How do I handle a stock security litigation claim refund?

I assume this was not in an IRA or other deferred plan?

It is a long-term capital loss, shown on schedule D. Use your original acquisition date as acquisition date, and the check date as sales date.

Sales price is the check amount, and basis is zero.

It will increase your capital losses.

Isn't that a capital GAIN, since the proceeds are more than the basis?

Arthur:

No, it was not in my IRA account but maybe I need to clarify things:

I originally bought the Enron stock on 11/7/2001 and sold it for the $4,400 loss on 11/21/2001. So I already "realized" my $4,400 (short-term) capital loss during my 2001 tax year. Now, as it turns out, I got back $1,100 from that $4,400 loss just a few days ago. This means that I somehow have to DECREASE my capital loss.

Looking for further help. Thanks!

Doh! No idea how I said what I said here. Of course it's a capital gain.

What I said about sales price being the check amount and basis being zero is correct. And yields a gain not a loss. Arrggghhh!

You're quite right -- it will produce a LT capital gain. And I knew that but my fingers didn't. And I haven't even had any of Dick's best Ale or Harlan's real Scotch Whisky. (I don't recall ever having mead, but that's my loss.)

The OP should also check whether there was an accompanying letter that clarifies things.

I received a check this week from the settlement of a case against Putnam funds. The letter says that some portion of the payment "represents your share of advisory fees and may be taxable income", another portion "represents your share of post-judgement interest, which constitutes taxable interest income", and the remainder "represents your share of losses due to market timing activity." I infer that only this last portion is capital gains, the rest is ordinary income.

Also, you asked whether the shares had been in an IRA. Presumably had they been so, the settlement check should have been sent to the IRA, not the investor directly. Although I'm not sure how things would be handled if the IRA account had been closed in the interim.

Au contraire. The check is "generally" made out to the Trustee identifying the taxpayer's IRA and mailed to the known residence of the taxpayer. E.g., State Street Bank Trustee, John Smith IRA.

If cashed, it is taxable. If redeposited into an IRA, it is tax-deferred. When redepositing you need to inform the trustee of the IRA that it is a settlement and not a contribution. It gets treated as a rollover. You can deposit it into any IRA account.

I asked the same question several years ago and was told it was miscellaneous regular income. Last year, in the same situation, my accountant handled it that way also.

I don't know what the right way is, but am just reporting other opinions.

capital gain.

Maybe someone was celebrating New Year's a little early? ;-)

Good point. I'd say it is a short term gain because the original realized loss claimed in 2001 was a short term loss. And the gain can be used to offset losses. I will try to research what the law actually says.

Note: if it is Other Income, then it does not get taxed at the preferential 15% long term rate, nor can it be offset by other capital losses (which the OP has).