I am somewhat confused based on the original facts:
- The original facts indicate that a LLC that you were a member of invested in the R&D project.
- Then the facts indicate that you, and I'm assuming other members, then recorded your share of the "bills" on your personal tax return.
- At this point, I believe we are missing some details:
- Were you active or passive in the LLC?
- Did the LLC pay the legal fees for the lawsuit?
- What exactly were you "deducting" on your personal tax return?
- The LLC should have had an "investment in R&D" line on the balance sheet of the original $1 million
- When the $600,000 was received, this would have just been a return of capital of the original investment.
- All of this activity should have been reflected on the LLC tax return and the member's should have received a K-1.
- When was the last year the LLC filed a tax return?
- Did you have tax basis in your LLC when all of this took place?
- What was the trade or business of your LLC?
- I'm not sure why there isn't documentation. I assume there is support for the original $1 million of funds to the R&D project?
- Addressing the above will allow at least a start in addressing your questions and issue.
- I'm also going to suggest that you find a new accountant once we begin to piece together the history.
*A reminder that posts in a forum such as this do not constitute tax advice.
Also keep in mind the date of replies, as tax law changes.
