ProEquity fee settlement

[kathyc2]

Client received refund of some fees due to class action settlement. No form produced, the letter than came with check states:

"Because this refund relates to a qualified account, you may deposit all of the funds into an IRA account as a restorative payment and not incur tax liability. If you do not rollover the funds and instead either cash or deposit the check, you may be subject to taxation. In this instance, the fee reimbursement should generally not be taxable, however the prejudgment interest may be."

I agree that if the refund was put into IRA, it would not be taxable as when the amount is eventually disbursed, it would be taxable then.

I'm not following why the return of fees (not interest) would be tax free. The fees were originally paid from within the IRA, reducing the fund balance, and therefore less to be taxed eventually. The refund of fees being non-taxable seems like double dipping to me.

Thoughts?

[Lion]

..."generally"... If your client paid the fees, the fee reimbursement would be a return of his fees and not taxable. Unless he was able to deduct his fees someplace when originally paid, then taxable income when reimbursed. If the fees were paid inside an IRA and later reimbursed to the owner/not to the IRA, taxable to owner.

[Burke]

I agree with Lion. It appears the reimbursement of fees were not restored to the IRA account by the class action settlement against (I assume) the custodian of that account who charged the fees. You state client got a check, I assume made payable to him. So it is taxable to him, and I don't believe it is eligible for a "rollover," although that is what the letter states. Maybe there is a Tax Court decision on this situation?