Tax liability of lawsuit settlement funds

Submitted by Jeff Watkins on Tue, 2019-01-22 17:49

Hello

What is our tax liability for settlement funds from a lawsuit against FSC (Fifth Street Finance, a BDC) involving artificially inflated share prices for purchases made inside our R/O IRA, T-IRA, and Roth IRAs. The checks are made to our names on the accounts, as in, Name, IRA #. I have endorsed them in the usual manner.

I consider the funds to be a return of money already held in the accounts when the trade was made, as compared to a distribution from the accounts. I want to send the checks to my brokerage for deposit in our accounts.

Neither the settlement group nor my brokerage will give tax advice. We are not working and so the checks can’t be considered a contribution. I am asking for insight to help me decide what to do, as in, send the checks in or consult a tax advisor/lawyer.

Many thanks!

Jeff



Submitted by Alan - IRA critic on Tue, 2019-01-22 18:05

  • Usually, the class action legal firm will collect information on the applicable accounts, and for an IRA the award would be made payable to the IRA or AN IRA. The IRA owner is then allowed to treat the award as a “restorative payment” and endorse the check over for deposit to the IRA to which the award applied, or if closed to another IRA account. This is treated as a non reportable transfer, with no 1099R or 5498 issued. The plaintiffs legal firm should be providing a written explanation of the award or at least refer the person to their website where details of the litigation may be outlined.
  •  I think your IRA appeared as part of the check payee, but even if it did not you can still do a 60 day rollover provided that the one rollover limitation rule allows. In that case, you will need to provide some documentation to your IRA custodian to enable them to process the deposit as a rollover contribution. 
  • If there is any punitive damage component included, that portion is not eligible as a restorative payment.

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