Gambling losses vs contractor fraud - tax loss harvesting?

[voidstar]

So, I'm not a casino or sports-type gambler. But in a way, I gambled on a home building contractor. That builder ended up abandoning the job and I'm out over $140K. Now, yes, lesson learned: don't deal with contractors that require upfront before-the-job-is-done payment. Just not worth the risk.

This guy was a Bible thumping preacher, his foreman was a retired Fire Department chief, and his wife and mother were helping with the business. Things started ok - but then he wouldn't show receipts or proof of material purchases (after claiming he had it all stored in his warehouse). That went on for months, with excuse after excuse on why he wasn't making any build progress. He did some framing work, or about 20% of the contracted work.

So, he no showed for the civil case, and a default judgement should be made sometime next week. But we know that the guy is still in town.

My question here is: can a loss like this be treated similar or same as a gambling loss? It's been suggested that large losses like this are in a different category and might be able to do a lump-sum deduction? Due to various other violations, the default judgement might be as much as 3X the damages -- but he clearly won't care (we've since learned he's done this to dozen other folks over the past decade), since (we think) he's given away whatever money he does get (such as to church donations to look good, house down payments for his kids, or just smoked the money away, etc.). I'm told the state is looking into his bank records (based on the cleared checks I gave him) - but at the speed-of-government he'll probably just end up long gone soon, and so I'm not very hopeful of any assets being found (at least, none tied to his name). It's a pretty big punch in the stomach, especially with the framing mostly completed such that have to decide to press on or demolish it.

But for taxes this season, I'm not sure what to do - if anything. I just use TaxAct typically and things are pretty straightforward. For a "large amount loss" is there anything more specific I should look into? Otherwise, the "losses" credit just seems to be capped at $3000/year?? Won't I need some wording in the default judgement as "proof of losses"?

 

[cathy63]

This type of loss is not deductible any more. That deduction was eliminated in the 2017 Tax Cuts & Jobs Act. Previously it would have been a loss due to theft.

You can only deduct gambling losses to the extent that you have gambling winnings, so even if you used some kind of pretzel logic to claim that building a house with a signed contract was a gamble (and there's no way the IRS would believe that if they audited you), you'd still have to have $140K of winnings to deduct it.

 

[GrayHare]

Best I can think of is to make it part of the cost basis of the home.

 

[Sunset]

Why don't the DA's file criminal charges against this thief.. There is a pattern of this behavior.

 

[voidstar]

The victims are across various counties, and some of them are fearful of coming forward (this contractor has a powerful personality and has threatened libel against anyone speaking anything bad against him - to which I am told that truth is a very powerful defense on that).

It's been a very discouraging thing - I don't even get speeding tickets, I pay my taxes (even on crypto!), try to do everything right and the "reward" is to end up screwed like this after decades of savings. Of course, we all know the whole stock market is full of corrupt business - that Nikola thing, for example (which per my reading, he's getting 4 years prison for over $40billion stolen? I'm somewhat teasing, but I think almost anyone would take that deal, even if the take home ended up just 1% of that).

I'm told the sheriffs have to collect the evidence and present the case to the DA, then they (the DA) will decide to pursue it or not. Just given the state of the world, they (the DA) just might have greater things to deal with (i.e. drugs and violent crimes). They have staffing limitations like almost everything else in law enforcement right now. Plus, it won't be a popular case for them: they'll put a family guy in prison, who has no assets that anyone wants. I've tried to stress to their office that even that is worthwhile, if they care about growing business development in the area (i.e. reputation of not dealing with fraud contractors is going to discourage development in the whole area -- but then there are those who are ok with that).


I've never seen the inside of a courtroom (aside from jury duty) so this is all new to me. And that's one question several of us have: should we go to the press to try to help encourage the DA this is a worthwhile case? Or could that backfire (such as causing this guy to flee faster and further than he might otherwise?)? Nobody seems to know.

From the laws perspective, I understand it all has to be investigated - I've kept all my emails, text messages, bank records, etc. So I'm confident in being able to prove my side of the story. But to establish fraud, the "pattern of behavior" has to be shown - so other victims need to do the same in providing evidence (and again, this is across various counties - and if someone only lost $5K maybe they don't want to bother with it, or other folks just might not have solid records). This is way beyond small claims, I'm not sure at which point it becomes federal and easier for the law to follow him across state lines.

Anyhow, the legal process is cranking away. Meanwhile, I was just hoping I could ease the pain about this if there were some tax-credit of some sort we could use. Sounds like that is not the case. But the "cost basis" idea might be helpful, I think I understand on that - thanks.

 

[gauss]

Hopefully all of your expenses such as your legal fees were included in your judgement.

Will your judgement name both husband and wife as defendants? In my state, it is a problem to seize assets in jointly held accounts if both of the holders are not named on the judgement.

Also I have heard that "process servers" can be very effective in helping to collect on judgement by seizing vehicles etc.

Are you familiar with the creditor/debitor exams in your state where you (or more likely a professional) can pull him in to court and question him under oath about where his assets are located. I am told that a good examiner will not ask the question until he already knows the answer so he can be quickly caught in perjury. Also bench warrants can be issued here if he is a no-show for the exam -- and the exams can be an iterative process.

If someone has no assets or income then collections can be a problem, but it sounds like your guy isn't in this group.

Bottom line, you can hope that the DA will pursue him criminally, but there a lots of things you can do yourself in the meantime to try to get recourse.

-gauss

 

[Aerides]

When I first started doing taxes for my small business, I remember asking DH where I could account for losses (damaged inventory, etc.). Unfortunately, yeah...that's an accounting matter for your costs/profit, not a taxable event.