Reporting Class Action Settlements


J

jeff_wisnia

As a result of having several "managed accounts" in our investment
portfolio my wife and I are the recorded buyers and sellers of an
awfully lot of different stocks and bonds, with frequent turnovers of
these investments.

A few times a year we get notices of class action suits which I usually
follow up on and file the requisite proofs of ownership for the time
periods specified.

It seems to work out pretty well (if we wait long enough) and every few
months a check rolls in for our share of one of those class action
settlements, generally not much more than a hundred dollars or so. (I
got one last month for 4 cents....WHY do they bother with such a small
amount, I guess it's because somebody gets paid for processing and
mailing those checks, and they want their share.)

Now to my question. What's the proper way of reporting those class
action settlement payments on our tax return (1040)?

I'm favoring showing them as long term capital gains, because in every
class action suit where I've filed a claim, we had a capital loss on the
investment involved, and I'd consider our share of the settlement as
just lowering those losses, hence a capital gain.

Thanks guys,

Jeff
 
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P

paulthomascpa

jeff_wisnia said:
As a result of having several "managed accounts" in our investment
portfolio my wife and I are the recorded buyers and sellers of an awfully
lot of different stocks and bonds, with frequent turnovers of these
investments.

A few times a year we get notices of class action suits which I usually
follow up on and file the requisite proofs of ownership for the time
periods specified.

It seems to work out pretty well (if we wait long enough) and every few
months a check rolls in for our share of one of those class action
settlements, generally not much more than a hundred dollars or so. (I got
one last month for 4 cents....WHY do they bother with such a small amount,
I guess it's because somebody gets paid for processing and mailing those
checks, and they want their share.)

Now to my question. What's the proper way of reporting those class action
settlement payments on our tax return (1040)?

I'm favoring showing them as long term capital gains, because in every
class action suit where I've filed a claim, we had a capital loss on the
investment involved, and I'd consider our share of the settlement as just
lowering those losses, hence a capital gain.

Without knowing the underlying basis for the suit, one wouldnt know how to
treat the settlement. Some are refunds of excessive fees charged, and would
accordingly be treated as a reversal of those charges. I doubt many of the
cases have been over improper investment activity or the mere fact that the
fund lost money or didn;t make enough.
 
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J

jeff_wisnia

paulthomascpa said:
Without knowing the underlying basis for the suit, one wouldnt know how to
treat the settlement. Some are refunds of excessive fees charged, and would
accordingly be treated as a reversal of those charges. I doubt many of the
cases have been over improper investment activity or the mere fact that the
fund lost money or didn;t make enough.
Thanks Paul..

One check I received last year from a brokerage firm I'd stopped using
about three years ago (when my broker there retired) was in fact
reported to me as a reversal of excessive fees charged.

Since I didn't specifically deduct those fees as expenses in the years
they were charged because they were included in the net purchase and
sale prices of the stocks and bonds involved. When I sold an investment
I reported the capital gains or losses derived from the net purchase and
sale prices as they were reported to me by the investment firm(s)involved.

That's why I thought the check I received returning "excessive fees"
should probably get reported as a capital gain.

I did receive a nice settlement from a FINRA arbitration I initiated two
years ago, but it was related to an investment held in my IRA, so I just
put it back into the IRA, and the brokerage firm handling the IRA didn't
consider it a "contribution".

Jeff
 

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