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?

[macuser_22]

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@Justin202203 wrote:

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?

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You will not find any law or IRS rule that says what you do not need to claim - only the type of income that must be reported.  If there is no rule of law that says that a returned investment must be claimed then the absence of such a law means that it does not need to be claimed.   Tax laws say what you must do, not what you do not have to do.

[Justin202203]

Hi Macuser,

Thank you for your reply.

Beside the original $50,000 capital I paid to partnership, I also paid legal fee, lawyer fee, management fee and syndication fee etc when invested cash to get partnership interest, can I add on all these fees when calculate the original basis of partner's interest ?

Thank you very much.

[macuser_22]

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@Justin202203 wrote:

Hi Macuser,

Thank you for your reply.

Beside the original $50,000 capital I paid to partnership, I also paid legal fee, lawyer fee, management fee and syndication fee etc when invested cash to get partnership interest, can I add on all these fees when calculate the original basis of partner's interest ?

Thank you very much.

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Add to what.   We were discussing reporting a return of your investment (i.e. a refund of your own pre-taxed money) that should not be reportable as income.  That has nothing to do with any additional expenses you might have had.  You do not need to report a refund of your own money.  Personal losses are no longer deductible from 2018-2025.

[Justin202203]

Hi Macuser,

I would like to set new numbers for my case to make sure my understanding is correct.

I invested cash $50,000 in partnership, along with that it also cost me $3,000 syndication fee, and lawyer fee, agency fee etc total $8,000. It's in year 2010, and the cash I paid totally for this investment is $50,000+$3,000+$8,000=$61,000.

In 2018, the partnership said there will be a merger event and ask me to agree to get $45,000 cash consideration for all the interests I had in the partnership. And no loss were reported in 2018 tax return.

In 2021, Court judgment the "merger event" in 2018 is not reasonable and paid me settlement $8,000.

So my question:

 What numbers should I compare to calculate the capital gain or loss? The total cash paid in 2011 is $61,000, the cash I received in 2018 and 2021 is $53,000. In this way, there is no capital gain I should report, right?

Thank you very much.

[DianeW777]

There is no capital gain or loss in your situation.  You have received a return of capital on your investment in the partnership.  Currently, with all settlement money received you have nothing to report. As indicated by our awesome Tax Champ @macuser_22: 'That has nothing to do with any additional expenses you might have had.  You do not need to report a refund of your own money.  Personal losses are no longer deductible from 2018-2025.' 

The additional expense would not be an allowed deduction during the period mentioned.

@Justin202203

[Justin202203]

Hi Diane,

Thank you so much for your kindly confirmation.

Even though the lawyer fee, agency fee etc were paid to third parties not the partnership itself, I can still use the return of capital rule, then no capital gain or loss to report in 2021, right?

Thanks again.

[DianeW777]

Yes, that's correct.  Keep all your documentation with your tax return about the settlement and your investment.

@Justin202203

[Justin202203]

Hi Diane,

Thank you so much for your reply and confirmation.

Can you please also share the rules and regulations from IRS for return of capital?

I was asking because I received other advices that have to compare the partner basis with the total money received, in that case, seems agency fee, lawyer fee etc was not included in the basis, then there might be capital gain.

Thanks again.

[DianeW777]

Yes. You can use the link below to review the 'return of capital' from your settlement.  You do need to know your partner basis which should be included with your prior tax returns.  It can fluctuate up and down based on the activity in the partnership. You can print the first link to keep with your tax return records.

• IRS Publication 4345 (See Loss in Value of Property)

[Justin202203]

Hi Diane,

Thank you so much. It helps a lot.

Which pages or forms I can refer to get the partner basis in prior years return? If there were something wrong, should I recalculate it? 

Can agency fee, lawyer fee etc which paid to 3rd parties be included in the partner basis? Any rules or regulations can share from IRS for that?

Thanks again.

[Justin202203]

Hi Diane,

Could you please kindly share your advices regarding above questions?

Thank you very much.

[AmyC]

Generally, the basis is the same as the k-1 Capital Account Analysis.

 

[Justin202203]

Hi Amy,

Thank you so much.

In that way, the syndication fee, lawyer fee, agency fee etc haven't been included in the basis, however, the return of capital rule as mentioned above told me can deduct these fees from the cash received.

Could you please help me to clarify that? Thanks.

[Justin202203]

Hi,

Where should I input from turbotax if settlement was clarified as capital gain?

Thank you very much.

[DianeW777]

To clarify by previous statement there is not capital gain included in this settlement based on many comments in the thread.  Here is my previous answer for you.

'There is no capital gain or loss in your situation.  You have received a return of capital on your investment in the partnership.  Currently, with all settlement money received you have nothing to report. As indicated by our awesome Tax Champ @macuser_22: 'That has nothing to do with any additional expenses you might have had.  You do not need to report a refund of your own money.  Personal losses are no longer deductible from 2018-2025.' 

The additional expense would not be an allowed deduction during the period mentioned.'