Los Angeles Feds: Section 1031 Exchange Accomodator Illegally Dipped Into Investor Escrow Accounts, Pocketing $23M

In Los Angeles, California, the Los Angeles Times reports:

• This week's indictment of Los Angeles real estate mogul Ezri Namvar on criminal fraud charges was welcome news to local investors who say the Iranian immigrant preyed on their shared ethnic ties and bilked them out of hundreds of millions of dollars.

• Namvar has agreed to surrender to federal authorities Monday to face charges that he stole $23 million from clients of his company, Namco Financial Exchange Corp., which safeguarded proceeds from commercial real estate transactions, said Thom Mrozek, a spokesman for the U.S. attorney's office in Los Angeles. A federal grand jury indicted Namvar on Tuesday.

• The indictment alleged that Namvar misappropriated the money in 2008, using it to pay investors and creditors from a real estate investment company he ran, instead of holding it in escrow as promised. The charges carry a combined maximum sentence of 100 years in prison. Also charged in the indictment was Hamid Tabatabai, who served as controller and vice president of Namco Financial.

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• Allegations in the indictment related only to Namco Financial, which helped investors avoid taxes by holding their commercial real estate profits in escrow until they could be reinvested.(1) Namvar promised to safeguard the money but instead dipped into it throughout 2008 to help run his struggling businesses, the indictment alleged.(2)

For more, see Investors cheer indictment of L.A. real estate mogul (A federal grand jury accuses Ezri Namvar of misappropriating $23 million held in escrow by one of his companies. 'I am happy because he deserves it,' said one man who lost $700,000).

For the U.S. Attorney press release, see Prominent L.A. Businessman Indicted On Fraud Charges That Allege He Bilked Five Victims Out $23 Million (Ezri Namvar Allegedly Stole Money Given to His Company for Safekeeping).

Go here for other posts on Section 1031 exchange escrow ripoffs.

(1) This outfit acted as a Qualified Intermediary (Exchange Accommodator) in Internal Revenue Code Section 1031 Exchanges, a legal maneuver that enables real estate investors reinvest proceeds from sales of profitable real estate investments into new real estate deals while indefinitely deferring the payment of income taxes on the profits.

(2) If it wasn't bad enough that the investors lost all this loot, the U.S. tax laws state that if the escrowed cash isn't reinvested in new real estate within certain time parameters, the investors will have to immediately pay their income tax liability. Thus, they now face a big tax bill on the un-reinvested profits from the sales, and no longer have those profits from which to pay the IRS bill (See Alleged 1031 Exchange Scam Leaves Real Estate Investors With Big Tax Bill & No Money To Pay It With).

However, the victims may be entitled to offset their taxable investment profits by taking an itemized deduction on their income tax returns for some, if not all, of their losses. See IRS Revenue Ruling 2009-9 for tax information that may provide some guidance:

• (1) A loss from criminal fraud or embezzlement in a transaction entered into for profit is a theft loss, not a capital loss, under §165.
  
  (2) A theft loss in a transaction entered into for profit is deductible under §165(c)(2), not §165(c)(3), as an itemized deduction that is not subject to the personal loss limits in §165(h), or the limits on itemized deductions in §§67 and 68.
  
  (3) A theft loss in a transaction entered into for profit is deductible in the year the loss is discovered, provided that the loss is not covered by a claim for reimbursement or recovery with respect to which there is a reasonable prospect of recovery. (Editor's Note: If you are one of the investors in the reported story, how the hell do you determine if "there is a reasonable prospect of recovery" when the criminal prosecution has only just started and you don't know how much, if any, of the loot the Feds will recover - and how much will ultimately end up in your pocket???)