Capiial gain?

[MDEA]

Client worked for a real estate company that bought and rented apartment houses.Part of his pay was an small piece of each deal he put together.He left the business in 2009 due to economic conditions.After years of litigation he has received $200,000 with legal fees of $80,000.All of the properties have been sold.I am uncertain how to report income.Capital gain of $200,000 with 0 cost and $80,000 schedule A deduction.All responses appreciated.

[Bees Knees]

Before we go off and speculate on answers based on a wide variety of possible speculated scenarios, you need to provide us with more details.

When you say part of his pay was a small piece of each deal, does that mean he was part owner in each rental property? Or does that mean he earned a commission based upon the value of each deal he put together? Or does that mean he received some kind of deferred compensation plan based upon his share of each deal?

When he received $200,000 after years of litigation, does that mean his employer paid him $200,000 in back wages or some kind of deferred compensation? Or does that mean he received $200,000 for the sale of his ownership interest in the rental properties? If so, was he considered a part owner of each rental property? If so, how was he a part owner; a partner in a partnership, or shareholder in a corporation?

As for the legal fees, what exactly were they incurred for? Back wages? A dispute over the value of property he partly owned? A contract dispute over how he was to be paid for his small piece of each deal? Or something else?

[MDEA]

Capital gain

He owned a small percentage of each building.He sued for this money after he found out that the buildings had been sold.He obtained a judgement against the majority owner of the business.The check came from a title company upon the sale of another building owned by this person.This company was very loose in the way he was paid each year.Salary plus 1099"s from various other companies controlled by the same owner.One of the other reasons he left their employ.The paper work is non existent on each of the individual buildings.

[Gary2]

He owned a small percentage of each building.He sued for this money after he found out that the buildings had been sold.He obtained a judgement against the majority owner of the business.The check came from a title company upon the sale of another building owned by this person.This company was very loose in the way he was paid each year.Salary plus 1099"s from various other companies controlled by the same owner.One of the other reasons he left their employ.The paper work is non existent on each of the individual buildings.

I learned a long time ago that often the difficult part is taking a vague question and turning it into a precise, complete question, and then the answer is easy.

In this case, please put a bit more effort into describing the situation and problem completely. For example, you say he "owned a small percentage...." Taken literally, this would mean that he'd have a deed to real estate making him a Tenant in Common of a small percentage undivided interest. There is no way anyone else could sell his share, unless he granted a power of attorney or other contractual document (such as a mortgage or trust deed granting the mortgagee the right to sell). This is conceivable, but seems unlikely. A more likely situation might be that he had a contract whose payout was based on the sale of specific buildings. Alternatively, perhaps he owned a small percentage interest in a partnership - maybe just a capital interest. Or perhaps that's the legal status, but the bookkeeping and tax reporting never reflected it. We can't answer these questions for you. You need to dig, to understand precisely what he owned.

Why did the check come from the title company? Was that building really owned just by the majority owner of the business? Or was it owned by the business? And what was the business entity?

The paperwork on the buildings can't be non-existent. There will be deeds and other recordings at the registry. There will be court documents for the lawsuit that likely reference the building.

Do some more homework, to get the paper work. Don't expect to be able to describe the situation in just one paragraph.

[MDEA]

Capital gain

I will talk to client to obtain more info.The check came from a title agent because they had a lien against the principle owner of this property.My client had know interest in the property they collected the money from.

[MDEA]

Capital gain

It was part of an employment agreement.Part of each property was owned by an LLC which my client had 25% ownership.They sued the owner of the company because he personally guaranteed the employment contract.The money came from a title the company to satisfy the judgement they had.

[WhiteOleander]

I'm confused also. On one side, you say it was an employment contract. On the other you state is was a LLC of which he was a 25% member/owner. So, how did the "owner" sell the property? How was it an employment contract if he was a member of the LLC?

If you are getting the explanation from your client, they frequently don't know or understand the agreements they enter into. You need to get copies of the LLC agreement and everything since. Follow the money to see how your client ended up where he is.

[Bees Knees]

Well if the LLC elected to be taxed as an S corporation, then a 25% member of an LLC would in fact be paid as an employee of the S corporation. If the LLC did not make the election and is taxed as a partnership, then the 25% member of the LLC would be a partner, and payments for services would be treated as guaranteed payments.

Sorry for not providing specific answers, but you are still not providing enough details for a specific answer.

[MDEA]

Capital gain

The original real estate company is out of business.There only paper work for the LLC are the original incorporation papers it never had a bank account or ever received the payments it was supposed to.The money came from a judgement against the principle owner.If it is not a capital gain what is it?The only paper work the client has is a check and an invoice from the lawyer.I know he must report this income but how?

[WhiteOleander]

The original real estate company is out of business.There only paper work for the LLC are the original incorporation papers it never had a bank account or ever received the payments it was supposed to.The money came from a judgement against the principle owner.If it is not a capital gain what is it?The only paper work the client has is a check and an invoice from the lawyer.I know he must report this income but how?

I am sorry, but you are still not giving us info to define the type of income. First you say he worked for a company. That would not be consider capital gain income. Then you say he had a split on each deal the company made. But, you don't say how or why. So, if you don't know, you will have to find out. Perhaps the attorney can help you.

[Bees Knees]

The default reporting whenever it is unclear is ordinary income. There are all kinds of court cases over capital gain vs. ordinary income reporting. Unless there is proof the gain is capital gain, the courts always rule it is ordinary income.

If you want to claim this as capital gain, you have to prove that the income came from the sale of property that your tax client owned. If it came from property your client did not own, or if you are unable to define the type of income, then it cannot be capital gain income. Report it as other income on line 21 of the Form 1040. Legal fees to collect ordinary income are deductible as miscesllaneous itemized deductions on Schedule A, subject to the 2% AGI limitation.

[Nashville]

No Answers to be Had

Sorry, but the more you tell us, the less able we are able to provide specifics. I don't think any of us on the forum can walk down this path with you as the information is just simply not there.

First, under the Statute of Frauds, there cannot be any real estate transactions which are not in writing. Don't pursue anything under the presumption of verbal promises, innuendos, or gentlemen's agreements.

Secondly, is the 25% share actually an OWNERSHIP share, or is it only a profit-sharing arrangement? Reporting this stuff can range from taxable compensation (with possible self-employment tax) to K-1 type reporting that comes from an S corp or Partnership.

To complicate matters above, the situation above can vary from property-to-property so it is possible that different properties get different treatment.

Thirdly, you mention getting a settlement from a title company because of defaults in paying loans. If client was in fact a 25% owner, he may end up with income from cancellation of debt.

If you can't get a straight answer (and I'm not sure even your client would know all this), you might consider reporting under the defaults set forth in the post above.

[MDEA]

Capital gain

Thank you all for your help.I am going to do what Bees Knees suggested report on line 21 and take the fees on Schedule A.All the paper work is gone and it is difficult to recreate what really happened.He has the money he will have to pay taxes on it.

[JohnH]

When you give him the return with the income reported on line 21, you could also run the numbers on how much less his tax liability would be if this really is LTCG. Then tell him how long he has to amend, plus what your hefty fee would be to prepare the amended return. Let him know it's up to him to gather the info to document the LTCG. If that won't get him jumping to get you more info, nothing will.

Of course, you might also need to give him an estimate of what the additional tax liability would be if it in some weird way turns out to be S/E income.