I received a settlement from lawsuit as a class member, but it was confirmed the settlement it's not 1099 reportable payment, not W2 reportable payment, should I file that payment?

[Justin202203]

Hi Alicia,

Then I couldn't deduct the syndication costs $2000 which I paid from the settlement $8000? Is my understanding correct?

And I checked with previous CPA, he didn't deduct the loss $5,000 in 2018 tax return, even I thought he did. Then should I report this settlement $3000(8000-5000) as capital gain? or ordinary ? How should I report?

I can summarize the case again if needed.

Thank you.

[RobertB4444]

@Justin202203  Syndication costs are not deductible.  They have to be amortized over time, as @AliciaP1 says above.  However, I am not sure why you are paying syndication costs from your lawsuit proceeds.  Those costs are usually associated with marketing a fund, not disposing of one, so I recommend that you consult with a tax professional about this issue.  

As far as the lawsuit proceeds go, until you are clear on the syndication cost issue I would not finish your tax return.  If you feel that you must then Cynthiad66, @DawnC and @GeorgeM777 have all told you how to report the $3000 that is over and above the return of principal that you received.  Follow their instructions.

[Justin202203]

Thank you very much, Robert.

Could you please help me this question?

As following  @DawnC and @GeorgeM777 have all told me how to report the $3000, then $3000 is reported as capital gain or ordinary income?

Thanks again.

[DawnC]

Ordinary Income.   Sign in to TurboTax and open or continue your return.

• Search for lawsuit settlement and select the Jump to link.
• Answer Yes to the question Any Other Taxable Income?
  1. If you've already entered miscellaneous income, select Add Another Miscellaneous Income Item.
• Enter a brief description and the amount you received and click Continue.

[Justin202203]

Thank you DawnC.

The last question: Does this $3000 income belong to covered earing which can earn credit for social security benefits?

https://www.ssa.gov/benefits/retirement/planner/credits.html

Thank you very much.

[DianeW777]

No. Your settlement will not be earnings for social security benefits.  Basically you are being repaid part of your original cost basis/investment in the partnership.  You already reduced your income in 2018 for the loss because you only received partial payment at the time.  For this reason the entire amount is taxable income.

It is not self employment so no social security or medicare taxes will be paid, nor should they be paid on this income.  

@Justin202203

[Justin202203]

Hi DianeW,

Thank you so much for your reply regarding social security benefit question.

I have to correct my previous posts again, nothing was deducted in 2018 which already checked and confirmed by my previous CPA, I just thought he did.

Thanks again.

[DianeW777]

It would seem the money you received in 2018 would have reduced your cost basis in the partnership, maybe as a return of capital.  If that is the case, and if you had any cost basis left at that time, then the additional $3,000 may also be a return of capital.  

• First you must be able to show your cost basis immediately before the payment, then if it is in fact a return of capital, then none of it would be taxable now.
• Second, if it was more than your cost basis, then you would report as income the difference.  Your CPA should be able to tell you what your ending cost basis was after the payment was received in 2018.  

To reiterate, you must have documentation to show your cost basis (and adjusted cost basis for income loss on the partnership which would be an increase, your payment received in 2108 which would be a decrease, to name only some of the transactions) so that you are prepared to show why you did not report some or all of the settlement.

@Justin202203

[Justin202203]

Hi Diane,

Should I rely on the capital account number in the K-1 which sent from partnership? Sorry I was asking because the partnership "forced" all members to accept lower cash consideration in 2018, in this case is $45000, and my original investment is $50,000, I didn't expect to get other settlement in 2018. That also why the class members win in the court and received settlement in 2021.

I mean the capital account number/cost basis in K-1 might be false, should I calculate one my own or ask my CPA help to do that?

Thank you very much.

[DianeW777]

If you are confident in calculating your remaining capital account/investment in the partnership, then you should use your figure to decide if any of your additional settlement is taxable.  If your CPA has the history and you would feel better with that opinion, it's up to you.

@Justin202203

[Justin202203]

Hi Diane,

Thank you so much for your reply.

I will check with CPA and Partnership to confirm that I received the correct documentations.

So far I just assume the K-1s which I had are correct and just use that numbers as example to ask your help:

"The capital account was $42,000 in 2017 year end, and $42,000 at the beginning of 2018 before the liquidity event, and capital account was $0 at the end of 2018 after liquidity event, but the cash I received was only $45,000.  And after lawsuit 2021, I received court settlement $8,000. The original investment cash in 2013 in Partnership is $53,000( Which included Syndication fee $3000)".

And it was confirmed that this $8000 settlement "considered to be a partial collection of class member's interest in the original property".

If in this case, which amounts should I compare to report gain or loss? And if gain, is that capital gain?

Thank you very much.

[Justin202203]

Hi,

Can anyone help to explain below question? Thank you very much.

I will check with CPA and Partnership to confirm that I received the correct documentations.

So far I just assume the K-1s which I had are correct and just use that numbers as example to ask your help:

"The capital account was $42,000 in 2017 year end, and $42,000 at the beginning of 2018 before the liquidity event, and capital account was $0 at the end of 2018 after liquidity event, but the cash I received was only $45,000.  And after lawsuit 2021, I received court settlement $8,000. The original investment cash in 2013 in Partnership is $53,000( Which included Syndication fee $3000)".

And it was confirmed that this $8000 settlement "considered to be a partial collection of class member's interest in the original property".

If in this case, which amounts should I compare to report gain or loss? And if gain, is that capital gain?

Thanks again.

[RobertB4444]

@Justin202203  A return of property is just that - a return of the money you gave them.  You had already paid taxes on that money before you invested it.  So you invested $53,000 and then received a total return of $45,000 and $8,000.  That's the exact amount that you invested.  If you never took a deduction on your taxes for the loss when the company liquidated then you do not have to report this lawsuit settlement at all.  

[Justin202203]

Hi Robert,

Thank you so much for your reply. Could you please help to share where can I refer to the IRS code or rules for that?

And could you please also kindly help to check if the numbers changed as below?

"The original investment cash in 2013 in Partnership is $53,000( Which included Syndication fee $3000). K-1 shows capital account was $42,000 in 2017 year end, and $42,000 at the beginning of 2018 before the liquidity event, and capital account was $0 at the end of 2018 after liquidity event, but the cash I received was only $45,000.  And after lawsuit 2021, I received court settlement $10,000. The original investment cash in 2013 in Partnership is $53,000( Which included Syndication fee $3000)".

And it was confirmed that this $10,000 settlement "considered to be a partial collection of class member's interest in the original property".

If in this case, which amounts should I compare to report gain or loss? And if gain, is that capital gain?

Thanks again.

[Justin202203]

Hi There,

Could you please help? Thank you very much.