Investment Losses

Hello
Have client with significant investment losses due to fraudulent activities of the company he invested in. Client would like to claim the capital loss however it appears he still has an open lawsuit against the company. My understanding is the investment should be completely worthless with zero chance of recovery.

Anyone worked on similar scenarios? Do we need to include a disclosure on with 1040?

Thanks

HTT

See the Applegate case referenced in this discussion.

The loss is deductible in the year sustained. However, it cannot be deducted if there is a reasonable prospect of recovery.(6) The possibility of recovery is a question of fact that must be determined by the particular circumstances involved. The recovery need not be complete to delay the deduction. The fact that the possibility of any recovery exists will delay the deduction until it can be determined with reasonable certainty that the recovery will be less than the loss sustained. In those cases in which the recovery would result from an action against a third party, the taxpayer will have to demonstrate that a favorable judgment would be insufficient to provide full reimbursement. It will be hard to establish this proof if a lawsuit has been filed for all damages sustained.(7)

. https://www.thefreelibrary.com/Deductin ... a014730883

Thank you for the response. Client's lawyer indicated they expect zero chance of recoverability, the lawsuit is essentially a step in the process of claiming the losses by proving they have effectively exhausted all option of recovering his investment. With that said, is it reasonable to claim the loss although the lawsuit is open with no expectation of a favorable outcome (ie recovering any of the investment)?

Yes, it sure is.

Thank you, much appreciated