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How to treat income?
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Tom C
Jul 23, 2012, 10:33:46 PM7/23/12
to
Taxpayer's investment advisor convinces them to sell the IBM and to
buy an annuity. State Office of Investment Regulation finds that the
investment guy gave improper advice. (Like how often you see THAT
happen?) Demands taxpayer be reimburses for the out- of-pocket tax and
related effects of the sale.
I calculate that if the taxpapayer was reimbursed, and if that
reimbursement was treated as ordinary income, they should get a
payment of, say $50,000.
Investment campany agrees to pay, but they also cite the Arrowsmith
case, and suggest that the taxpayer may want to consider treating the
proceeds of the settlement as capital gains.
I'm not crazy about that. Something about it seems a little off-
point.
What do you guys think?
--
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buy an annuity. State Office of Investment Regulation finds that the
investment guy gave improper advice. (Like how often you see THAT
happen?) Demands taxpayer be reimburses for the out- of-pocket tax and
related effects of the sale.
I calculate that if the taxpapayer was reimbursed, and if that
reimbursement was treated as ordinary income, they should get a
payment of, say $50,000.
Investment campany agrees to pay, but they also cite the Arrowsmith
case, and suggest that the taxpayer may want to consider treating the
proceeds of the settlement as capital gains.
I'm not crazy about that. Something about it seems a little off-
point.
What do you guys think?
--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2011) - All rights reserved. >>
<< ------------------------------------------------------- >>
Bill Brown
Jul 24, 2012, 9:02:43 AM7/24/12
to
On Monday, July 23, 2012 10:33:46 PM UTC-4, Tom C wrote:
> Taxpayer's investment advisor convinces them to sell the IBM and to
If the above doesn't absorb all of the $50,000 then I suspect the rest is ordinary income.
> Taxpayer's investment advisor convinces them to sell the IBM and to
> buy an annuity. State Office of Investment Regulation finds that the
> investment guy gave improper advice. (Like how often you see THAT
> happen?) Demands taxpayer be reimburses for the out- of-pocket tax and
> related effects of the sale.
>
> I calculate that if the taxpapayer was reimbursed, and if that
> reimbursement was treated as ordinary income, they should get a
> payment of, say $50,000.
>
> Investment campany agrees to pay, but they also cite the Arrowsmith
> case, and suggest that the taxpayer may want to consider treating the
> proceeds of the settlement as capital gains.
>
> I'm not crazy about that. Something about it seems a little off-
> investment guy gave improper advice. (Like how often you see THAT
> happen?) Demands taxpayer be reimburses for the out- of-pocket tax and
> related effects of the sale.
>
> I calculate that if the taxpapayer was reimbursed, and if that
> reimbursement was treated as ordinary income, they should get a
> payment of, say $50,000.
>
> Investment campany agrees to pay, but they also cite the Arrowsmith
> case, and suggest that the taxpayer may want to consider treating the
> proceeds of the settlement as capital gains.
>
> point.
>
> What do you guys think?
>
Consistent with the Arrowsmith Doctrine (Arrowsmith v. Commissioner, 344 U.S. 6), I believe the portion of the settlement that is to reimburse capital losses (potential or realized) should be reported as capital gain. The portion of the settlement that is to reimburse items that are deductions against ordinary income should be reported as ordinary income.
>
> What do you guys think?
>
If the above doesn't absorb all of the $50,000 then I suspect the rest is ordinary income.
Tom C
Jul 24, 2012, 2:42:00 PM7/24/12
to
>
> Consistent with the Arrowsmith Doctrine (Arrowsmith v. Commissioner, 344 U.S. 6), I believe the portion of the settlement that is to reimburse capital losses
>(potential or realized) should be reported as capital gain. The
portion of the settlement that is to reimburse items that are
deductions against ordinary income
> should be reported as ordinary income.
However, because taxpayer has a big tax bill due to bad investment
advice, the settlement with the Department of Regulation required them
to be reimbursed for those taxes. Taxpayer makes out alright, they
effectively get a step-up in basis in their portfolio due to the
recognized capital gain, plus they get reimbursed for the tax bill.
The investment company lawyer is making the suggestion that taxpayer
might want to treat it as capital gain. They and their accountants are
$500 an hour type guys.
That doesn't scare me, but then I didn't want to dismiss the idea, nor
do I want my client to pay too much in taxes.
Alan
Jul 24, 2012, 3:07:36 PM7/24/12
to
On 7/23/12 8:33 PM, Tom C wrote:
> Taxpayer's investment advisor convinces them to sell the IBM and to
> buy an annuity. State Office of Investment Regulation finds that the
> investment guy gave improper advice. (Like how often you see THAT
> happen?) Demands taxpayer be reimburses for the out- of-pocket tax and
> related effects of the sale.
>
> I calculate that if the taxpapayer was reimbursed, and if that
> reimbursement was treated as ordinary income, they should get a
> payment of, say $50,000.
>
> Investment campany agrees to pay, but they also cite the Arrowsmith
> case, and suggest that the taxpayer may want to consider treating the
> proceeds of the settlement as capital gains.
>
> I'm not crazy about that. Something about it seems a little off-
> point.
>
> What do you guys think?
>
If the reimbursement is for an over payment of federal income taxes due
> Taxpayer's investment advisor convinces them to sell the IBM and to
> buy an annuity. State Office of Investment Regulation finds that the
> investment guy gave improper advice. (Like how often you see THAT
> happen?) Demands taxpayer be reimburses for the out- of-pocket tax and
> related effects of the sale.
>
> I calculate that if the taxpapayer was reimbursed, and if that
> reimbursement was treated as ordinary income, they should get a
> payment of, say $50,000.
>
> Investment campany agrees to pay, but they also cite the Arrowsmith
> case, and suggest that the taxpayer may want to consider treating the
> proceeds of the settlement as capital gains.
>
> I'm not crazy about that. Something about it seems a little off-
> point.
>
> What do you guys think?
>
to bad advice, then see Clark v. Comm�r, 40 B.T.A. 333 (1939), acq.
1957-2 C.B. 4, and Rev. Rul. 57-47, 1957-1 C.B. 3 where the
reimbursement was determined to be not taxable. If the amount received
goes beyond the excess taxes paid, then you will need to determine the
reason for the excess in order to characterize it. E.g., if there's an
amount that represents additional gain on the stock sold had the t/p
held on to it: = LT Capital Gain.
--
Alan
http://taxtopics.net
Tom C
Jul 25, 2012, 12:45:33 PM7/25/12
to
Thanks, but te situation wasn't an "overpayment of taxes," the taxes
that will be paid are the correct amount. The taxpayers also benefit
from the step-up in basis in the portfolio.
In Clark, the taxpayer was merely brought back to his original
position where he would be had the return been prepared competently.
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