Recommended reading:
Capital Gain or Ordinary Income: How Securities Lawsuit Recoveries Are Taxed
Author: Robert W. Wood, who practices law in San Francisco. He is the author of 31 books, including Taxation of Damage Awards and Settlement Payments (3d Ed. 2005).
11-page pdf file at:
Excerpt:
>>Over the last few years, the economy, corporate conduct, major
upsets in the securities markets, or some combination of those factors
has produced a wave of lawsuits against corporate America. The
resolution of those cases can raise many tax issues, not the least of
which is how plaintiffs must treat their recoveries. On the defendant’s
side, questions also arise whether the defendant’s payments are
deductible, though most defendants surely assume that they are. . . .
The origin of the claim controls the tax treatment of a recovery
from a lawsuit, whether it is received as a result of a settlement or a
judgment. To determine the origin of the claim, courts and the IRS what
a recovery was paid in lieu of. The theory is that a recovery should be
taxed in the same manner as the item for which it is intended to
substitute. The origin of the claim is determined by reference to the
claims raised in the complaint, those claims that are pursued, and those
that are resolved in a verdict or settlement. Still, the IRS generally
views the complaint as the most persuasive evidence of the origin of the
claim.<<
Someone posted a question about this type of settlement on the Dutch Software Users message board (which, as expected, has degenerated into a forum for reactionary political commentary). The same kind of question seems to come up frequently in many forums during tax season. I have to admit that "origin of claim" is not a phrase that has always been on the tip of my tongue when these matters are discussed.
Capital Gain or Ordinary Income: How Securities Lawsuit Recoveries Are Taxed
Author: Robert W. Wood, who practices law in San Francisco. He is the author of 31 books, including Taxation of Damage Awards and Settlement Payments (3d Ed. 2005).
11-page pdf file at:
Excerpt:
>>Over the last few years, the economy, corporate conduct, major
upsets in the securities markets, or some combination of those factors
has produced a wave of lawsuits against corporate America. The
resolution of those cases can raise many tax issues, not the least of
which is how plaintiffs must treat their recoveries. On the defendant’s
side, questions also arise whether the defendant’s payments are
deductible, though most defendants surely assume that they are. . . .
The origin of the claim controls the tax treatment of a recovery
from a lawsuit, whether it is received as a result of a settlement or a
judgment. To determine the origin of the claim, courts and the IRS what
a recovery was paid in lieu of. The theory is that a recovery should be
taxed in the same manner as the item for which it is intended to
substitute. The origin of the claim is determined by reference to the
claims raised in the complaint, those claims that are pursued, and those
that are resolved in a verdict or settlement. Still, the IRS generally
views the complaint as the most persuasive evidence of the origin of the
claim.<<
Someone posted a question about this type of settlement on the Dutch Software Users message board (which, as expected, has degenerated into a forum for reactionary political commentary). The same kind of question seems to come up frequently in many forums during tax season. I have to admit that "origin of claim" is not a phrase that has always been on the tip of my tongue when these matters are discussed.
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