This one caught my interest because I had never encountered anything this. It is common to get a 1099-R with the gross income in block 1 and either a zero or a number in Block 2a. I have never encountered a “yes”. In the case where the provider does not have records to determine the taxable amount for Block 2a, then the “Taxable amount not determined” box is normally marked in Block 2b. The 7 in Block 7 simply indicates a normal distribution.
Since the question has gone unanswered for a few days, I will report what I learned. I looked around to see what I could learn, and I found the February 2018 issue of the Life Partners Position Holder Trust (PHT) investor newsletter. It states that they sent Form 1099-R to report “maturity payments made to Continuing Fractional Holders in 2017 (including investors who successfully completed the Option 4 conversion).” The newsletter also states that as "in the Form 1099s for 2016, the PHT did not determine each investors’ taxable income. Instead, as allowed by IRS regulations, we have reported the total amount paid to each investor. Each individual investor must determine his or her taxable income taking into account all of the costs incurred in purchasing and maintaining the positions, any previous write-offs and the effect, if any, of the transactions required by the Plan.”
So it appears that you are on your own for the basis since they take the position that they can’t know all of your expenses or your previous write-offs. When taxable amounts are not determined, I’ve seen some situations where the taxpayers are instructed to enter the correct taxable amount for the Block 2a entry for the 1099-R. However, the Line 21 method that you describe is also used to correct totals for many situations also. As long as you document your process and get the correct AGI, then I think you should be OK.
But keep good records. You might need them to defend your numbers.
