A few days ago, maybe a week or so by now, a friend called who I don't often hear from but who knows that I had a long career in taxation. He had some questions about a situation
His wife had gotten into a predicament with her brother or brother-in-law. The man had been in prison for some kind of scam or fraud and had come up for parole, so my friend and his wife, the parolee's sister or sister-in-law, decided to help and provided money and resources so the parolee could get out and get going. So anyway, the man got out and seemed to be doing okay, and my friend and his wife continued to extend help and give support to him. Eventually, the man needed funds for his "business," and he apparently asked my friend's wife for an investment that would eventually, he said, earn beaucoup bucks for her. She extended the funds, and as it turns out, he ripped her off
Now my friend and his wife are out the money, are anxious to see the parolee receive justice for ripping them off, and will never see a return on their investment. It is lost. So, my friend wanted to know if he could do anything for tax purposes with the situation that would give them some immediate
So the question is, what are the tax consequences? Well, like so many things, it depends, and there are not enough facts at hand to be precise. It is likely that the "investment" is now worthless and that would make this year, 2008, the year to report the loss. But what is the nature of the loss? My friend mentioned that the parolee had made my friend's wife an officer in a corporation. So in all likelihood my friend's wife, as collateral for her funds provided to or advanced to him, received stock or ownership in the corporation. In all likelihood, what my friend and his wife have is worthless stock, at best a short-term capital loss. It is possible however that the nature could be something else, but I don't have enough factual information to conclude that.
We always want to trust those closest to us. I know I've done the same thing and continue to do the same thing all the time. You hope for the best and you make extensions of help based upon that hope. I hope I never have to give up on hoping, but sometimes you have to wonder.