A client received a brokerage consolidated 1099 that included a 1099-MISC Box 3 entry (other income). The detail traced it to a California tax-exempt bond. The broker had no idea what it was all about. Can anyone think of how a tax-exempt bond can generate 1099-MISC other income?
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Evan Appelman, EA -
It sounds like the broker "loaned out" the securities. Payments received for loaned out securities are reported on Form 1099MISC box 3 even if tax-exempt. By the broker, I don't mean the actual broker who handles the client's account, but the firm that holds the securities.
This is fairly common when someone loans out securities to enable someone to sell short. -
Does the income still retain its tax-exempt character?
If not, somebody owes the client some money! My software does allow me to designate Box 3 income as tax-exempt.Evan Appelman, EAComment
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It is not tax exempt. It is paid by the brokerage agency and not the muni bond issuer. And, I am sorry, I should clarify...when I said "even if tax-exempt" I was implying the issue loaned out was tax exempt - not that the earnings received were tax-exempt. They are likely taxable.Last edited by TXEA; 03-15-2014, 05:41 PM.Comment
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Making the client whole
The question is whether these amounts are received in lieu of tax exempt interest payments. If so, it would seem that someone should be responsible for making the client whole.Evan Appelman, EAComment
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Consent payment
I'm thinking it is more likely a consent payment for a change in terms, e.g. an earlier call date. And this would be taxable.Evan Appelman, EAComment
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