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Class Action Lawsuit Payment for bankrupt security investment

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Level 2

In 2018 a client became aware of a loss of $100,000 thru an investment that went bankrupt.  She was part of a class action lawsuit initiated in 2018 against the administrators of the investment vehicle.

Becasue of the pending lawsuit I did not report the loss on the 2018 return.

In 2019 she received partial reimbursement of around $35,000. She received a 1099-MISC with the reimbursed amount reported in box 3.  So the IRS will be looking for this to be reported as taxable other income.  I feel it needs to be reported as proceeds on Form8949 (Box C checked) with a basis of $100K/

But I'm not sure how to get ProSeries to allow me to enter the 1099-MISC box 3 amount so the IRS recognizes we've acknowledged it - but then have it shown as proceeds on Form 8949.

If I am going about this the right way, can I get ProSeries to handle it for e-filing? Or is this likely to require a paper filing?

Thanks in advance for any guidance that comes my way.

 

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Level 5

There are provision for worthless stock that could possibly allow you to report the loss before the process is completed.  If you are interested in claiming the loss you should look at that.  I believe the instructions also walk you through what to do in future years when new information is known or money is received.

To answer your question:

I would put the 1099 Misc in and carry it to misc. income as it states.

Then I would go to line 8 Other Income and enter a negative amount and as description put removing 1099 MISC income to report on Schedule D.

Then I would go to schedule D and put it in again showing that this is a capital transaction and that you are using up your basis to offset this income which reports no gain or loss at this time.  Note the new basis for when this settles and final loss is claimed.

Ask questions as maybe this is something that you are supposed to be reporting a prorated share of the gain or loss at this time, rather than making this transaction go to zero.  If the taxpayer received money, they probably received a letter from the bankruptcy attorney explaining what was going on and maybe even telling them how to report this.

 

 

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9 Replies 9
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Level 11

Are you sure there will be no more funds coming from either this class action, or other sources?  

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Level 2

No - actually she thinks there will be additional funds from the class action in 2020.

Jumping ahead - I'm assuming your question leads to perhaps we should not report the loss in 2019 either while we wait for the additional funds.  That makes sense. 

If I am in synch with you, I'm still at a loss on how to exclude the $35K reported on the 1099-MISC from taxable income in 2019.

 

 

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Highlighted
Level 5

There are provision for worthless stock that could possibly allow you to report the loss before the process is completed.  If you are interested in claiming the loss you should look at that.  I believe the instructions also walk you through what to do in future years when new information is known or money is received.

To answer your question:

I would put the 1099 Misc in and carry it to misc. income as it states.

Then I would go to line 8 Other Income and enter a negative amount and as description put removing 1099 MISC income to report on Schedule D.

Then I would go to schedule D and put it in again showing that this is a capital transaction and that you are using up your basis to offset this income which reports no gain or loss at this time.  Note the new basis for when this settles and final loss is claimed.

Ask questions as maybe this is something that you are supposed to be reporting a prorated share of the gain or loss at this time, rather than making this transaction go to zero.  If the taxpayer received money, they probably received a letter from the bankruptcy attorney explaining what was going on and maybe even telling them how to report this.

 

 

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Highlighted
Level 11

Tyrannies don't take all of your freedom at once, they do it with one piece of paper at a time.  If the government sends you a piece of paper, send them back a piece of paper explaining why it is not taxable.  Why is everyone so afraid of attaching an explanation to a return?  Some of the questions here raise serious doubts about the preparer's literacy, but you seem to be able to put words into sentences that form paragraphs.

 

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Level 5

ProSeries can be hit and miss with attaching explanations and how do you know what is really transmitted?  If it is typed right on the forms it will be hard for IRS to say they never received it should anything come up later.  I have never seen it questioned nor had to explain when keypunching this way.

 

 

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Level 11

I posted an excerpt elsewhere from the Internal Revenue Manual which points out that CP-2000 clerks don't have access to the original assessment document when it is filed electronically.  Excuse my annoyance at this viral urban tax myth that nontaxable 1099's should be handled with an "add it in, then subtract it out" strategy.  Show me one place in the last 20 years of e-filing where IRS has advised anyone to do that.  

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Level 2

bKamman - You seem more interested in giving insults than help.   You question my literacy skills.  Please check yours. If you have such skills, you can see that my post is asking if ProSeries has a way to handle this situation for an e-filed return, or if paper filing is more appropriate.  I have no issue with attaching an explanation to a return or filing on paper if the situation requires it.  My interest is to understand if ProSeries can handle this in a way that will allow e-filing.

Please refrain from responding on this site if your goal is nothing more than proclaiming superiority to others.  That attitude has no place here.

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Level 10
Level 10

I think the settlement needs to be reported on 8949. This would be a return of her investment (look up Origin of claim doctrine) You will need to know her basis, and if it was higher than the $35000 she received, then it would not be taxable. I would put the amount as other income with a corresponding negative entry with an explanation that you are reporting it on 8949. I would not wait to see if she receives more in a later year, but would report it each year she receives a settlement. Just my opinion, and the way I would do it.  

Highlighted
Level 2

linette and Terry53029 

Thank you both for your responses. They support each other and make sense to me. If I can give you both solution credit, I'll do so.  If the system only allows one, I'll credit linette as she was first to provide a similar answer.

Thank you both again for your help.

 

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