Follow up question
- I took the Ponzi scheme safe harbor (deducted 75% of theft loss) on schedule A (via form 4684) in my 2017 return. Have 25% left over for tax free future recoveries (starting to come in) under the tax benefit rule.
- Ponzi scheme company went into bankruptcy and was taken over by Receivership. Receiver liquidated the assets and is in the process of paying back the recoveries. Receivership also had to settle tort claims with investor group so the investors don't sue the Receiver (since they just became the Ponzi scheme company).
- Received one recovery payout from the Receiver so far. Also got a 1099 from the Receiver for the tort claim settlement portion of this payout. Total payout is slightly higher than the 25% loss not yet deducted. Ponzi scheme theft loss safe harbor treatment states the future recoveries <= undeducted portion (25% in my case) falls under tax benefit rule and are not added to gross income and therefore not taxed.
My question is
- If I include this 1099 to my gross income, how do I eliminate it from calculating tax liabilities? According to tax benefit rule, I should be able to not claim <= 25% as income. The only way to do that is to not include the 1099.
- There will be further recoveries and potentially more 1099s. What if a future 1099 amount straddles and goes above the 25% undeducted loss? I know I have to add to gross income for all recoveries > 25%. But then how do I report the fraction of the 1099 that is above the 25%?
My guess is I don't include these 1099s to my Turbotax even though the issuer reports them to IRS. Instead, I just calculate and include all recoveries > 25% as misc income on the tax year of the recovery. Is this correct?
UPDATE:
Slowly learning more info. Seems recoveries from insurance and asset liquidation provide tax free treatment opportunities (if unused theft loss deductions are available) while punitive recoveries (tort settlements) are taxable with 1099s. A bit surprising receivership issued 1099 for the tort settlement portion of the recovery. Recovery came from liquidating assets, really kind of crappy portion for converted into taxable recovery treatment.
