No risk, no deduction
Taxpayers may deduct losses up to the amount of their at-risk investment, under certain conditions. But deducting a loss if no risk was involved could lead to a civil fraud penalty of 75% of the resulting underpayment. A U.S. District Court denied one taxpayer’s loss, stating he hadn’t engaged in an at-risk financial activity, and that his capital contributions were made to an account in a Cayman Island entity that he could freely draw from. Based on a finding of fraudulent intent, the court imposed the penalty. (DC UT, 3/8/17, 2017-519)
