This was not a ponzi scheme and the U.S government that found these culprits guilty of fraud was the U.S Department of Justice. According to TP, the department will be checking for the next 20yrs to see if the culprits have any money to pay back the investors. TP in their heart know they will never get paid
I believe I found my answer to question 1:
Year of discovery with no reasonable prospect of recovery.
Determining the correct year in which to take the theft loss deduction may be the most troublesome aspect of the deduction. A taxpayer with an allowable theft loss who takes the deduction in an inappropriate year can face not only the disallowance of the deduction, but also substantial penalties and interest.
IRC section 165(e) states that any loss arising from theft shall be treated as sustained in the taxable year the taxpayer discovers the loss and is thus deductible in that year. The Treasury Regulations specifically note that the loss is not deductible in the year the theft actually occurs unless that is also the year in which the loss is discovered. The troublesome caveat, however, is found in Treasury Regulations section 1.165-8(a)(2); if in the year of discovery there exists a reasonable prospect of recovery or reimbursement, that portion of the loss may not be deducted until it can be determined that recovery or reimbursement will not occur. Furthermore, if it is “unknowable” if recovery will occur, the entire deduction must be postponed until it can be determined with reasonable certainty whether such reimbursement will be received.
A reasonable prospect of recovery exists when the taxpayer has a bona fide claim for recovery or reimbursement and there is a substantial possibility that such claims will be decided in the taxpayer’s favor. The Tax Court has explained that a taxpayer does not have to be an “incorrigible optimist,” and claims for recovery whose potential for success are remote or nebulous will not cause a postponement of the deduction. Furthermore, the court does not look at facts whose existence was not reasonably foreseeable as of the end of the year in which the loss was discovered. In other words, the fact that the taxpayer subsequently succeeded in a legal action on the claim does not necessarily mean that no reasonable prospect of recovery existed in the year the deduction was taken [Ramsay Scarlett & Co. v. Comm’r, 521 F.2d 786 (4th Cir. 1974)].
This standard presents important considerations for taxpayers who are determining whether there is a reasonable prospect for recovery in a given year. If a taxpayer files suit against the perpetrator or joins in an existing suit, a prospect for recovery is usually deemed to exist. The lengthy process of lawsuits and receiverships can, however, delay the allowance of the claim. A similar delay in deductibility may occur when the taxpayer files bankruptcy claims against the perpetrator of the investment theft. In Bunch v. Comm’r (TC Memo 2014-177 2014), the Tax Court ruled that the taxpayers had a reasonable prospect of recovery at the end of the discovery year because they had filed a claim in connection with the perpetrator’s bankruptcy proceeding and it had not yet been proven that there would be no assets with which to pay the claims.
Another consideration for taxpayers is the cost of litigation. Because “reasonable prospect of recovery” is a factual determination, it is usually not resolved by a motion for summary judgment. This means that a full trial may be needed to win against an IRS action. The cost is often prohibitive for many taxpayers.