how to report proceeds from security class action suit

Assuming we are discussing the litigation that settled the claims of bond holders... it is treated the same as the distributions from the bankruptcy trustee. Lehman Bros. bonds are not worthless. The bankruptcy trustee stated that there would probably be distributions over a five year period. Each distribution from the trustee reduces your cost basis in the bonds. When the trustee states that there will be no more distributions, the bonds become worthless and can be written off as a long term capital loss. In the interim, the settlement money would be treated as a return of principal and reduce your cost basis in the bonds. If you sold the bonds and your basis is now obviously zero any payment you receive as a legal settlement is treated as a long-term capital gain.

The securities were some of the preferred class,not the bonds, and they were indeed sold. I assume the long-term capital gain treatment applies to these as well.

jo

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Yes.