Business Opportunity Fraud, Deductable?
Posted: Sun Mar 23, 2014 8:16 pm
The fact that a significant number of people fall victim each year to a fairly staggering array of fraud comes as no surprise to almost anyone here. Some people seem born without a BS detector and others with almost incredible levels of BS and the internet just makes it so much easier for those people to meet each other. The result of those interactions is depressingly predictable.
So yea, a lot of people are getting ripped off. But under what circumstances are losses due to getting swindled deductible from federal taxes?
In the wake of the Madoff scandal there is a fair amount of information in public circulation regarding the tax implications of investment related fraud. For anyone finding this topic looking for that information I'll provide just a few links: [1] [2] [3]. But not all fraud is "investment" related, I know investment related investigations (on a federal level) are issues for the SEC while deceptive and unfair trade practices are more a matter for the FTC. Is there a similar distinction in the tax code?
Hypothetical example: Johnny Sleaze markets a "work at home" business opportunity. Using slick promotional materials he represents that in exchange for a modest up front fee and small recurring charge, someone without any particular skill set can quite easily earn a substantial income in only a few hours per week. If anyone thought critically about the business model that Johnny describes they'd be tempted to wonder why he didn't just hire a number of people to perform the requisite task and retain what's purported to be an incredible profit for himself. This seem to assure that critical thinkers make up almost none of the people paying to participate in Johnny's business opportunity.
Johnny has been marketing this opportunity for many years, due perhaps in part because the total amount of money he receives from any one person before they become disaffected with his offer is too low to justify retaining an attorney and filing a lawsuit and the almost happy coincidence very few of the people he markets the opportunity to are in a physical proximity to file against him in local small claims court.
But one day, after a sufficient number of consumer complaints, the FTC files suit against Johnny and his company. The wheels of justice turn slow and while they do Johnny not only continues marketing his opportunity but sharply increases his prices.
Billy Bumble isn't the sharpest tool in the shed, in fact he's an elderly gentleman with diminished capacity. In the period of time after the FTC filed suit against Johnny's company Billy sent Johnny a bit more than $5,000 in a single tax year but partly because Billy's lack of capacity and partly because Johnny's opportunity is other than profitable to anyone but Johnny, Billy hasn't earn a dime.
Questions: Is any part of Billy's more than $5,000 loss in any way tax deductible? Does the FTC's suit against Johnny's company need to resolve before a claim could be made? What factors would be considered in evaluation such a claim and what records must be presented to substantiate them?
Fraud and deception, sadly, seem to be growth industries. In this time of the year when thoughts turn to taxes I see questions like this popping up in places. There are a few resources to point people to relative to "investment" related fraud but it's hard to find the same for false "Biz Ops."
And the obligatory, nothing offered here is legal or tax advice. If you have personal need of legal or tax advice, please contact a qualified professional.
So yea, a lot of people are getting ripped off. But under what circumstances are losses due to getting swindled deductible from federal taxes?
In the wake of the Madoff scandal there is a fair amount of information in public circulation regarding the tax implications of investment related fraud. For anyone finding this topic looking for that information I'll provide just a few links: [1] [2] [3]. But not all fraud is "investment" related, I know investment related investigations (on a federal level) are issues for the SEC while deceptive and unfair trade practices are more a matter for the FTC. Is there a similar distinction in the tax code?
Hypothetical example: Johnny Sleaze markets a "work at home" business opportunity. Using slick promotional materials he represents that in exchange for a modest up front fee and small recurring charge, someone without any particular skill set can quite easily earn a substantial income in only a few hours per week. If anyone thought critically about the business model that Johnny describes they'd be tempted to wonder why he didn't just hire a number of people to perform the requisite task and retain what's purported to be an incredible profit for himself. This seem to assure that critical thinkers make up almost none of the people paying to participate in Johnny's business opportunity.
Johnny has been marketing this opportunity for many years, due perhaps in part because the total amount of money he receives from any one person before they become disaffected with his offer is too low to justify retaining an attorney and filing a lawsuit and the almost happy coincidence very few of the people he markets the opportunity to are in a physical proximity to file against him in local small claims court.
But one day, after a sufficient number of consumer complaints, the FTC files suit against Johnny and his company. The wheels of justice turn slow and while they do Johnny not only continues marketing his opportunity but sharply increases his prices.
Billy Bumble isn't the sharpest tool in the shed, in fact he's an elderly gentleman with diminished capacity. In the period of time after the FTC filed suit against Johnny's company Billy sent Johnny a bit more than $5,000 in a single tax year but partly because Billy's lack of capacity and partly because Johnny's opportunity is other than profitable to anyone but Johnny, Billy hasn't earn a dime.
Questions: Is any part of Billy's more than $5,000 loss in any way tax deductible? Does the FTC's suit against Johnny's company need to resolve before a claim could be made? What factors would be considered in evaluation such a claim and what records must be presented to substantiate them?
Fraud and deception, sadly, seem to be growth industries. In this time of the year when thoughts turn to taxes I see questions like this popping up in places. There are a few resources to point people to relative to "investment" related fraud but it's hard to find the same for false "Biz Ops."
And the obligatory, nothing offered here is legal or tax advice. If you have personal need of legal or tax advice, please contact a qualified professional.