, insurance company, association, or
other organization classified as a corporation by the Code),
certificates of interest or participation in any profit-sharing
agreement, or in any oil, gas, or other mineral property, or lease,
collateral trust certificates, voting trust certificates, bonds,
debentures, certificates of indebtedness, notes, car trust certificates,
bills of exchange, obligations issued by or on behalf of a State,
Territory, or political subdivision thereof.
1.543-1(b)(5)(ii) In the case of regular dealers in stock or securities
there shall not be included gains or losses derived from the sale or
exchange of stock or securities made in the normal course of business.
The term regular dealer in stock or securities means a corporation with
an established place of business regularly engaged in the purchase of
stock or securities and their resale to customers. However, such
corporations shall not be considered as regular dealers with respect to
stock or securities which are held for investment. See section 1236 and
§ 1.1236-1.
1.543-1(b)(6) Gains from futures transactions in commodities.
Gross income and personal holding company income include the amount
by which the gains exceed the losses from futures transactions in any
commodity on or subject to the rules of a board of trade or commodity
exchange. See § 1.543-2 for provisions relating to this limitation. In
general, for the purpose of determining such excess, there are included
all gains and losses on futures contracts which are speculative.
However, for the purpose of determining such excess, there shall not be
included gains or losses from cash transactions, or gains or losses by a
producer, processor, merchant, or handler of the commodity, which arise
out of bona fide hedging transactions reasonably necessary to the
conduct of its business in the manner in which such business is
customarily and usually conducted by others. See section 1233 and §
1.1233-1. |
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To their credit in light of the IRS attack (see above) against
promoters misleading the public, this website is disclosing that
basically no marketable securities qualify for a Section 165(c)(2)
tax deduction (see red text below for
narrow situations where it can be argued). The following
situations do, arguably, have some merit.
http://www.165services.com/
Ponzi Schemes
It is illegal for an investment to be offered where the source of the
returns come from the investor’s own money. The operators of a Ponzi
schemes promise high returns, pretending there is some business basis,
but merely pay some of the original investors with new investors money
and skim off the major portion for their own use.
You will rarely find a Ponzi scheme running a
legitimate business. The later investors are the most injured victims.
A Ponzi scheme can also be a situation where a business sells one
product to many investors each believing they were the sole owners.
Pyramid Scheme
Investors are offered to buy a membership, upfront in cash, in a pyramid
shaped organization with the objective of finding others to pay to join
the pyramid. The pyramid operators promise payment from selling stock
or obtaining a loan. There is no effort To secure the loan or sell
stock and the investors lose their membership fee.
Misrepresentations
Promoters offer a legitimate investment but misrepresents important
facts or hide information in order to sell large quantities of the
security.
Omissions
Promoters fail to disclose important negative information about the
investment.
High Yield Investments (HYIP)
Investors are offered high yield from an investment that is purported to
be backed by banks, the FDIC or the U.S. Treasury. Some have been set up
outside the U.S. to avoid regulation.
Misappropriation
Promoters sell interests in a company and proceed to misappropriate the
money for their own purposes ultimately causing the failure of the
business.
Nigerian Investments
Individuals from foreign countries, mostly from Nigeria, claim they
would have access to large amounts of money, but need funds to get
through the legal process. They have very colorful stories regarding
why they can get the funds. In return for the help they agree to pay
huge fees. By merely giving these people access to your bank account or
paying a fee there will be an incredible payment. These are completely
fraudulent and have bilked investors out of millions of dollars.
Stockbrokerage Churning
There are stockbrokers that promote very active
trading in an investment account causing substantial commissions to be
charged. When these investments are unsuitable for the investor and the
amount of trading leads to substantial losses, the investor may be a
victim of “churning”. In many states this is
considered theft.
Stockbrokerage “Pump and Dump” Schemes
Stockbrokers and their firms that aggressively promote a stock “pumping”
and then quickly sell (dumping) the stock to give the original investors
a profit, injure the later investors at the expense of the original
investors. This is considered theft in many
states.
update
3/12/08
Final regs section 1.165-5(i) were issued for abandonment of stock or
other securities after March 12, 1008. If the security is a
capital asset then the resulting loss is treated as a loss from the sale
or exchange of a capital asset on the last day of the taxable year.
The loss is only allowed if all rights in the abandoned security are
permanently surrendered and relinquished for no consideration.
Here's another link:
http://ifrn165.com/
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