Schwab YieldPlus Settlement distribution: taxable income?

When I go to this website it asks if this is for the federal or california settlement. I clicked federal. In one of the case documents it says

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for Settlement: The core of Plaintiffs' case is that Defendants represented the Fund was designed to "maintain share price stability" but concealed risks in achieving this investment objective due to concentrations in mortgaged-backed securities and corporate bonds that were related to real estate. As strongly as Lead Plaintiffs and Lead Counsel believed in their case, Defendants' defenses were well received by two different mediators with whom the parties met on at least five different occasions. Among the significant risks perceived were (i) Defendants - who deny having any liability to Lead Plaintiffs or to the members of the Federal Classes (described below) - could point to language in the disclosure documents which arguably put Class Members on notice of the risks associated with the Fund's investments in mortgage-backed securities, (ii) Defendants argued that the housing crisis was unprecedented and caught even the most sophisticated financial firms by surprise, thus no known and foreseeable risk existed and thus no misrepresentation was made, and (iii) the amount of alleged damages was a battle of the experts with Defendants' experts claiming zero alleged damages were related to the misrepresentations alleged in the lawsuit.

It is impossible to predict how a jury might resolve this case. Settlement avoids the uncertainty of a jury trial, the costs and risks associated with continued litigation, including the danger of no recovery, and provides a substantial benefit to the Class now.

If the case proceeded to trial, plaintiffs would have claimed Section 11 alleged damages of $651 million or Section 12 alleged damages of up to $889 million. Again, Defendants would have argued no alleged damages existed. To put this settlement in context, the average settlement of cases at the $200 million level according to a study by Cornerstone Research was 4.6 percent of alleged damages. This settlement is 35.9 percent of Section 11 alleged damages and 23.4 percent of Section 12 alleged damages.

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It looks you bought some stock that lost all its value. So $10,000 is the proceeds, or the little you've recovered, and what you paid for the stock you know. Sounds like you have a big loss. If you deducted the full cost earlier, then I suppose the $10,000 is a capital gain so as to reduce your capital gain of the earlier year.

But I could be wrong. Maybe you can call the fund and instead of asking for tax advice asks what the $10,000 represents, will a 1099-B be issued and if not then why not.

Not directly on point, but I just got a check for $1.03 representing my share of the Montana Power litigation in my mother's estate (she died 12 years ago). I'm using 1099 code C to report it as a long-term capital gain.

I presume you mean box C in Form 8949, which is filed with Sched D.

Thanks for that pointer. I was not aware of it.

Yes, that is where I would expect to report this distribution __if__ it should be treated as capital gain.

And frankly, that was my thinking as well. I did not want to speculate because I have gotten into trouble doing that in this forum before.

The problem for me was (but no longer): I discovered that the method of how "your share will be calculated" seems very different between the federal and Calif settlement.

It is that section of the two notices that led me to think that the distribution should be treated as capital gain in the first place. Generally, the distribution is compensation for agreed-to "recognized loss" in NAV.

But I had previously read only the Calif description. And based on that, initially (but no longer) it sounded to me like some of the distribution represents __unrealized__ gain. I was not sure if or how to deal with that; specifically, whether I needed to prorate the taxable capital gain based on the number of shares still held after the period of record covered by the settlement.

Now, my "uneducated" thinking is that in effect, the settlement is saying that the NAV would have increased by the agreed-to amount and, therefore, it would have increased the capital gain (decreased the capital loss) by that amount for __any__ sale even after the period of record. That is made clearer to me by the language under "your share will be calculated" in the notice of the federal settlement.

So yes, my own "uneducated" conclusion was that part or (now) all of the entire distribution should be treated as capital gain.

I just did not know how to report that in Form 1040, in part because I was not aware of box C in Form 8949.

That does make it all so "obvious" now. Thanks again.