Write off worthless IRA

[kirkavery]

I want to make sure I am not missing something because the dollar amounts involved are huge. 

The taxpayer and spouse had IRA accounts totaling $589,000 which became worthless in 2020.  They received final Forms K-1 with the IRA as the partner showing ordinary business income losses totaling $568,000 and distributions totaling $21,000.

All the IRA contributions were tax deductible and they have no basis in the IRAs from non-deductible contributions.

As understand the Tax Cuts and Jobs Act it eliminated the miscellaneous itemized deductions so even if there was basis there still would be no write off.

Is that correct, no write off anywhere, no how?

[qbteachmt]

They already got the benefit of the write off of their own money. What they lost is Unrealized Gain.

Do you mind sharing what sort of investment scheme they got involved with? This is a sad lesson.

[kirkavery]

The IRA invested in Holiday Prime Capital II, LLC (HPC) which was in the business whose principal product was loans..  They contend fraudulent activity and even had the FBI involved.   The company HPC described the loss as "bad business decisions and/or fraudulent activity.

[qbteachmt]

Oh, that's sad. Does it seem scary when you see "II" as in, this is their Second attempt? Hopefully there will be some recovery for them.

[Terry53029]

I think you should advise your clients to see an attorney. If they withdraw any funds left they may be able to use Revenue Procedure 2009-20, and take a loss not subject to 2% AGI

[kirkavery]

That is an interesting thought to use revenue procedure 2009-20 but when it refers to the amount of write off they refer to "basis" and "amounts included in gross income".   In this case with a tax deductible funded traditional IRA I do not believe we have either.

[Terry53029]

Once you take out your IRA, it is no longer a tax favored account. You then have a loss due to fraud. I am far from an expert in that area, but have read of people doing that. Which is why you should send your clients to a good tax lawyer. Also I think you must take out all IRA accounts, and if under 59 1/2 the 10% penalty applies.

[qbteachmt]

Remember, you cannot write off something you never wrote on. The Madoff scheme has different considerations, because people reported and paid taxes on phantom gain.

[BobKamman]

This apparently relates to an ongoing case in New Jersey (no comment) Bankruptcy Court and a debtor who claims to have a 401k worth $591,000.  I won't mention his name because he might be your client.  On the other hand, an IRA investor has recently settled a claim; the court file doesn't give many details, other than documents from other entities are involved.  Maybe that's your client.  Some of the debtors are in Naples, Florida.  I would be very careful when looking at anything involved in this matter.