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PDtax, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 4677
Experience:  35 years tax experience, including four years at a Big 4 firm.
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I was a partner in an LLC in Michigan. I left the LLC and negotiated

Customer Question

I was a partner in an LLC in Michigan. I left the LLC and negotiated a settlement with the other partners for my share. I just received a 1099 MISC for the settlement amount. It was reported in box 3. I believe this is incorrect and should have been reported on a different form so that I can show a capital gain/loss for my share based on my cost basis when entering the LLC. The partners of the LLC will not change the reporting. How can I go about showing this as a gain/loss and not income. This would make a huge difference in what I might owe in taxes. I am trying to avoid a lawsuit.
Submitted: 1 year ago.
Category: Tax
Expert:  PDtax replied 1 year ago.
Hi from Just Answer. I'mCustomer I'll assist. I assume you have a written agreement or other support for your position, which likely included the endorsement of your LLC member certificates or other proof of a sale. if so, no need to dispute with your former LLC members. Report the 1099-MISC income as other income, then deduct it on 1040 under other deductions (1040, line 36). That way, the 1099 income is reported as you received it, and you are telling IRS that is incorrect. Then, report the sale of the shares as you would have. IRS will have notice of the difference you have with the LLC. They chose 1099-MISC reporting to try and get a tax deduction for your payment. Your proof will support your position. If IRS asks about it, it is the LLC that will have to defend its position, and your sale contract and endorsed ownership (not to mention the LLC return they file that no longer has you as a member) will support your position. Thanks for asking at Just Answer. Positive feedback will be appreciated, as will a bonus if warranted. I'mCustomer
Customer: replied 1 year ago.
Let me give you a bit more info. This LLC was started after all the partners pooled their personal property in exchange for a share of the LLC.
Clearly the payout means I am no longer a partner and they retain the property I initially brought into the LLC. I am not certain if I would show they settlement amount on schedule D or some other form. I believe I should be able to calculate a gain or loss. Could You advise?
Expert:  PDtax replied 1 year ago.
I told you how to report the 1099-MISC you wanted to reclassify without making the LLC revise their reporting. "I am trying to avoid a lawsuit." I suggested your contract or agreement be used as proof of the terms of your agreement. You did not mention one, but refer to a payout: "Clearly the payout means I am no longer a partner and they retain the property". It does not. Receipt of a check does not explain why. The K-1 you received in your final year should show the date you were no longer a member. The contract you executed likely would as well. Reporting as I recommended should allow IRS to process your return with the 1099-MISC amount received. Then report your gain or loss on liquidation on Schedule D as a capital gain. It is the best resolution, given your aversion to litigation. Report the sale on Schedule D. Please accept/rate when you are satisfied with my answer. I'mCustomer
Customer: replied 1 year ago.
They never issued a K1. Will that be an issue?
Expert:  PDtax replied 1 year ago.
It confirms the treatment of your payment as a purchase of your interest. It is not an issue, and in fact helps.Customer