I see no reason he can't - afterall, an investment is an investment. You do need to document the investment and you'll need to get support for it being worthless. Try to determine if this was an investment or a loan - though the end result may be the same, if it was a loan there may be a loan document. Of course, if it was an investment there should be something in WRITING to substantiate this. Ask to see the canceled check for the investment - if its made to a company it may be an investment (or a purchase) if its made to a person it may be a loan - use your professional judgement and MAKE sure to apply the sniff test!

I DO see a big problem with trying to classify this as a Schedule C - YOUR guy was NOT operating a sole proprietorship, he was an investor. And if he WAS involved in the operation of the business it would be a partnership, LLC or C Corp (remember, S Corp stockholders MUST be US Citizens or resident aliens - no foreign nationals). If it was an LLC or a corporation it would have had to have been registered with ONE of the State Departments. If it wasn't registered then it may have been a de facto partnership - that means you'll need to file a Form 1065.

BUT WAIT THERE'S MORE - if you've got a partnership AND at least 20-25% of the income ESCAPES U.S. Taxation - beause of foreign partners - you'll have to register the partnership as a Tax Shelter. When that happens, get a U. S. Coast Guard Approved Life Jacket because you WILL be in the BIG water then.

Good luck

Schedule C?

As well US persons are subject to worldwide taxation.

What happened in the last 3 years?

No investment losses unless he has reported in prior years. You can't just pick and choose when to take losses and never show the investment when the hog is fat.....