Sch C or Sch A?

[Catherine]

Client made a business deal with a friend; they were going to flip a house.  Friend bought the house, client gave personal loan for materials/supplies/etc for the flip.  Even got a real note, with real terms, notarized and everything.  "Friend" skips out with the money after making a couple of payments; house (in friend's name) foreclosed; almost the whole amount is lost.

So it looks like a plain-jane theft loss - but the 4684 for theft losses only flows to Sch A.  This was business only; agreement in place, proper documents, plan was to make a bundle on a flip.  Should I leave off the 4684 and just report it on Part V of Sch C?  I've been looking through instructions pubs and regs until I can't see straight and can find nothing specific to theft losses and Sch C.  It does not seem right to report on Sch A; it had nothing to do with personal items.

So the question is - am I right thinking this really belongs on Sch C?  Or am I stuck reporting on Sch A?

[Margaret CPA in OH]

Hmmm. wouldn't this have originally been a de facto partnership?  If it was a business 'deal' and 'they' were going to flip a house, why would it be only your client's Sch. C?  I agree it doesn't seem appropriate for A as it was a business - sort of.  I'm guessing getting the SSN of the scoundrel is not going to be easy, though. 

[Lee B]

Is this pre or post TCJA ?

[Lee B]

Upon further reflection, I don't believe this meets the definition of a casualty loss.

Since your client is not in the business of loaning money, it also doesn't meet the requirements for the deduction of a business bad debt.

I believe that the only deduction it qualifies for is a capital loss.

[jklcpa]

Did the documents and agreements include the business setup and agreement to share in profits, losses, and expenses, or was the documentation you refer to the loan agreement only.  I'm trying to determine if it really was a de facto partnership or a joint venture, either of those requiring a return for the business.

[Abby Normal]

My first reaction is Sch D capital loss on the loan. I'm guessing the loan was not secured by the property.

[ILLMAS]

1 hour ago, Catherine said:

Client made a business deal with a friend; they were going to flip a house.  Friend bought the house, client gave personal loan for materials/supplies/etc for the flip.  Even got a real note, with real terms, notarized and everything.  "Friend" skips out with the money after making a couple of payments; house (in friend's name) foreclosed; almost the whole amount is lost.

So it looks like a plain-jane theft loss - but the 4684 for theft losses only flows to Sch A.  This was business only; agreement in place, proper documents, plan was to make a bundle on a flip.  Should I leave off the 4684 and just report it on Part V of Sch C?  I've been looking through instructions pubs and regs until I can't see straight and can find nothing specific to theft losses and Sch C.  It does not seem right to report on Sch A; it had nothing to do with personal items.

So the question is - am I right thinking this really belongs on Sch C?  Or am I stuck reporting on Sch A?

Show this to your client:  https://www.legalmatch.com/law-library/article/theft-by-conversion.html

He can file a police report and make his friend a wanted person, this will get his attention.

 

[Catherine]

13 minutes ago, ILLMAS said:

He can file a police report and make his friend a wanted person, this will get his attention.

Already done.  Blood from a turnip; the bozo blew the money and is broke.

[Catherine]

Looking into other documentation.  From what I can tell, it was a loose partnership.  One was going to buy the house, the other do most of the renovations and put in funds because the first had wholesale connections for supplies.  Yeah.  And we'll never get the other's ssn.

Year is 2016; before the tax law changes.

[Possi]

6 hours ago, Abby Normal said:

My first reaction is Sch D capital loss on the loan. I'm guessing the loan was not secured by the property.

I agree. The loan is documented as well as the attempt to collect, by the police report. 

[Lee B]

12 hours ago, Possi said:

I agree. The loan is documented as well as the attempt to collect, by the police report. 

I disagree, the police report is not an attempt to collect, it is the report of an alleged crime.

[DANRVAN]

20 hours ago, Catherine said:

  "Friend" skips out with the money after making a couple of payments; house (in friend's name) foreclosed; almost the whole amount is lost.

How much did your client lose?

[Catherine]

13 minutes ago, DANRVAN said:

How much did your client lose?

95k

[DANRVAN]

I don't think you have given enough info to answer your question.  However, I don't think you can call it a theft loss, it sounds more like a bad debt.  If so, the question becomes whether it is  bad dept from business  (write off 100% as ordinary loss) or personal (treated as short term capital loss).

Section 166 basically says that a business debt is one created or acquired in connection with a taxpayers business,: or incurred within a trade or business.  It depends on facts and circumstances as case law tells us.  For example, there was a case where a CPA incurred a business debt when he loaned money to a start up business with the expectation of providing professional services to the business.

So in the case of your client, if he can show it was connected to a trade or business he gets a free pass to write it off as an ordinary loss. However, there is another possible twist since you mentioned a partnership.

There are cases where the courts have treated loans as a capital contribution in exchange for a percentage of profits.  If that was the case, then the loss becomes deductible under section 165.  So then the question is whether the house flipping venture was going to be treated as a business or an investment in determining whether an ordinary loss or capital loss was incurred.