topic Partial Liquidating Distribution from SEC Frozen Mutal Fund Following Fraud in Investors & landlords

Partial Liquidating Distribution from SEC Frozen Mutal Fund Following Fraud

69VanNuys — Wed, 17 Nov 2021 15:32:02 GMT

The SEC froze a mutual fund purchased through Schwab and regulated under the 1940 Act because the CFO is believed to have been adjusting the value of certain securities within the fund. What a mess. The SEC ordered the fund to liquidate all its assets and develop a distribution plan. The plan of distribution was approved by the SEC and the fund is planning to distribute 40 percent of the available assets back to shareholders on a pro-rata basis. The remaining 60 percent of the cash (liquidated assets) will be held by the funds until it can determine what its liabilities are and defend all litigation and class actions...The fund was frozen on February 2021.

Any thoughts on how to manage the loss on the investment in this tax year 2021? I know: (i) the amount or basis of my investments in this fund; (ii) the value of the investments on the day it was frozen; and (iii) the amount of funds I will receive at the end of November 2021.

How to treat the cash received in the liquidating distribution? is it income? long-term capital gain (I invested in 2017/2018)? Is it offset by the loss?

Thank you in advance

Re: Partial Liquidating Distribution from SEC Frozen Mutal Fund Following Fraud

Critter-3 — Wed, 17 Nov 2021 15:52:20 GMT

Ask the broker how this will be reported ... then you will have an idea on how to report it.

Re: Partial Liquidating Distribution from SEC Frozen Mutal Fund Following Fraud

Anonymous_ — Wed, 17 Nov 2021 16:00:15 GMT

I agree with @Critter-3; contact Schwab and inquire as to how they are planning to report it on the consolidated statement for 2021.

Also, if this is the Infinity Q Diversified Alpha Fund, there is a web site.

https://www.infinityqfundliquidation.com

Re: Partial Liquidating Distribution from SEC Frozen Mutal Fund Following Fraud

69VanNuys — Wed, 17 Nov 2021 16:39:18 GMT

Yes, it is Infinity Q Diversified Alpha. Sadly they are frauds.

Re: Partial Liquidating Distribution from SEC Frozen Mutal Fund Following Fraud

69VanNuys — Thu, 18 Nov 2021 00:13:00 GMT

Thank you @Critter-3 and others that commented. The broker says the liquidation distribution will be reported as a sale in a 1099B. Still leaves open a question on the remaining assets of the fund that are not yet distributed and how I treat that "investment."

Re: Partial Liquidating Distribution from SEC Frozen Mutal Fund Following Fraud

Anonymous_ — Thu, 18 Nov 2021 00:39:57 GMT

@69VanNuys wrote:

.....Still leaves open a question on the remaining assets of the fund that are not yet distributed and how I treat that "investment."

You can deal with that issue at a later date. Based upon the following statement on the web site, that will most likely be the 2022 tax year.

Although the Fund is currently unable to anticipate when it will be able to make a final liquidating distribution, at this time it is highly unlikely that a final liquidating distribution could be made in 2021.

Re: Partial Liquidating Distribution from SEC Frozen Mutal Fund Following Fraud

Mike9241 — Thu, 18 Nov 2021 07:47:58 GMT

generally, in situations like this, the IRS would say any loss is contingent until the final distribution is made. you don't know what your loss will be. at best you would have an estimate.

so it's likely the broker will report the proceeds but provide no cost basis. if so, report cost equal to proceeds. you'll take any loss in the year the final distribution is made.

if they provide your cost basis, go with it by I think the IRS would disagree based on similar situations like Enron, Lucent, and 100's of other publically traded securities where fraud was involved.

Re: Partial Liquidating Distribution from SEC Frozen Mutal Fund Following Fraud

Mike9241 — Thu, 18 Nov 2021 18:16:53 GMT

there is another possibility I've should have mentioned. just don't know enough about what happened.

losses from Ponzi type Investment Schemes
The IRS has issued the following guidance to
assist taxpayers who are victims of losses from
Ponzi-type investment schemes.

• Revenue Ruling 2009-9, 2009-14 I.R.B. 735
https://www.irs.gov/irb/2009-14_IRB#RR-2009-9
• Revenue Procedure 2009-20, 2009-14 I.R.B.
749

https://www.irs.gov/irb/2009-14_IRB#RP-2009-20
• Revenue Procedure 2011-58, 2011-50 I.R.B.
849

https://www.irs.gov/irb/2011-50_IRB#RP-2011-58
If you qualify to use Revenue Procedure
2009-20, as modified by Revenue Procedure
2011-58, and choose to follow the procedures
in the guidance, first fill out Section C to
determine the amount to enter on Section B,
line 28. Skip lines 19 through 27. Section C of
Form 4684 replaces Appendix A in Revenue
Procedure 2009-20. You don't need to
complete Appendix A.
For more information, see the instructions
for Section C, later, and the above revenue
ruling and revenue procedures.
If you choose not to use the procedures in
Revenue Procedure 2009-20, you may claim
your theft loss by filling out Section B, lines 19
to 39, as appropriate.

Section C—Theft Loss
Deduction for Ponzi-Type
Investment Scheme Using the
Procedures in Revenue
Procedure 2009-20
Fill out Section C if you claim a theft loss
deduction for a Ponzi-type investment scheme
and you meet both of the following conditions.
• You qualify to use Revenue Procedure
2009-20, as modified by Revenue Procedure
2011-58.
• You choose to follow the procedures in the
guidance.
If you meet both conditions, fill out Section C
in lieu of Appendix A in Revenue Procedure
2009-20.
For more information about claiming a theft
loss deduction from a Ponzi-type investment
scheme, see the following guidance.

Line 40
Enter the initial amount of cash or basis of
property that you invested in the investment
arrangement. Don't include any of the following
on this line, line 41, or line 42.
• Amounts borrowed from the responsible
group and invested in the specified fraudulent
arrangement, to the extent the borrowed
amounts weren't repaid at the time the theft was
discovered.
• Amounts such as fees that were paid to the
responsible group and deducted for federal
income tax purposes.
• Amounts reported to you (the qualified
investor) as taxable income that weren't
included in gross income on the investor's
federal income tax returns.
• Cash or property that you (the qualified
investor) invested in a fund or other entity
(separate from you (the qualified investor) for
federal income tax purposes) that invested in a
specified fraudulent arrangement.
For definitions of responsible group,
specified fraudulent arrangement, and qualified
investor, see Section 4 of Revenue Procedure
2009-20.
Line 41
Enter the amounts of cash or the basis of
property that you invested after you made the
initial investment (including amounts
reinvested).
Line 42
Enter the total amounts of net income (for
example, interest and dividends minus
expenses) from the specified fraudulent
arrangement that, consistent with information
received from that arrangement, you included in
income for federal tax purposes for all tax years
before the discovery year, including tax years
for which a refund is barred by the statute of
limitations.
Discovery year. The discovery year is the tax
year when one of the following occurs.
• The indictment, information, or complaint
described in section 4.02(1) or (2) of Revenue
Procedure 2009-20 (as modified by Revenue
Procedure 2011-58) is filed.
• The complaint or similar document
described in section 4.02(3) of Revenue
Procedure 2009-20 (as modified by Revenue
Procedure 2011-58) is filed, or the death of the
lead figure occurs, whichever is later.
Line 44
Enter the total amount of cash or property that
you withdrew from the investment arrangement

in all years (whether designated as income or
principal).
Line 45
This is the amount of your investment that is
eligible for a deduction before any actual or
potential recoveries are taken into account.
Line 46
Potential third-party recovery. This is the
amount of all actual or potential claims for
recovery, as of the last day of the discovery
year (defined earlier), that are not from
potential insurance or Securities Investor
Protection Corporation (SIPC) recovery, or a
potential direct recovery.
Potential insurance/SIPC recovery. This is
the total of all actual or potential claims for
reimbursement that, as of the last day of the
discovery year, are attributable to:
• Insurance policies in your name that protect
you from this type of loss;
• Contractual arrangements, other than
insurance, that guaranteed or otherwise
protected against this type of loss; or
• Amounts payable from SIPC, as advances
for customer claims under the Securities
Investor Protection Act of 1970, or by a similar
entity under a similar provision.
Potential direct recovery. This is the amount
of all actual or potential claims for recovery, as
of the last day of the discovery year (defined
earlier), against the responsible individual or
group.
Line 48
Enter the amounts you actually received as a
reimbursement or recovery from any source.
Don't include amounts that are potential direct
recoveries (defined earlier) or potential
third-party recoveries (defined earlier).
Line 49
Enter the amount of potential insurance/SIPC
recovery (defined earlier).
Line 51
Enter the amount from line 51 on line 28 of
Section B. Don't complete lines 19 through 27
for this loss. Then complete Section B, Part II

Part II
Read the statements and declarations in this
part carefully. Enter the required information in
the spaces provided. You are agreeing to these
statements and declarations when you sign
your tax return. The information you enter in this
part will be used to verify the fraudulent
investment arrangement.

Re: Partial Liquidating Distribution from SEC Frozen Mutal Fund Following Fraud

Opus 17 — Mon, 22 Nov 2021 20:32:08 GMT

@69VanNuys wrote:

Thank you @Critter-3 and others that commented. The broker says the liquidation distribution will be reported as a sale in a 1099B. Still leaves open a question on the remaining assets of the fund that are not yet distributed and how I treat that "investment."

Do you expect to take a loss (receive less than your original investment)? Or you will receive less than you were told your assets were worth, but still more than your original investment.

If you will have a gain, just less than you expected, then I concur with @Mike9241 's answer below. I don't think the Ponzi scheme rules would be allowed or beneficial to you.

generally, in situations like this, the IRS would say any loss is contingent until the final distribution is made. you don't know what your loss will be. at best you would have an estimate.

so it's likely the broker will report the proceeds but provide no cost basis. if so, report cost equal to proceeds. you'll take any loss in the year the final distribution is made.

Re: Partial Liquidating Distribution from SEC Frozen Mutal Fund Following Fraud

69VanNuys — Tue, 23 Nov 2021 04:35:41 GMT

Thank you all for your thoughts. It is uncertain now whether I will recover even the amount of the investment. I will not know u til it is determined how much, if any, will be in a final distribution. The initial distribution will not cover my initial investment.

I will need to study the Ponzy scheme rules to determine whether they may apply. The only facts I have are those repeated by the company in its plan and disclosures on the website listed above.

Re: Partial Liquidating Distribution from SEC Frozen Mutal Fund Following Fraud

Anonymous_ — Tue, 23 Nov 2021 15:07:28 GMT

@69VanNuys wrote:
I will need to study the Ponzy scheme rules to determine whether they may apply.

There will inevitably be lawsuits that will be filed (or already have been filed) so that will be determined for you.