Following up on this since 2 separate CPAs handling friend's ponzi scheme loss are doing differently than suggested here
- If claim 75% loss in prior year tax return. This means tax payer reasonably expect 25% recovery
- Tax benefit rule only applied after recovery exceed the estimated recovery (25% in this example)
Here is an article suggesting similar. See section "Subsequent year adjustments"
How to deduct the maximum theft loss Ponzi scheme | JW Accounting + Tax LLC New Orleans (jwaccountin...
Here is the language on IRS Revenue Ruling 2009-09. A bit hard to read but I think states the recoveries are first untaxed up to the undeducted portion (underlined). Amount beyond this is taxed following tax benefit rule.
A may deduct the theft loss in Year 8, the year the theft loss is discovered, provided that the loss is not covered by a claim for reimbursement or other recovery as to which A has a reasonable prospect of recovery. To the extent that A’s deduction is reduced by such a claim, recoveries on the claim in a later taxable year are not includible in A’s gross income. If A recovers a greater amount in a later year, or an amount that initially was not covered by a claim as to which there was a reasonable prospect of recovery, the recovery is includible in A’s gross income in the later year under the tax benefit rule, to the extent the earlier deduction reduced A's income tax. See § 111; § 1.165-1(d)(2)(iii). Finally, if A recovers less than the amount that was covered by a claim as to which there was a reasonable prospect of recovery that reduced the deduction for theft in Year 8, an additional deduction is allowed in the year the amount of recovery is ascertained with reasonable certainty.
