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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22638
Experience:  Taxes, Immigration, Labor Relations
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I received a 1099 misc from the settlement of a class action

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I received a 1099 misc from the settlement of a class action suit. The form shows it is royalty income. The suit derived from a K1 partnership where the managing partners kept an unfair share of the proceeds and were sued by the other K1 partners. All the other income has been in the form of a K1. Had the partners treated everyone fairly this 1099 M income would have been K1 income which I have losses to offset. Now I am looking at a big tax bill for being self employed. Is there a middle ground. Also, my ex-wife now claims that part of the 1099 M income is hers. Do I give her a 1099 M for her share is she is entitled to any.

Thanks.

K
Submitted: 9 months ago.
Category: Tax
Expert:  Lev replied 9 months ago.

Lev :

Hi and welcome to our site!
Please verify how this payment is reported on form 1099MISC - box 3 or box 7?
Are you active participant in this partnership?

Customer:

Box 2

Customer:

This is a payment is from a lawsuit settlement where the non managing partners sued the managers for overcharging their share of the proceeds from the partnership. Had the managers treated everyone fairly the income would have shown up on K1's from 2009-2012. I received over $300,000 in K1 income from the K1's for those years.

Lev :

Box 2 reports "Royalties" - based on your information - it doesn't look as Royalty income...
It would be more appropriate to report in box 3.

Lev :

To determine if settlement amounts you receive by compromise or judgment must be included in your income, you must consider the item that the settlement replaces. The character of the income as ordinary income or capital gain depends on the nature of the underlying claim.
Thus - if the settlement replaces income which is subject of self-employment tax - the settlement itself is also subject of self-employment tax.
So to determine - you need to itemize that settlement amount - a part of it might be compensation for legal expenses, a part might be interest on the award because of delay, etc - each item must be treated differently.

Customer:

That is part of the issue. It seems wrong to me. Should I contact the ones who sent the 1099 to see how they came to this?

Customer:

All that I received was notice of payment and a check in the amount of $72,499.39. No explanation but I can safely assume the payment was net of any costs of any sort since it derived from a class action suit.

Customer:

Am I safe to offset it against NOL from before?

Lev :

Should I contact the ones who sent the 1099 to see how they came to this?
You need to obtain the settlement document that most likely you signed and agreed which specifies settlement items. If there is no details - it would be hard to proof anything.
If that is not passive income - and in case that income is subject of self-employment taxes it is not passive - yes - you may use NOL carried from previous years to offset that income.
However - I would object the fact of reporting in the box 2 and ask to correct 1009MISC form reporting this amount in box 3 - that might help to avoid self-employment taxes.

Customer:

Thanks. You get high marks. I will follow your advice.

Customer:

I was a limited partner in the underlying partnership. I just checked my K1

Lev :

For limited partnership - it might be passive income - so if you have NOL - only passive losses carried over from previous year may be used to offset passive income.
So verify with your K1 - if that was passive loss or not.

Customer:

I had over a million dollars in NOL's to carry over. How would I determine on the K1 if they were passive.?

Customer:

Also How do I distribute a share to my ex-wife if the court determines she has an interest?

Lev :

How would I determine on the K1 if they were passive.
On K1 either is reported in box 1
There are two kinds of passive activities.


•Trade or business activities in which you do not materially participate during the year.


•Rental activities, even if you do materially participate in them, unless you are a real estate professional.


 

Lev :

So - if you did not materially participate in this partnership for the tax year - that is your passive activity - in this case gains and losses are accounted separately.

Lev :

For Material participation tests see page 5 in this publication - http://www.irs.gov/pub/irs-pdf/p925.pdf
Generally - that is not a passive activity if you participated in the activity for more than 500 hours.

Customer:

It is online 1 and shows as passive in previous returns.

Lev :

How do I distribute a share to my ex-wife if the court determines she has an interest?
The best way would be to contact the sender asking to issue separate 1099MISC forms and separate checks.
If that income was received by your ex-spouse - but reported to you - such situation is classified as nominee income. A nominee is someone who receives, in his or her name, income or interest that actually belongs to another individual or entity.
If the individual receives a Form 1099 for amounts that actually belong to another person or entity - that person is considered a nominee recipient. It may be necessary to file with the IRS and furnish to the other owners the same form Form 1099 for that amount.
Because the IRS expects to see that amount reported on the taxpayer's individual tax return - I suggest to attach a note with explanation of facts and mention that was a nominee income which actually was reported his/her share of income and provide the tax ID of that person. In this case - no need to report that amount on your 1040.

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22638
Experience: Taxes, Immigration, Labor Relations
Lev and 9 other Tax Specialists are ready to help you
Expert:  Lev replied 9 months ago.
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