For my CHTR stock, I joined a class action lawsuit. In return, I was sent a mere $20 check a long time later. It came in 2006. Does anyone know where I should report this on my 1040? The check had some stub to say it should be taxed, but I didn't receive any end of the year form, so I'm lost where to put it. Thanks in advance!
Thinking out loud here; what happens if that particular stock was held in an IRA and became worthless? I owned Enron at some point and am a member (supposedly) of multiple class action lawsuits. Regards -
Is the money you received ordinary income or a capital gain, and
Is the money you received a gain or a recovery on your basis in the stock. The IRS will use the "origin of the claim" test to help determine the answers to the 2 issues. So you will need to look at the original lawsuit as well as the settlement or the judgement papers to help the determination. The IRS usually will argue it is ordinary income while taxpayers will usually argue it is a long-term capital gain. However, for all practical purposes, the amount is so small it won't make much of a difference on your tax return if you report it as ordinary income on Form 1040 line 21 or on Schedule D as a long-term capital gain. Rudy
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Disclaimer: The posted answer is for educational purposes only and Lizcano Tax Services, LLC and/or Rodolfo Lizcano have not been engaged to render any tax, accounting, legal, or other professional services.
To be treated as a capital gain, the proceeds from the lawsuit (less any attorney fees) would have to be clearly and directly tied to a previous capital loss. Not knowing the exact nature of the lawsuit, the most likely answer is that the $20 is "other income" on line 21 of your form 1040, and yes you do have to report it, even though the payer was not required to send you a year-end tax form.
I was in this situation a few times. I subtracted the amount from the basis of the shares. So my tax return will be affected when the shares are ultimately sold. My thinking was that the litigation asserted I paid too much for the shares, and the recovery is a correction of that. (Disclaimer: I'm not a tax pro.)
Thanks Seth - that seems logical. Do you happen to have a pointer to an IRS pub that I can refer to that shows me this? I would hate to put in the $ into my (now nondeductible) IRA and find out that I had a problem later on. (Of course, that's assuming I even get anything out of the class action lawsuit.) Regards -
You might draw some inference from Pub 590, but I doubt there's a specific reference. If you go to section 408 of the Internal Revenue Code you'll find that the IRA is a separate tax-exempt entity from its beneficiary. Thus nothing that goes on totally within the IRA affects the beneficiary's return.
If the payment is handled properly it will be made payable to the IRA, not to you, and you won't have a choice of where to put it.
Thanks for everyone's input and logical explanations! I like what a few people said how it's not taxable until i sell the stock. I can see how it's compensation to the value of the stock and not immediate income. I've had the IRS come after me for less than $20 when I messed up my taxes, so I'm not so sure it's neglible to uncle sam! They can ge their money when I sell it though.
Thanks for everyone's input and logical explanations! I like what a few people said how it's not taxable until i sell the stock. I can see how it's compensation to the value of the stock and not immediate income. I've had the IRS come after me for less than $20 when I messed up my taxes, so I'm not so sure it's neglible to uncle sam! They can ge their money when I sell it though
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The treatment of your recovery will depend on what it was in payment of (i.e., origin of the claim). If it was a payment to settle a claim that as a result of securities fraud you overpaid for the stock you acquired, then it is a payment for impairment of capital, and as such will go first to reduce your basis in the stock, and once that basis hits $0, be treated as capital gain. Since you still own the stock, you would simply reduce your basis in the stock. If in a prior year you had already sold the stock or had claimed a deduction for worthless stock, then you would include the amount received as capital gain. For authority, see, e.g., Dobson v. CIR, 320 US 489 (1943); Boehm v. CIR, 146 F2d 553 (2d Cir. 1945), aff'd w'out discussion, 326 US 287 (1946); see also, Arrowsmith v. CIR,
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