USA ESOP 1099 incorrect amount

[Tina Hamilton]

My husband was laid off 2007 after 13 years with a home builder. He had over 100K in the company ESOP retirement plan. Contributions were 100% by the employer. The plan summary stated distributions could only take place 5 years after termination. Our request for distributions were ignored and we had to hire an attorney and file a lawsuit. At this point the stock was worth 26K and we wanted a distribution before the company went under or the stock dropped further. We accepted a discounted cash distribution in the amount of 16K if we dropped the lawsuit. We received a 1099 last week for an amount in excess of 35K. We think this is an error but are wondering if the former employer is reporting the value of the stock at time of distribution and not the actual cash value we received. We are going to request a corrected 1099 for the distribution but are sure our request will be ignored. My question is what amount are we liable to pay taxes on? Are we able to deduct our legal fees? Is this considered a capital gain or loss? Do we claim the actual cash received on our taxes and contact the IRS regarding the 1099 amount being too high? Any advice would be appreciated.

 

[Kerry Claxton]

The income is retirement income and possibly subject to early withdrawl penalties (if husband under 591/2 years old 10% penalty unless meet one of the exceptions). Legal fees would be deductible on Schedule A. If corrected 1099 is not issued hopefully you have documentation showing that you received the $16,000 not the $35,000 because when you report the $16,000 (which is what I would report) you should prepare for the IRS notice of deficiency for under reporting the income. Was the total payout the $35,000 but the difference went to your lawyers? If so sorry to break it to you but you get to report the entire $35,000 as income and the 1099 is right.

Kerry Claxton, CPA