Interesting tax question
Ernie Klein
(Donell v. Kowell). Mr. Kowell was an early, innocent investor in what
turned out to be a Ponzi scheme. Because Kowell was an early investor,
he was one of 800 that actually made a profit from his investment, the
other 6000 investors either lost some or all of their investment. The
time period was between 1997 and 2001.
California law (The Uniform Fraudulent Transfer Act (łUFTA˛)) provides
that Kowell (and the other 800 who made a profit) must return the
profit, about $32,000 in Kowell's case (only the profit - he can keep
his original investment) that he received to the bankruptcy receiver, to
be distributed to those other 6000 who lost their investments.
Mr. Kowell was arguing that he was also an innocent victim of the Ponzi
scheme and should not have to pay back the money that he received and
spent years ago, AND [here comes the tax question] paid all Federal and
State taxes on the investment income.
Kowell lost the appeal and the court said "Ponzi schemes leave no true
winners once the scheme collapses‹even the winners were defrauded,
because their returns were illusory. Those who receive gains from
innocent participation in the scheme may be required to disgorge those
amounts, long after the money has been spent."
Since Kowell's return was "illusory" as the court said, but he paid
capital gains tax between 1997 and 2001 as if it was real and now he has
to give it back, can he now declare it a capital loss (even though it
was never a "real" capital gain in the first place)?
--
-Ernie-
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Katie
> An opinion by the Ninth Circuit Court of Appeals was issued today
> (Donell v. Kowell). Mr. Kowell was an early, innocent investor in what
> turned out to be a Ponzi scheme. Because Kowell was an early investor,
> he was one of 800 that actually made a profit from his investment, the
> other 6000 investors either lost some or all of their investment. The
> time period was between 1997 and 2001.
>
> that Kowell (and the other 800 who made a profit) must return the
> profit, about $32,000 in Kowell's case (only the profit - he can keep
> his original investment) that he received to the bankruptcy receiver, to
> be distributed to those other 6000 who lost their investments.
>
> Mr. Kowell was arguing that he was also an innocent victim of the Ponzi
> scheme and should not have to pay back the money that he received and
> spent years ago, AND [here comes the tax question] paid all Federal and
> State taxes on the investment income.
>
> Kowell lost the appeal and the court said "Ponzi schemes leave no true
> winners once the scheme collapses‹even the winners were defrauded,
> because their returns were illusory. Those who receive gains from
> innocent participation in the scheme may be required to disgorge those
> amounts, long after the money has been spent."
>
> Since Kowell's return was "illusory" as the court said, but he paid
> capital gains tax between 1997 and 2001 as if it was real and now he has
> to give it back, can he now declare it a capital loss (even though it
> was never a "real" capital gain in the first place)?
>
> --
> -Ernie-
>
Ernie, see IRC Sec. 1341.
Katie in San Diego
Han
news:6c231c2b-6dde-4e2c...@d19g2000prm.googlegroups.com:
> On Jul 1, 7:37 pm, Ernie Klein <eckl...@pacbell.net> wrote:
>> An opinion by the Ninth Circuit Court of Appeals was issued today
>> (Donell v. Kowell). Mr. Kowell was an early, innocent investor in
>> what turned out to be a Ponzi scheme. Because Kowell was an early
>> investor, he was one of 800 that actually made a profit from his
>> investment, the other 6000 investors either lost some or all of their
>> investment. The time period was between 1997 and 2001.
>>
>> California law (The Uniform Fraudulent Transfer Act (łUFTA˛))
>> provides that Kowell (and the other 800 who made a profit) must
>> return the profit, about $32,000 in Kowell's case (only the profit -
>> he can keep his original investment) that he received to the
>> bankruptcy receiver, to be distributed to those other 6000 who lost
>> their investments.
>>
>> Mr. Kowell was arguing that he was also an innocent victim of the
>> Ponzi scheme and should not have to pay back the money that he
>> received and spent years ago, AND [here comes the tax question] paid
>> all Federal and State taxes on the investment income.
>>
>> Kowell lost the appeal and the court said "Ponzi schemes leave no
>> true winners once the scheme collapses‹even the winners were
>> defrauded, because their returns were illusory. Those who receive
>> gains from innocent participation in the scheme may be required to
>> disgorge those amounts, long after the money has been spent."
>>
>> Since Kowell's return was "illusory" as the court said, but he paid
>> capital gains tax between 1997 and 2001 as if it was real and now he
>> has to give it back, can he now declare it a capital loss (even
>> though it was never a "real" capital gain in the first place)?
>>
>> --
>> -Ernie-
>>
>
>
> Ernie, see IRC Sec. 1341.
>
> Katie in San Diego
>
I thought it was an intersting question, and if I was really interested
I might consult IRC. Howver, I am just curious for the short answer, if
there is any such thing. Kowell might have been an early "non-victim"
of the Ponzi scheme, but should his "winnings" impinge on recovery of
losses by the real losers?
Then, IMHO, Grasso is not entitled to his gross (pun intended) payoff.
Not a lawyer.
--
Best regards
Han
email address is invalid
Dick Adams
> An opinion by the Ninth Circuit Court of Appeals
> was issued today (Donell v. Kowell). Mr. Kowell
> was an early, innocent investor in what turned
> out to be a Ponzi scheme. Because Kowell was
> an early investor, he was one of 800 that
> actually made a profit from his investment, the
> other 6000 investors either lost some or all of
> their investment. The time period was between
> 1997 and 2001.
>
> California law (The Uniform Fraudulent Transfer
> Act (łUFTA˛)) provides that Kowell (and the other
> 800 who made a profit) must return the profit,
> about $32,000 in Kowell's case (only the profit
> - he can keep his original investment) that he
> received to the bankruptcy receiver, to be
> distributed to those other 6000 who lost their
> investments.
>
> Mr. Kowell was arguing that he was also an
> innocent victim of the Ponzi scheme and should
> not have to pay back the money that he received
> and spent years ago, AND [here comes the tax
> question] paid all Federal and State taxes on
> the investment income.
$32,000 divided by 6000 equals $5.03 per person
before administrative costs and attorney fees.
Which means the other 6000 receive zip point
you-know-what. So the effect upon the Bankruptcy
estate is minimal while the effect upon the
innocent victims may be devastating.
In 2001, I researched a similar situation for some
innocent victims. My suggestion was that they sue
the financial advisor who got them to invest in the
Ponzi scheme. They did and they got an out-of-court
settlement of 34 cents on the dollar.
The UFTA has failed to consider the substantial
negative effect this process has upon innocent
victims. The Courts should be looking at the
intermediary promoters for full recovery for all
innocent victims.
> Kowell lost the appeal and the court said "Ponzi
> schemes leave no true winners once the scheme
> collapses. Even the winners were defrauded, because
> their returns were illusory. Those who receive gains
> from innocent participation in the scheme may be
> required to disgorge those amounts, long after the
> money has been spent."
>
> Since Kowell's return was "illusory" as the court
> said, but he paid capital gains tax between 1997
> and 2001 as if it was real and now he has to give
> it back, can he now declare it a capital loss
> (even though it was never a "real" capital gain
> in the first place)?
IMRHO (with R like in Rarely), the IRC does not
handle this very efficiently. The victims most
likely have a theft loss which is a Schedule A
deduction subject to a 10% of AGI floor. This
means many retirees who do not file a Schedule A
get shafted.
Since Kowell treated his gains as capital gains,
he should have a capital loss for both the $32,000
and his legal fees - probably subject to $3,000
per year.
Perhaps Kowell could argue that because there was
fraud involved, his returns for 1997 through 2001
are now open. That would be a great leap of faith.
If Kowell appeared before the Bankruptcy Court
pro se, he deserves to be chided for being
ignorant.
The best legal adage I know is "Appearing pro se
is like walking into a Lions at lunch time without
a whip, a gun, and a chair".
Dick
Dick Adams
> Ernie Klein <eckl...@pacbell.net> wrote:
> <The trials and tribulations of a Ponzi Scheme victim>
> Ernie, see IRC Sec. 1341.
Perfect cite, Katie.
I recall the one time I thought Katie was wrong.
After a thorough search of the IRC, Regs, etc.
it turned out she was correct.
Dick
Ernie Klein
rda...@panix.com (Dick Adams) wrote:
> $32,000 divided by 6000 equals $5.03 per person
> before administrative costs and attorney fees.
> Which means the other 6000 receive zip point
> you-know-what. So the effect upon the Bankruptcy
> estate is minimal while the effect upon the
> innocent victims may be devastating.
It is probably much more than that. Mr. Kowell was only 1 of 800 who
made a profit. The opinion didn't indicate how much was recovered from
the other 799 victims that also had to give back their "profits" to the
bankruptcy receiver.
--
-Ernie-
Harlan Lunsford
> In article <g4fs5l$45h$1...@reader2.panix.com>,
> rda...@panix.com (Dick Adams) wrote:
>
>
>> $32,000 divided by 6000 equals $5.03 per person
>> before administrative costs and attorney fees.
>> Which means the other 6000 receive zip point
>> you-know-what. So the effect upon the Bankruptcy
>> estate is minimal while the effect upon the
>> innocent victims may be devastating.
>
> It is probably much more than that. Mr. Kowell was only 1 of 800 who
> made a profit. The opinion didn't indicate how much was recovered from
> the other 799 victims that also had to give back their "profits" to the
> bankruptcy receiver.
>
Unfortunately the only real winners will be the lawyers who get that
5.03 per person.
Let's hope there will be an appeal of the blatantly unfair 9th liberal
circuit court decision. there's GOT to be some constitutional issue
in this case.
ChEAr$,
Harlan Lunsford, EA n LA
Stuart Bronstein
> Ernie Klein wrote:
>> rda...@panix.com (Dick Adams) wrote:
>>
>>> $32,000 divided by 6000 equals $5.03 per person
>>> before administrative costs and attorney fees.
>>> Which means the other 6000 receive zip point
>>> you-know-what. So the effect upon the Bankruptcy
>>> estate is minimal while the effect upon the
>>> innocent victims may be devastating.
>>
>> It is probably much more than that. Mr. Kowell was only 1 of 800
>> who made a profit. The opinion didn't indicate how much was
>> recovered from the other 799 victims that also had to give back
>> their "profits" to the bankruptcy receiver.
>
> Unfortunately the only real winners will be the lawyers who get
> that 5.03 per person.
>
> Let's hope there will be an appeal of the blatantly unfair 9th
> liberal circuit court decision. there's GOT to be some
> constitutional issue in this case.
It is unfair to some, but more fair to others. All of the
"investors" were similarly defrauded, so why should some benefit and
others not? Bankruptcy law requires any creditor who gets a
"preference" (not what happened in this case) to give back anything
received from the debtor, so it can be equally shared with all
similarly situated creditors.
In this case the situation is similar. I don't necessarily agree
with the legal analysis - it's a little to simple minded. But it is
a rational interpretation of the Fraudulent Conveyance laws. And
apparently the 9th Circuit is not the only Court of Appeals that
thinks so.
Stu
dpb
...
> It is probably much more than that. Mr. Kowell was only 1 of 800 who
> made a profit. The opinion didn't indicate how much was recovered from
> the other 799 victims that also had to give back their "profits" to the
> bankruptcy receiver.
If all made as much as Mr K it would still be only 12.5 cents on the
dollar before fees, expenses, etc., ... Not likely anybody but the
lawyers will get anything significant I'd think unless there were some
really large sums recovered. But even if so, one would assume they would
be so because the initial investment was much larger and any settlement
be allocated based on that investment.
--
Katie
> Katie <katiej_1...@yahoo.com> wrote:
> > Ernie Klein <eckl...@pacbell.net> wrote:
> > <The trials and tribulations of a Ponzi Scheme victim>
> > Ernie, see IRC Sec. 1341.
>
> Perfect cite, Katie.
>
> I recall the one time I thought Katie was wrong.
> After a thorough search of the IRC, Regs, etc.
> it turned out she was correct.
>
Well, I HAVE been wrong from time to time, and I might be wrong here.
But I think the answer is that Kowell received the gains under a claim
of right (i.e., based on what was known at the time, he had the right
to the money) and Sec. 1341 applies. His tax liability for the year
in which he was forced to repay the gains is the lesser of (a) the tax
computed with a deduction for the amount repaid or (b) the tax for the
repayment year calculated without the deduction, minus the reduction
in tax for the year(s) of receipt of the income that would have
resulted if that income had not been received.
So yes, I think Kowell does get a deduction for the amount he repaid,
or an adjustment to his current year tax liability. Also, I don't
think the deduction is a capital loss; I think it's ordinary. The (b)
calculation takes care of the difference between capital and ordinary.
Katie in San Diego
Stuart A. Bronstein
> Well, I HAVE been wrong from time to time,
Yeah, I think that was the time you agreed with me. ;-)
Stu
KEBSC...@aol.com
> On Jul 2, 5:33�am, rdad...@panix.com (Dick Adams) wrote:
>
> > Katie �<katiej_1...@yahoo.com> wrote:
> > > Ernie Klein <eckl...@pacbell.net> wrote:
> > > <The trials and tribulations of a Ponzi Scheme victim>
> > > Ernie, see IRC Sec. 1341.
>
> > Perfect cite, Katie.
>
> > I recall the one time I thought Katie was wrong.
> > After a thorough search of the IRC, Regs, etc.
> > it turned out she was correct.
>
Katie:
> Well, I HAVE been wrong from time to time,
... YUP! :-) But you always graciously come back and correct the
record.
> and I might be wrong here.
... NOPE! :-)
> But I think the answer is that Kowell received the gains under a claim
> of right (i.e., based on what was known at the time, he had the right
> to the money) and Sec. 1341 applies. �His tax liability for the year
> in which he was forced to repay the gains is the lesser of (a) the tax
> computed with a deduction for the amount repaid or (b) the tax for the
> repayment year calculated without the deduction, minus the reduction
> in tax for the year(s) of receipt of the income that would have
> resulted if that income had not been received.
>
> So yes, I think Kowell does get a deduction for the amount he repaid,
> or an adjustment to his current year tax liability. �Also, I don't
> think the deduction is a capital loss; I think it's ordinary. �The (b)
> calculation takes care of the difference between capital and ordinary.
>
> Katie in San Diego
Think about what could happen if the "gain" had been less than $3000.
You are probably not surprised that I am annoyed by the treatment for
amounts less $3000.
Do you have any insight into why the Code requires different treatment
depending on whether the repayment by the taxpayer is more or less
than $3000?
Cheers,
WDK
Seth
Katie <katie...@yahoo.com> wrote:
>But I think the answer is that Kowell received the gains under a claim
>of right (i.e., based on what was known at the time, he had the right
>to the money) and Sec. 1341 applies. His tax liability for the year
>in which he was forced to repay the gains is the lesser of (a) the tax
>computed with a deduction for the amount repaid or (b) the tax for the
>repayment year calculated without the deduction, minus the reduction
>in tax for the year(s) of receipt of the income that would have
>resulted if that income had not been received.
Let me see if I understand this (and ask a hypothetical question):
10 years ago, someone had "income" of, say, $50,000, which he
shouldn't have. This year, he has to return it.
So he does the following calculations:
1) Redo his income tax return for 10 years ago without the $50,000,
and see how much less tax he paid. Take that as a tax credit this
year.
2) Take a deduction of $50,000 this year. (What sort of deduction?
Subject to limitations based on income?)
He does whichever of those is better for him.
Now, suppose he had $50,000 of deferred investment interest expense
going in to 1998. The bogus income wiped that out, but didn't
actually add to his tax bill. So calculation (1) is $0. However, if
he hadn't used it up, he'd have had a lower tax bill the following
year (when he had more investment income to deduct it against). Does
that matter?
If not (and he didn't have much investment income in the ensuing
decade), he's just converted $50,000 of deferred (and still
deferrable) investment interest expense into an actual $50,000
deduction, right?
Seth
Katie
> > But I think the answer is that Kowell received the gains under a claim
> > of right (i.e., based on what was known at the time, he had the right
> > to the money) and Sec. 1341 applies. �His tax liability for the year
> > in which he was forced to repay the gains is the lesser of (a) the tax
> > computed with a deduction for the amount repaid or (b) the tax for the
> > repayment year calculated without the deduction, minus the reduction
> > in tax for the year(s) of receipt of the income that would have
> > resulted if that income had not been received.
>
> > So yes, I think Kowell does get a deduction for the amount he repaid,
> > or an adjustment to his current year tax liability. �Also, I don't
> > think the deduction is a capital loss; I think it's ordinary. �The (b)
> > calculation takes care of the difference between capital and ordinary.
>
> > Katie in San Diego
>
> Think about what could happen if the "gain" had been less than $3000.
> You are probably not surprised that I am annoyed by the treatment for
> amounts less $3000.
>
> Do you have any insight into why the Code requires different treatment
> depending on whether the repayment by the taxpayer is more or less
> than $3000?
>
No, none whatever. As far as I can see, Sec. 1341 including the
$3,000 limitation goes back to the 1954 Code and who knows how far
beyond. Certainly $3,000 was a lot more when this statute was first
enacted than it is today, so your objection would have been much more
significant then than it is now.
Bear in mind that in general, if a taxpayer repays an amount received
in an earlier year under a claim of right, a deduction is allowed in
the year of repayment. Sec. 1341 provides an additional benefit in
the form of what is in effect a refund of the overpayment of tax in
the year the income was received, if that's more than the reduction in
current year tax arising from the deduction. So even if the repayment
is less than $3,000, a deduction is allowed in the repayment year.
You just don't get the (possibly) additional benefit of the (b)
calculation.
I did look at the regs and I see that I was wrong about the nature of
the deduction in the year of repayment. Reg. Sec. 1.1341-1(c) says
that if the income was capital gain, the repayment is treated as
capital loss subject to the Sec. 1211 limitation on current year
deduction. So, unless the taxpayer has other capital gains in the
repayment year, the deduction is limited to $3,000. That makes it
perhaps more likely that the (b) calculation will be more advantageous
-- which is the whole point of Sec. 1341.
Katie in San Diego
--
removep...@yahoo.com
> On Jul 2, 8:13 pm, KEBSCHU...@aol.com wrote:
> > Do you have any insight into why the Code requires different treatment
> > depending on whether the repayment by the taxpayer is more or less
> > than $3000?
>
> No, none whatever. As far as I can see, Sec. 1341 including the
> $3,000 limitation goes back to the 1954 Code and who knows how far
> beyond. Certainly $3,000 was a lot more when this statute was first
> enacted than it is today, so your objection would have been much more
> significant then than it is now.
>
> Bear in mind that in general, if a taxpayer repays an amount received
> in an earlier year under a claim of right, a deduction is allowed in
> the year of repayment. Sec. 1341 provides an additional benefit in
> the form of what is in effect a refund of the overpayment of tax in
> the year the income was received, if that's more than the reduction in
> current year tax arising from the deduction. So even if the repayment
> is less than $3,000, a deduction is allowed in the repayment year.
> You just don't get the (possibly) additional benefit of the (b)
> calculation.
Suppose the repayment of less than 3k is a repayment of wages, then
the deduction is reported on Schedule A as misc deduction subject to
the 2% of AGI limit. If the taxpayer does not itemize, then they
don't get any benefit from the deduction, which discriminates against
lower income taxpayers. And besides, if they do itemize it is subject
to the 2% limit, which means that you likely don't get the benefit of
the deduction anyway, which discriminates against taxpayers dealing
with small amounts of money.
Publication 525, Repayments:
http://www.irs.gov/publications/p525/ar02.html#d0e9279
> I did look at the regs and I see that I was wrong about the nature of
> the deduction in the year of repayment. Reg. Sec. 1.1341-1(c) says
> that if the income was capital gain, the repayment is treated as
> capital loss subject to the Sec. 1211 limitation on current year
> deduction. So, unless the taxpayer has other capital gains in the
> repayment year, the deduction is limited to $3,000. That makes it
> perhaps more likely that the (b) calculation will be more advantageous
> -- which is the whole point of Sec. 1341.
Consider the following scenario for method (b), where you compute your
tax on your prior year tax return without the extra income, and take
the difference as a credit on line 70. Say in the prior year of 1998
your income was 125k, including the 32k capital gain. You had rental
loss of 10k, but as your income was above the 100k, the loss was
partially disallowed and you got to deduct only 5k, and 5k got carried
over. The following year your rental income was a profit of 8k, but
combined with the carried over loss of 5k, the actual profit is 3k.
Now you go back and redo your 1998 return without the 32k income. The
income is 93k, so the entire loss of 10k is allowed. But this does
not sound right as the 10k loss would be deducted in full in 1998, and
then part or all of it deducted again in 1999. So I'm guessing that
you should not increase your rental loss (meaning still take only 5k
of loss as in your original return), or for that matter any item with
a carryover component (such as investment interest, charitable
contributions, etc).
The original post mentions 32k of long term capital gains in a year
probably before 2000, so the tax on it would be 20% of 32k, or
$6,400. In addition, the 32k income might have lowered the AMT
exemption and thereby increased AMT tax, increased AGI and thereby
lowered medical expense deduction and so on, so all in all, the credit
would be $6,400 or something in excess of $6,400.
Finally, what about state taxes.
Regarding method (b) of computing the credit, will the same method
carry over to the state?
And would method (a) of taking the deduction also carryover to state?
Say the person did not live in California when they got the 32k, but
they are a California resident now, then I imagine the deduction is
not allowed.
Arthur Kamlet
removep...@yahoo.com <removep...@yahoo.com> wrote:
>
>Suppose the repayment of less than 3k is a repayment of wages, then
>the deduction is reported on Schedule A as misc deduction subject to
>the 2% of AGI limit. If the taxpayer does not itemize, then they
>don't get any benefit from the deduction, which discriminates against
>lower income taxpayers.
That's OK. If the taxpayer is from higher income upbringing, and
is pushed into AMT territory, he won't get any benefit from the
deduction, which discriminates against higher income tax payers.
Fair & equitable, no?
--
ArtKamlet at a o l dot c o m Columbus OH K2PZH
removep...@yahoo.com
> removeps-gro...@yahoo.com <removeps-gro...@yahoo.com> wrote:
> >Suppose the repayment of less than 3k is a repayment of wages, then
> >the deduction is reported on Schedule A as misc deduction subject to
> >the 2% of AGI limit. If the taxpayer does not itemize, then they
> >don't get any benefit from the deduction, which discriminates against
> >lower income taxpayers.
>
> That's OK. If the taxpayer is from higher income upbringing, and
> is pushed into AMT territory, he won't get any benefit from the
> deduction, which discriminates against higher income tax payers.
>
> Fair & equitable, no?
If they're from higher income upbringing, their normal tax might be
more than the AMT tax, so they do get the benefit of the deduction.
Katie
gro...@yahoo.com> wrote:
>
> Suppose the repayment of less than 3k is a repayment of wages, then
> the deduction is reported on Schedule A as misc deduction subject to
> the 2% of AGI limit. If the taxpayer does not itemize, then they
> don't get any benefit from the deduction, which discriminates against
> lower income taxpayers. And besides, if they do itemize it is subject
> to the 2% limit, which means that you likely don't get the benefit of
> the deduction anyway, which discriminates against taxpayers dealing
> with small amounts of money.
>
> Publication 525, Repayments:
>
> http://www.irs.gov/publications/p525/ar02.html#d0e9279
The 2% floor on itemized deductions dates back to the 1986 Tax Reform
Act. The $3,000 limit on application of Sec. 1341 goes back a lot
farther than that -- at least into the 1950s and maybe as far as the
1930s.
The problem with an anomaly or injustice or whatever you want to call
it that has small tax effects, like this one, is that no one taxpayer
can afford to pursue it, either by a lawsuit or by lobbying for a
statutory change.
>
> Consider the following scenario for method (b), where you compute your
> tax on your prior year tax return without the extra income, and take
> the difference as a credit on line 70. Say in the prior year of 1998
> your income was 125k, including the 32k capital gain. You had rental
> loss of 10k, but as your income was above the 100k, the loss was
> partially disallowed and you got to deduct only 5k, and 5k got carried
> over. The following year your rental income was a profit of 8k, but
> combined with the carried over loss of 5k, the actual profit is 3k.
> Now you go back and redo your 1998 return without the 32k income. The
> income is 93k, so the entire loss of 10k is allowed. But this does
> not sound right as the 10k loss would be deducted in full in 1998, and
> then part or all of it deducted again in 1999. So I'm guessing that
> you should not increase your rental loss (meaning still take only 5k
> of loss as in your original return), or for that matter any item with
> a carryover component (such as investment interest, charitable
> contributions, etc).
>
I think the regs take care of this. See Reg. Sec. 1.1341-1(d). You
have to recalculate the tax for all of the prior years that were
affected by the inclusion of that income. So you would have to reduce
the (b) calculation by the amount of tax benefit you got in subsequent
years from any carryovers that resulted from the inclusion of the
income.
>
> Finally, what about state taxes.
> Regarding method (b) of computing the credit, will the same method
> carry over to the state?
>
> And would method (a) of taking the deduction also carryover to state?
> Say the person did not live in California when they got the 32k, but
> they are a California resident now, then I imagine the deduction is
> not allowed.
>
Many states probably conform to Sec. 1341. A state that, by statute,
starts the calculation of taxable income with federal AGI or federal
taxable income probably conforms. However, you would have to look at
it state by state.
California does have a statute that conforms very closely to Sec. 1341
(CRTC Sec 17049). Also, in California, after 2001 an individual
resident takes items into account as if he had been a resident for all
relevant years. So the deduction would be allowed, just as a resident
is allowed to claim a capital loss carryforward that arose in a
nonresident year. Of course the result of the (b) calculation would
be zero, unless the taxpayer actually filed a nonresident return and
paid a tax in the year the income was reported. Again, you'd have to
look at this state by state.
Katie in San Diego
D. Stussy
news:0013291a-9d6a-4911...@f24g2000prh.googlegroups.com...
> On Jul 2, 5:33 am, rdad...@panix.com (Dick Adams) wrote:
> > Katie <katiej_1...@yahoo.com> wrote:
> > > Ernie Klein <eckl...@pacbell.net> wrote:
> > > <The trials and tribulations of a Ponzi Scheme victim>
> > > Ernie, see IRC Sec. 1341.
> >
> > Perfect cite, Katie.
> >
> > I recall the one time I thought Katie was wrong.
> > After a thorough search of the IRC, Regs, etc.
> > it turned out she was correct.
>
> Well, I HAVE been wrong from time to time, and I might be wrong here.
> But I think the answer is that Kowell received the gains under a claim
> of right (i.e., based on what was known at the time, he had the right
> to the money) and Sec. 1341 applies. His tax liability for the year
> in which he was forced to repay the gains is the lesser of (a) the tax
> computed with a deduction for the amount repaid or (b) the tax for the
> repayment year calculated without the deduction, minus the reduction
> in tax for the year(s) of receipt of the income that would have
> resulted if that income had not been received.
>
> So yes, I think Kowell does get a deduction for the amount he repaid,
> or an adjustment to his current year tax liability. Also, I don't
> think the deduction is a capital loss; I think it's ordinary. The (b)
> calculation takes care of the difference between capital and ordinary.
As a deduction, it is ordinary - because it goes on schedule A.
As a credit, the character doesn't matter. However, it is a REFUNDABLE
credit.
Katie
> "Katie" <katiej_1...@yahoo.com> wrote in message
>
>
> > So yes, I think Kowell does get a deduction for the amount he repaid,
> > or an adjustment to his current year tax liability. Also, I don't
> > think the deduction is a capital loss; I think it's ordinary. The (b)
> > calculation takes care of the difference between capital and ordinary.
>
> As a deduction, it is ordinary - because it goes on schedule A.
> As a credit, the character doesn't matter. However, it is a REFUNDABLE
> credit.
>
Actually, Dieter, I was wrong about that. The deduction in the
restoration year is a capital loss, subject to the Sec. 1211
limitation, if the income was originally capital gain. See Reg. Sec.
1.1341-1(c).
Katie in San Diego
D. Stussy
> On Jul 3, 11:40 pm, "D. Stussy" <s...@bde-arc.ampr.org> wrote:
> > "Katie" <katiej_1...@yahoo.com> wrote in message
> > > So yes, I think Kowell does get a deduction for the amount he repaid,
> > > or an adjustment to his current year tax liability. Also, I don't
> > > think the deduction is a capital loss; I think it's ordinary. The (b)
> > > calculation takes care of the difference between capital and ordinary.
> >
> > As a deduction, it is ordinary - because it goes on schedule A.
> > As a credit, the character doesn't matter. However, it is a REFUNDABLE
> > credit.
> >
>
> Actually, Dieter, I was wrong about that. The deduction in the
> restoration year is a capital loss, subject to the Sec. 1211
> limitation, if the income was originally capital gain. See Reg. Sec.
> 1.1341-1(c).
I disagree for this reason:
Section 1341 existed in the 1954 Code (and maybe earlier). In 1986,
Congress added section 67, which specifically lists it (at 67(b)(10)) as an
"itemized deduction" that is exempt from the 2% of AGI floor. That
reclassified it as ordinary IN ALL CASES and invalidated regulations put in
place before the change that said otherwise.
Since 1987, as an individual only gets the claim of right deduction as an
itemized deduction (not limited by the 2% AGI floor), it is always ordinary
in nature. Prior to 1987, it could have been claimed anywhere on a tax
return (and was usually claimed on the schedule where the income being
reversed was listed). This does not affect the claim of right as a credit.
TR 1.1341-1(c), enacted in 1957 and updated last in 1978, was superseded by
a change in statute in 1986.
removep...@yahoo.com
> "Katie" <katiej_1...@yahoo.com> wrote in message
> > Actually, Dieter, I was wrong about that. The deduction in the
> > restoration year is a capital loss, subject to the Sec. 1211
> > limitation, if the income was originally capital gain. See Reg. Sec.
> > 1.1341-1(c).
>
> I disagree for this reason:
>
> Section 1341 existed in the 1954 Code (and maybe earlier). In 1986,
> Congress added section 67, which specifically lists it (at 67(b)(10)) as an
> "itemized deduction" that is exempt from the 2% of AGI floor. That
> reclassified it as ordinary IN ALL CASES and invalidated regulations put in
> place before the change that said otherwise.
>
> Since 1987, as an individual only gets the claim of right deduction as an
> itemized deduction (not limited by the 2% AGI floor), it is always ordinary
> in nature. Prior to 1987, it could have been claimed anywhere on a tax
> return (and was usually claimed on the schedule where the income being
> reversed was listed). This does not affect the claim of right as a credit.
>
> TR 1.1341-1(c), enacted in 1957 and updated last in 1978, was superseded by
> a change in statute in 1986.
Could publication 525 not be in accordance with the law then
<Quote source="http://www.irs.gov/publications/p525/ar02.html#d0e9279
">
Type of deduction. The type of deduction you are allowed in the year
of repayment depends on the type of income you included in the earlier
year. You generally deduct the repayment on the same form or schedule
on which you previously reported it as income. For example, if you
reported it as self-employment income, deduct it as a business expense
on Schedule C or Schedule C-EZ (Form 1040) or Schedule F (Form 1040).
If you reported it as a capital gain, deduct it as a capital loss on
Schedule D (Form 1040). If you reported it as wages, unemployment
compensation, or other nonbusiness income, deduct it as a
miscellaneous itemized deduction on Schedule A (Form 1040).
</Quote>
D. Stussy
news:16d41867-1992-4262...@q24g2000prf.googlegroups.com...
1986 and earlier law was exactly that. Such is incorrect for 1987 and later
law.
26 USC 67(b) is pretty clear: "..., the term 'miscellaneous itemized
deductions' means the itemized deductions other than --"
... (10) the deduction under section 1341 (...), ...
All the [other] enumerated items are itemized deductions (taxes, interest,
contributions, casualty losses, gambling losses, medical, ETD for IRD, work
expenses overcoming a disability, unrecovered pension basis, and a few
others). It's clear that by including the claim of right deduction in the
list that Congress reclassifed the deduction for individuals as ordinary
income and ONLY as an itemized deduction. Section 67 only applies to
individuals, estates, and trusts.
When one deducts taxes or interest on Schedule C, one is not taking a
deduction under the authority of section 163 or 164. One is using section
162 as authority and deducting it as an "ordinary and necessary business
expense," not as a tax or as [non-personal] interest.
To claim a 1341 deduction "above the line", one has to have a section
authorizing it to appear there. The problem is that the deduction is NOT an
expense, and therefore neither IRC 162 nor 212 authorize it above the line.
(Not all deductions are expenses - e.g. personal and dependency exemptions).
It is a reversal of income - like "returns and allowances" (e.g. Schedule C,
line 2). Although it did have capital treatment for an individual under
pre-87 law, 1341(4)(B) does NOT authorize a capital loss carryover beyond
the [current] taxable year for a claim of right deduction, and IRC 1212(b)
does not authorize capital loss carrybacks for non-corporate entities. What
that provision effectively means is that where the claim reverses a capital
gain, the individual taxpayer's OTHER capital losses carry forward without a
$3,000 (or $1,500 if MFS) reduction and that the current year's capital loss
is zero - since the claim of right deduction is an itemized deduction that
must appear on Schedule A.
Section 63(d) defines itemized deductions as any deduction other than
personal (and dependency) exemptions and those listed in section 62 for
computing AGI. Section 62(a) enumerates only one type of repayment - at
(12), as an AGI adjustment: Certain types of unemployment compensation.
Prior law may have recognized it according to character, but the addition of
section 67(b) which specifically includes it as among "itemized deductions"
changed that -- it CANNOT be a deduction which adjusts AGI.
Katie
> <removeps-gro...@yahoo.com> wrote in message
So the IRS is wrong in Pub. 525?
I don't really think so. I don't see that the inclusion of the 1341
deduction in Sec. 67 as an itemized deduction not subject to the 2%
AGI floor changes the character of the deduction. All it means is
that when the deduction is properly deductible as an itemized
deduction, it is not subject to the floor. That's what the IRS says
in Pub 525. Of course IRS publications are not authority for
anything, but one is not likely to be penalized for following their
instructions.
Also, the regulations under Sec. 1341 are quite detailed, with
examples, of how NOL carryforwards and carrybacks are handled when the
recognition year tax liability is recomputed. Of course for an
individual, capital losses are only carried forward. Reg. 1341(c)
gives an example; if a taxpayer restores $4,000, and the amount is a
long-term capital loss, the taxpayer (assuming no other capital gains/
losses in the restoration year) can deduct only $3,000 in the current
year and can deduct the remaining $1,000 in the following year. The
whole $4,000 is taken into account in determining whether the Sec.
1341 rules apply.
RIA is pretty good about noting when regulations have not been updated
for later legislation, but there is no note to that effect on Reg.
1.1341-1. I think the regulation is still good, and the IRS
publication is correct also.
Katie in San Diego
Katie
> the deduction is reported on Schedule A as misc deduction subject to
> the 2% of AGI limit. If the taxpayer does not itemize, then they
> don't get any benefit from the deduction, which discriminates against
> lower income taxpayers. And besides, if they do itemize it is subject
> to the 2% limit, which means that you likely don't get the benefit of
> the deduction anyway, which discriminates against taxpayers dealing
> with small amounts of money.
>
Note that the Sec. 1341 deduction in the year of restoration, if it is
a miscellaneous itemized deduction, is not subject to the 2% AGI
floor. That's something I learned from our discussion with Dieter,
that I didn't know before. So thanks to Dieter for that.
Katie in San Diego
KEBSC...@aol.com
> On Jul 3, 12:33�pm, "removeps-gro...@yahoo.com" <removeps-
>
> gro...@yahoo.com> wrote:
>
> > Suppose the repayment of less than 3k is a repayment of wages, then
> > the deduction is reported on Schedule A as misc deduction subject to
> > the 2% of AGI limit. �If the taxpayer does not itemize, then they
> > don't get any benefit from the deduction, which discriminates against
> > lower income taxpayers. �And besides, if they do itemize it is subject
> > to the 2% limit, which means that you likely don't get the benefit of
> > the deduction anyway, which discriminates against taxpayers dealing
> > with small amounts of money.
>
> Note that the Sec. 1341 deduction in the year of restoration, if it is
> a miscellaneous itemized deduction, is not subject to the 2% AGI
> floor. �That's something I learned from our discussion with Dieter,
> that I didn't know before. �So thanks to Dieter for that.
>
> Katie in San Diego
>
> --
Looks like we've finally got this figured out!
But what we cannot forget is that if the amount that has to be
repaid is $3000 or less and has to be reported as a deduction subject
to the 2% AGI floor, the taxpayer can still be whacked even when the
2% AGI floor does not reduce the deduction. Why? Because $3000 of
income can produce more than $6000 of taxable income because the
$3000 is included in the AGI phase-out calculations that are part of
almost 30 provisions in the Tax Code related to deductions,
exemptions, exclusions, credits, etc. Thus the taxpayer can pay tax
on more than $6000 on the $3000 of income that has to be repaid and
get a $3000 deduction or if the deduction is phased-out by the 2% AGI
floor he/she may get zippo benefit when the $3000 is repaid.
So at the 25 percent tax rate, the taxpayer can get whacked for $1500
in taxes with "illusory income". Do we have a great Congress or
what?
And compare that with the instructions that IRS has derived from
section 56(b)(1)(D). See line 7 on Form 6251 and consider what
happens when the refund is from a year when the regular tax was paid.
Deduction for the tax overpayment and then exclusion of the refund
from AMTI.
Cheers,
WDK
Arthur Kamlet
Are we entering the third and final year of the phase-out
of the phase-out? Meaning no more phase-outs?
--
ArtKamlet at a o l dot c o m Columbus OH K2PZH
--
KEBSC...@aol.com
> In article <9b61ed06-b378-450c-a822-363deaef2...@l64g2000hse.googlegroups.com>,
exemption phase-out?
Phase-out up to 85 percent of the Social Security benefit exclusion
and the phase-out of medical and miscellaneous expense deductions due
to the thresholds can more than double the taxable income attributable
to income at the margin.
Cheers,
WDK
KEBSC...@aol.com
> In article <9b61ed06-b378-450c-a822-363deaef2...@l64g2000hse.googlegroups.com>,
>
>
>
>
>
> �<KEBSCHU...@aol.com> wrote:
deductions.
Cheers,
WDK