Class Action Securities Settlement from a "Qualified Settlement Fund"

[mikeflregion]

I received a Class Action Securities Settlement from a "Qualified Settlement Fund"  with no 1099 for a stock I sold and took a loss on years ago.  How do I enter this on my current year taxes?  The settlement does not recover the losses I incurred at the time when I sold the stock years ago. 

I need to confirm that I need to report the whole settlement received (since I did take a complete loss and no longer hold the stock) either as a LT or ST Capital Gain and how to do this within TurboTax since no 1099 was issued.

Thank you

[Critter]

You can report it as other income on Sch 1  line 21. Here's how to enter it in TurboTax.

• Click the Federal Taxes tab ( Personal in the Home & Business version)
• Click Wages & Income. (Personal income in the H & B version)
• On the screen "Your 2018 Income Summary," scroll all the way down to the last section, "Less Common Income."
• Click the Start or Update button for the last topic, "Miscellaneous Income, 1099-A, 1099-C."
• On the next screen, "Let's Work on Any Miscellaneous Income," scroll down and click the Start or Update button for the last topic, "Other reportable income."
• The next screen asks, "Did you receive any other taxable income." Click Yes.
• On the next screen, "Other Taxable Income," enter a description and the amount. Click Continue.
• On the next screen click Done.

The income will be reported on Sch 1 line 21 with the description that you entered.

[mikeflregion]

Critter - Thank you, I really appreciated your response.   Sch 1 line 21 flows to 1040 Line 6 which will be added to ordinary income. This does not seem correct since about 5 years ago I took a capital loss on Sch D since I sold all the stock at a Hugh loss.      Why would I not report the whole amount as either a ST or LT capital gain to offset  the loss I took on Sch D?   This stock settlement does not nearly cover all my Sch D losses I am still carrying forward so if I entered it as a capital gain instead of ordinary income I would not have to pay any taxes and my carry forward Scd D losses would be reduced by the amount of the settlement.  Does using Sch 1, Line 13 - Capital Gain or Loss attach Sch D if required  OR Sch 1, Line 14 - Other Gains or Losses attach form 4797 more appropriate? Thank you

[mikeflregion]

anyone else have any thoughts on this?  I called the settlement distribution company and asked why they are not issuing 1099 of some sort and they stated everyone's situation is different with regards to taxation and to contact your accountant.  I thought all securities settlements issued by a QSF (Qualified Settlement Fund) were required to report distributions to the IRS and therefore issue 1099s?

[TomYoung · Accepted solution]

A "Qualified Settlement Fund" (https://www.law.cornell.edu/cfr/text/26/1.468B-1) is essentially an entity that allows which allows defendants to deduct amounts paid into the fund before the final allocation and distribution occurs to plaintiffs.

Not receiving a 1099 actually works in your favor here since the default tax accounting for amounts reported on the 1099 largely are dictated by what box or boxes have dollars in them.

The broad general concept behind how amounts received in settlements are accounted for income tax purposes is the "origin of the claim."  In other words a recovery should be taxed in the same manner as the item for which it is intended to substitute. So if this was a class action against a former employer for unpaid wages, the settlement amount would be considered "wage" income (and possibly reported on a W-2). 

Without knowing the details here of what exactly comprises your settlement it's impossible to state "this is how you should account for the dollars."

[mikeflregion]

Thank you... it was a class action securities settlement for publicly traded stock due to investors losing stock value due to proven company corruption at the executive level.  The pay out settlement was a small  fraction of  the stock losses investors incurred.   

[mikeflregion]

So along that same train of thought if there was a a gain it would have been either a LT or ST capital gain which I took  a loss on years ago I would think it would be correct to show the partial capital loss recovery the settlement represents should be reported now as a ST or LT capital gain.   How do I exactly do this in TurboTax. Critter got me to the right area 90% but I need a little more guidance to finish.   Thank you 

[TomYoung · Accepted solution]

To report a LT capital gain for the amount received you'd use the "Stocks, Mutual Funds, Bonds, Other" interview and tell TurboTax that a 1099-B was not received.  Since you've presumably used all the original basis some years ago reporting the loss on the stock the proceeds would be taxed entirely as LTCG.

[mikeflregion]

Tom.. Thank you for your prompt and precise help.    

[mikeflregion]

I also would like to add I am carrying forward both LT and ST Capital losses each of which both exceed (which include the losses associated with this settlement) the payout of this securities settlement.  So this would simply reduce some of my LT Capital loss carry forward. No tax due correct?   Thanks again

[TomYoung · Accepted solution]

If losses carried forward exceed the amount of the settlement there should be no tax effect from entering the settlement as LTCG.

[mikeflregion]

Thank you, Tom, for your thorough answer...