If I sold shares at a loss in 2023, but received a class action award in 2024, do I need to amend the 2023 submission?

[reljjl1]

The two responses received when this question was first posed, are not consistent about how to handle the settlement check received because a company was considered to have misrepresented the value of its stock when it purchase another company (in which I had stock) and transferred the stock shares to the new owner.  A class action suit was subsequently filed.  Last year (2023) that company itself was purchased and taken private.  My net sales in 2023 for shares transferred in 2017 resulted in a capital loss.  That was reported on 2023 taxes.  However, in May 2024, a class action settlement check was distributed to all those affected by the original stock transfer.  So the loss in 2023 was a real loss and reported as such.  My question is what is the impact of the 2024 claim settlement check.  I understand it is income and, as such, taxable.  But does is require that I amend 2023 submission and, if so, how.  Or do I handle the 2024 check simply at 2024 income without a 1099 form, since the settlement company has already indicated it will not send such forms?  Surely someone has had this issue before and there is some tax liability accurate answer and procedure.

[rjs]

It would have been better if you had added a reply to your original question instead of posting a separate new question. That way you keep all of the discussion of your question in one place. When information is scattered in multiple threads it's confusing and hard to follow, and hard to see the whole picture.

The two answers to your first post are consistent. I told you to report the payment on your 2024 tax return. @Hal_Al gave you detailed steps for reporting it on your 2024 tax return, without a 1099 form.

Income that you receive in 2024 does not change your 2023 tax return. You report income that you received in 2024 on your 2024 tax return. You do not amend your 2023 tax return because of income that you received in 2024, even though the 2024 income is related to a 2023 transaction.

[reljjl1]

So the answer provided seems to be reasonable about when the settlement claim was received; the problem is that the impact of the loss claims for this stock and others sold in 2023 has a carryover balance for subsequent years.  Unless the cost basis for the stock bought in 2017 and sold in 2023, when the company's new owner made it private, is modified by an amended return for 2023, that carryover is not changed.  In addition, the directions about the 1099 creation for 2024 are not straightforward to a novice.   

I have been reading various articles prepared by Tax lawyers about the "Tax Benefit Rule" to seek a close example to this situation. Nothing quite aligns yet.

I also have a Tax Advisor CPA recommend the above -described change to the 2023 cost basis with an amended return.

Clearly there are alternate approaches.

[Opus 17]

If you are paying a CPA for their advice and they will defend you if audited, why are you asking anonymous strangers on the internet?

I happen to agree that you leave 2023 alone and report the income in 2024.  If this reduces a carry forward (the $3000 loss limitation, for example) then you should recalculate the loss and carry forward based on the recovery, and use that information for future tax returns instead of the old information, but that does not requiring filing an amended return to change the tax you paid in 2023.   You would just use the revised carry forward information and keep your notes and records in case you are asked.  

But I'm just another anonymous person.  If you are paying for advice from a reputable person who will stand behind that advice, then you should follow that instead. 

[reljjl1]

Excellent point about the CPA advice!  Some of the varying information/guidance  from TT experts, the CPA not under any commitment at this point, and legal opinion reading was received within the same timeframe.  Frankly I am not sure any of the "expert" advice reflects any actual experience with the specific or a similar situation, whether from anonymous or known sources.  Hence the research on my part that may subsequently help others.

[Mike9241]

@reljjl1 Have you asked your CPA if he has case law or anything else to back up his position? 

what would be the case if recovery was in say 2027 - past the ability to amend 2023?

there have been many cases of fraudulently overvalued stocks. Enron, Lucent, etc and from my experience losses were taken in year sold and recoveries were reported in year received. 

[reljjl1]

Spoiler

There are still issues to be better explained.

Since the income received occurred in 2024, the recommendation was to create a 1099 for taxes for 2024 (presumably, a 1099-B) and identify a zero cost basis.  However, the company no longer exists on the stock exchange and the source of the check is the settlement claim company.  They have already verified that they will not issue any kind of 1099 so I know I am responsible for creating one.  


I do want to thank all of you, who have offered your insights.

[rjs]

reljjl1 wrote (in the Spoiler box):

Since the income received occurred in 2024, the recommendation was to create a 1099 for taxes for 2024 (presumably, a 1099-B) and identify a zero cost basis. However, the company no longer exists on the stock exchange and the source of the check is the settlement claim company. They have already verified that they will not issue any kind of 1099 so I know I am responsible for creating one.

@reljjl1 

You do not create a 1099 of any kind. That was not the recommendation. You do not need a 1099 to report the income. You report it as an investment sale for which you did not get a 1099-B. The post by Hal_Al in your other thread gave you step by step instructions for doing that.