Class Action Suits

[Lion]

Anyone have any experience with two class action suits that mailed checks during 2010?

Northwestern Mutual Life Insurance Company -- not much helpful information on their website. Client knows they pay for policies but doesn't remember the income, doesn't even remember how much income and the check stubs don't include amounts!

Prudential Securities -- this one had a helpful website. My client held it in her IRA, but cashed the check personally. I think I include it as an IRA distribution and call it a Code 1 even though no Form 1099--R was issued.

[Gary2]

Have you tried contacting the companies directly?

It's unclear why you think the latter amount would be an IRA distribution. Wouldn't that depend on the nature of the compensation? If it's a return of overcharges, then shouldn't it have been sent to the IRA trustee? If it's compensation for misrepresenting the securities, then it's less obvious to me whether it belongs to the IRA or to the individual.

Assuming your client doesn't qualify for one of this year's disaster area extensions, any payments are already late. Unless the amount is significant enough to worry about the penalties and interest (and any possible understatement penalty), it may be worth risking an extra month's P&I to spend the time getting it correct now, as opposed to paying up first and then trying to get it back. Of course, that's the client's decision.

[Lion]

Hurricane Irene

Clients are in CT and appropriate Hurricane Irene zip codes. Have only the Draft K-1 for wife, but in the past the Final has matched the Draft, so they want to file by the deadline. So, that issue is settled, but my questions re the two class actions remain.

One settlement check was made out to her IRA, but she deposited it into her personal account instead of forwarding it to her IRA. So, I think it's a distribution with 10%. It's also only a small amount, and they're still getting refunds, so they chose the safest interpretation.

The other three checks from the other settlement don't have amounts on the stubs they gave me. These three MAY be a return of premiums on life insurance policies. They're looking for information on them now. If that's the case, then NO taxable income?

I had no power for a week during Hurricane Irene, so the extended deadline doesn't mean I have spare time now. I read the information on both websites, but put questions back in the clients' laps -- as well as choices due to the current ambiguities.

[FEDUKE404]

Interesting situation

While I was not involved with the companies mentioned, I did file to recover some funds through a class action lawsuit.

I owned shares in the same company both in my investment accounts and in my Roth IRA account.

Proper documentation (to include photocopies of the relevant account statements) was provided with the claim.

I eventually received a single check for all accounts, even though one of those accounts was plainly shown to be "XYZ, Custodian for Roth IRA," etc.

The dollar amounts were minimal, so I just cashed the check. Something about that outcome did not completely pass the smell test, however.

FE

[JohnH]

It may have been one of those insider class action suits. I think it happens when a company has some potential huge legal exposure, a cooperative lawyer files a class action suit against them on a closely related matter, and it's settled with a relatively minor payment or a "coupon setttlement" to everyone in the class.

End result is the company is immunized against a much larger claim because technically the issue which has already been through the courts is close enough to the bigger issue to avoid getting it reintroduced.

[Snaggletooth]

Taxable?

Maybe, maybe not. Misrepresented securities generally mean that the claimant has a basis in the security (if hasn't already written it off), and this would result in a loss.

As a preparer I would not automatically assume a class action settlement is taxable. In fact, I can think of more non-taxable settlements than taxable settlements. When you stop and consider such a settlement is generally restitution for something that has previously been expended by the claimant, you move into the realm of cost reimbursement as opposed to income.

[Lion]

Small Amounts

The clients found the dollar amounts for the Northwestern checks that we knew the least about. Very tiny checks. Clients have life insurance policies, so the checks may have been due to a pricing issue and a return of premiums paid and not taxable. But, clients and I decided to be conservative and report on line 21, easy to do with such a tiny amount.

The other check resulted from timing/trading issues by Prudental but was held in an IRA. Wife thinks she deposited check in personal account and did not forward to her IRA as the cover letter suggested she do. (She has since transferred her IRA to a different broker, so not easy to get the final answer.) So, we're going to report as an early distribution. Again, a small amount, so easy to be generous to the government when little is at stake.

I laid out the issues for the clients. They want no worries and chose the reporting we're doing. One is a banker, so wants more reporting to be safe. Their educated call.