How do I report Passive Income on my tax return?

[veteran007]

Several years ago i made an investment with GWG Holdings. The basis of this investment was to receive interest or dividends. In 2022, the company stopped sending me these funds and was notified that they filed for bankruptcy. In 2024, i received a letter from a firm named the Wind Down Trust that reported financial information that started with losses. Since these losses were reported on the firm's terms and not a Federal form where do i report these losses on my 2023 tax return. I am currently preparing a second amended return to the IRS and State of California Franchise Tax Board. 

[Mike9241 · Accepted solution]

we have no way of knowing if this is a beneficiary lettter with info to report for tax purposes or meary what's taken place in the trut

if this was a beneficiary letter, there should have been included instructions for reporting

tax reporting info see these links

https://gwgholdingstrust.com/wp-content/uploads/2023/08/Accessing-Your-Computershare-Account-Instruc... 

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https://gwgholdingstrust.com/ 

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Baker Tilly provides tax accounting services to the Trust and issuance of beneficiary letters (in lieu of K-1 or 1099 that would previously be submitted by the Company) on behalf of the Trust.

the trust is a grantor trust so you could enter the tax reporting info through a trust k-1

we have no way to know if those losses would be considered business losses for federal amd state purposes or investment expenses which are not deductible for federal purposes.

[veteran007]

I would have to take the Trustee’s letter as the only viable answer to Mike9241 that it doesn’t provide instructions and it doesn’t indicate on which form (1099 Int or K-1) but I’ll be obliged to do the K-1 instead.
Does it matter knowing the intent of the letter and what advise or action should I take as appropriate in this matter? Before I go on to disclose its contents, I received this letter in March 2024 before the 2023 tax return was due but didn’t do anything because I was confused and concerned what to do. I didn’t talk to a tax professional because I thought I could handle it until the letter stated “if required” and that through me off.  In addition, page 2 containing the financial numbers were largely negative (meaning losses) and in 1099 Int and K-1 they rejected the negative passive income numbers. Therefore, I left the passive income out of my original tax return and Amended 1for 2023. 

This one paragraph of the letter, I believe was crucial to reconsidering by including it in my 2nd Amended Return to the IRS and FTB (California).

By the Trustee Liz Freeman March 28, 2024, page 1.

”Enclosed is Substitute Grantor letter for the period August 1, 2023 - December 31, 2023. The Substitute Grantor letter includes your share of income and associated expenses related to your interests in the GWG Wind Down Trust for the period August 1, 2023– December 31, 2023. We advise you to seek advice from a tax professional as to the potential inclusion of these amounts in a Federal Income tax return. Page 2 imbedded in between after my name as Grantor and name of the trust, GWG Wind Down Trust was this statement “The following income, deductions and credits are to be reported on the Federal Income Tax Return of the above named grantor, if required.”  

Passive Income is —$2,431.79.
Other Income $470.27

Deductions

Attorney and Accountant Fees $175.02

Administration Cost $406.24

Other Information 

Loss on Life Insurance Policies, —$1,654.72

Interest Expense -$770.63

Management fee  $6.44

Total Passive Income ((loss) from business 

—$2,431.79.

I know the $ detail is not necessary but I added it anyway. 

[veteran007]

Mike9241. Your response was dead on accurate. Meaning the difference of business expenses vs investment expenses. To get further clarification from Trustee Freeman on these two points she has not been forthcoming. With a response, therefore it must be the investment expenses that she reported to me and not as business expenses. GWG stopped doing business in mid 2022 and since then started their bankruptcy proceedings. Therefore these expenses where tied to August 1, 2023 through December 31, 2023 which tells me that the latter course of action prevailed in this case, as an investment expense. I will not enter these expenses into the K-1. 

[veteran007]

Hi Mike9241

I don’t want to be picky but some additional information was addressed to the issue I presented and wanted for you to see. First, I agree with your assessment in that business losses was not the contributing factor of whether I should have included these expenses by the Wind Down Trust but I adhered to your reasoning of investment expenses instead and decided to not pursue this matter further not enter into a K-1. This passage below was taken from an article I read on the WDT and I wanted your view on it, if you don’t mind. 
“On April 2, 2024 the Wind Down Trust completed a mailing of Substitute Grantor Letters to interest holders whose interests are held at Computershare. Included in the Substitute Grantor Letters are individual interest holders pro-rate share of the Wind Down Trust’s income and expenses for the fiscal year ended December 31, 2023.”

If this changes your thinking then I need to know because I have already amended #2 return and I’m ready to send it out to the IRS and FTB this week coming and I could add the expenses to a K-1 because it may be applicable for a change here. But if this doesn’t change the perception then I’ll leave it alone with investment expenses. Key here is the notification (not included above) that the WDT is acknowledging that holders, like myself, are beneficiaries of the WDT and that every year we/I will be notified of these expenses annually. Does this change your view that investors could be beneficiaries of the business therefore are allowed to record those losses on a k-1?

[Mike9241]

How are the expenses described in the letter? Does the letter say anything else regarding the expenses reported? The WDT is a grantor trust involved in liquidating the assets of the business and returning any income net of expenses to the former shareholders. every beneficiary letter I ever seen has reported some income from investment of proceeds, until distributed, and expenses for administering the trust. These would be investment expenses, not deductible for federal income tax purposes, since the trust is not engaged in a operating a business but in its liquidation.