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Tax Fools,

Yesterday I received a small check (<$18) from a Pfizer class action litigation settlement (http://www.pfizersecuritiessettlement.com/). The stock in question is held in my Traditional Rollover IRA - which was at Scottrade at the time of the incident and is now held at TD Ameritrade. The check is titled Joel Corley, Scottrade.

I'm wondering about the right way to handle this check.

Of course I'm probably worrying over nothing. If I cash the check, the penalty is 10%, right? So it will cost me $1.80 in extra taxes - assuming I can even get my bank to take the check given how it is titled. But I'm assuming that the money ought to go back into my T-IRA.

So I just got off the phone with a client service representative at TD Ameritrade. The rep doesn't think they can take the check and my Scottrade account has been closed for years. The rep thinks I should try to cash it at my bank; but I'm concerned I'll have to deal with it in next year on my taxes ... and I hardly need the money right now. ;-)

But I'm wondering if the account rep really knows what he's talking about. He thinks that since this is part of a litigation settlement that it has no tax consequences to me. But having been through other investment-related litigation, I'm pretty confident that advice is just plain wrong. From what a CPA once told me, something like this in a taxable account would be treated as either a capital gain or a return of capital, depending on the circumstances surrounding the litigation and settlement. Since this is was from an T-IRA, I'm assuming none of those details matter, but the fact that it was effectively a distribution from an IRA does matter and if not deposited promptly, it will be treated as a distribution.

Is my understanding wrong here? Given the small amount of the check and the even smaller tax consequences, I'm reluctant to engage a professional for advice - because penalties and interest from the IRS should be far less than an hour with a CPA. But if the check were larger, I would be much more concerned. So I assume figuring this out now might save me a bigger headache in the future if something similar happens.

So what's the right approach here? Do I try to pursue this with TD Ameritrade? Or do I just take it to the bank? And what's your rational either way? And obviously I want to know the tax consequences with either approach.

Thanks in advance for everyone's time and opinion...

- Joel
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No. of Recommendations: 5
First step: Deposit the check in your bank. Use an ATM or your bank's smart phone app to avoid pesky questions about the payee. That takes care of getting the cash back into your control.

If you want to avoid tax issues, send the money on to your current IRA custodian and call it a rollover deposit. Keep in mind that you can only do one such rollover during any 12 month period. So if you've done a rollover recently or plan to do one in the next 12 months, I wouldn't go this route.

If you don't want to do the rollover (or can't because of the above 12-month issues), report it as an IRA distribution on your tax return. You'll pay tax and/or penalty on it, depending on the type of IRA and your current age. Given the dollars involved, the tax and/or penalty aren't onerous.

Finally, you should know that these investor-based class action settlements are almost never reported to the IRS. I don't think I've ever seen a 1099-R for one. (Class actions based on employment issues are more commonly reported to the IRS, usually as wages, but sometimes on a 1099-MISC.) If there's interest involved in the settlement AND the interest amount is over the reporting threshold (currently $10), the interest is often reported to the IRS on a 1099-INT. In any case, any tax reporting forms are typically included with the check. So if you didn't get a 1099 with the check, you probably won't get one at the end of the year.

I'm not advocating tax avoidance here, just giving you the info you need to make an informed decision on what to report on your tax return.

--Peter
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ptheland,

You wrote, If you want to avoid tax issues, send the money on to your current IRA custodian and call it a rollover deposit. Keep in mind that you can only do one such rollover during any 12 month period. So if you've done a rollover recently or plan to do one in the next 12 months, I wouldn't go this route.

Do custodian-to-custodian transfers count? The Scottrade account landed at TD Ameritrade by way of E*Trade. The transfer from E*Trade occurred last December - less than 12 months ago. The transfer was done via ACATS so I never touched any of it.

Also, will TD Ameritrade have an issue with the deposit coming straight from my personal account? Hum. I guess that actually happens a lot - especially when a 401K plan sends someone directly a check for the balance. But I think the only time I've been physically involved in a transfer, the 401K plan wrote me a check (and sent me company stock) that was titled something like, "FBO: Joel Corley" and I just took those items to the broker. That was when I set up my Rollover IRA at Scottrade ~15 years ago.

Finally, Finally, you should know that these investor-based class action settlements are almost never reported to the IRS. I don't think I've ever seen a 1099-R for one. (Class actions based on employment issues are more commonly reported to the IRS, usually as wages, but sometimes on a 1099-MISC.) If there's interest involved in the settlement AND the interest amount is over the reporting threshold (currently $10), the interest is often reported to the IRS on a 1099-INT. In any case, any tax reporting forms are typically included with the check. So if you didn't get a 1099 with the check, you probably won't get one at the end of the year.

I'm not advocating tax avoidance here, just giving you the info you need to make an informed decision on what to report on your tax return.


I did get a letter telling me to consult my tax adviser about the tax treatment; but it was a generic form letter - no 1099-R. I would of course report this on my return ... if I remember. But if they don't send me something, there's at least a 50:50 chance I'd forget about less than $18.

Sigh. Now that you made me think that far ahead, I realize that I should set a reminder on Google calendar for next January. Darn. Now I'll probably wind up reporting it. It's either that or I drive down to the local TD Ameritrade office and give them a check. Cost- and time-wise, it's probably a wash either way.

- Joel
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I wouldn't be concerned.

I'd photocopy the check for my records and deposit it into my checking account... and that would be that.

I agree with your TDA rep in this case. Litigation proceeds like this are not income.

I doubt the IRS cares one whit about this, but if they did, I'd offer to make good on any tax due.

This isn't worth worrying about IMO.
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I had one of these a couple of years ago, but for a larger dollar amount. I had already done a rollover into my IRA that year so I didn't want it classified that way. I ended up taking the check to the TD Ameritrade office and they were able to classify it as "Other". However, for such a small dollar amount I probably would just cash the check. You won't be getting a 1099 for this.

Gina
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Considering the size of the amount, you might just sign it on the back and send it to the charity of your choice. The can deal with the taxes. And they can ignore the taxes as they are probably tax exempt.
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Do custodian-to-custodian transfers count?

No.

The one rollover per 12 months applies only to rollovers where you take actual custody of the IRA funds for a period of time (up to 60 days), then send the money directly to an IRA custodian as a rollover deposit.

You can do as many trustee-to-trustee transfers as you care to do. A check made payable to the new trustee FBO joelcorley is a trustee-to-trustee transfer.

If you're really concerned about the tax reporting, deposit the check into your own account, then - within 60 days - send the money to your current IRA custodian and indicate that it is a rollover deposit. It's really pretty easy.

I currently use TDA, and did a rollover about 18 months ago. Logged in to TDA, went to the cash transfers tab, told them to take the money out of my checking account, and checked the box to say it was a rollover. That's the same process and took about the same amount of time as my annual contribution.

--Peter
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ptheland,

You wrote, I currently use TDA, and did a rollover about 18 months ago. Logged in to TDA, went to the cash transfers tab, told them to take the money out of my checking account, and checked the box to say it was a rollover. That's the same process and took about the same amount of time as my annual contribution.

Oh, excellent! A simple online method!

Assuming it won't raise red flags with the IRS, I might do that.

While I've had an account with TDA since they were Datek, it's been quite a while since I've been eligible for an IRA contribution (other than after-tax TIRA), so I've not looked into what the website supports for making contributions. Cool.

Thanks Peter! I'll consider that.

- Joel
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Just a thought, but you could contact Scottrade as well. It might be possible for you to take the check to a local branch and have then endorse it over to you so you have sole rights to the check and can then do what you want with it.

Fuskie
Who agrees that given the value, this is mostly a principle thing...

-----
Ticker Guide for The Walt Disney Company (DIS), Orbital ATK (OA), Titan International (TWI), Intuit (INTU), Time Warner (TWX)
Disclaimer: This post is non-professional and should not be construed as direct, individual or accurate advice
Disclosure: May own shares of some, many or all of the companies mentioned in this post (tinyurl.com/FuskieDisclosure)
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I agree with your TDA rep in this case. Litigation proceeds like this are not income.

You are welcome to agree with the rep, but you'd both be wrong. Why do you think brokers always tell you to consult your own tax professional? It's because the broker can't be relied on to give correct advice and doesn't want to accept the liability if they give bad advice.

Ira
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Considering the size of the amount, you might just sign it on the back and send it to the charity of your choice. The can deal with the taxes. And they can ignore the taxes as they are probably tax exempt.

Regardless of the amount involved, you can't avoid recognition of the income by signing it over to anyone else, even a charity. There are a few exceptions, but these are explicitly stated in the tax code.

Ira
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irasmilo,

You wrote, You are welcome to agree with the rep, but you'd both be wrong. Why do you think brokers always tell you to consult your own tax professional? It's because the broker can't be relied on to give correct advice and doesn't want to accept the liability if they give bad advice.

I'm with you on this. I *know* it's income based on a previous experience. That settlement was several orders of magnitude larger and it forced me to seek the advice of a CPA as well as do some research of my own.

Settlements involving the disposition of stock always have tax consequences. However, that other settlement didn't involve an IRA account, but I was already pretty certain that this is (potentially) income from the IRA no matter how you look at it ... and no matter how petty the dollar amount.

From what I recall the main class of tax-exempt settlements are damage awards for injuries or other personal losses - though those can have tax consequences if you claimed a reimbursed loss in a previous year's tax filing. Punitive awards are not exempt. In other words, if you get a significant litigation settlement, you probably need to seek professional advice on how to file. Even if you don't get a settlement, you probably will need advice on how to deal with claiming the litigation expenses.

BTW, my memory was wrong. The check was for $13.73 - even less than I remembered.

- Joel
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You are welcome to agree with the rep, but you'd both be wrong. Why do you think brokers always tell you to consult your own tax professional?

This is entirely out of context. I did not suggest that everyone follow their broker's advice. I only that my opinion aligns with what had been attributed to the broker.

You are free to do whatever you choose.

FWIW, when a broker points you to a "tax professional" that doesn't mean their advice is invalid, for in doing so they are only shielding their employer from legal liability consistent with the terms of their employment.
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FWIW, when a broker points you to a "tax professional" that doesn't mean their advice is invalid, for in doing so they are only shielding their employer from legal liability consistent with the terms of their employment.

The employer doesn't have any such concern about the employee giving investment advice because the employer knows it has hired (at least minimally) competent investment advisors who have to pass various exams demonstrating their knowledge of relevant subject matter.

If the employer doesn't have confidence that the employee can give accurate tax advice, why should you?

Bottom line, their tax advice is no more valid than my diagnosis of your medical symptoms. Just because you receive an answer you want/agree with doesn't make it right. With more than 30 years experience as a tax practitioner, I've lost count of how many times I've had to (try to) rescue a client from the consequences of actions taken based on the recommendation of brokers or other financial advisors.

Ira
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I only that my opinion aligns with what had been attributed to the broker.

Ira's right. Both your opinion and the broker's opinion are wrong in this case.

I'll agree that settlement proceeds are often not taxable, but I've seen far too many settlements that are taxable to glibly say that any one case in particular is not taxable.

In this case, there's the extra wrinkle of the IRA. These settlement proceeds belong to the IRA, not directly to the taxpayer. As such, the proceeds themselves would not be taxable as long as the money gets into the IRA.

What is making these proceeds potentially taxable is the fact that they are being removed from an IRA. If the OP doesn't get the money into the IRA, it's effectively a distribution from a traditional IRA. And that kind of distribution is taxable income. Plus it's subject to an early withdrawal penalty due to the OP's age.

--Peter
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RoyGeeBiv,

You wrote, FWIW, when a broker points you to a "tax professional" that doesn't mean their advice is invalid, for in doing so they are only shielding their employer from legal liability consistent with the terms of their employment.

Also FWIW, in my case the broker isn't the one that told me to consult a tax professional. That was in letter from the law office handling the litigation that sent me the check. The TDA broker didn't make any such suggestion. Paraphrasing a bit, he just told me to cash the check and not worry about it.

- Joel
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he just told me to cash the check and not worry about it.

For $13 (or even $18), I'd actually agree with the broker. The reality is that this is going to be entirely off of the IRS radar. They won't know about it, and even if they do the amount is so small as to not be worth their time. In the highest tax bracket, you're looking at $5 of tax plus $1 of penalty.

I've gone into the details mainly as an intellectual or teaching exercise.

--Peter
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For $13 (or even $18), I'd actually agree with the broker. The reality is that this is going to be entirely off of the IRS radar.

I've had occasion to file 1040Xs, usually due to late arriving K-1s, a few times where I turned out to owe a bit more--less than two bucks. The IRS, every time, blew off that amount and zeroed my balance due. I don't know where the actual threshold is for the IRS to take that action.

But I suspect it's colored somewhat by the fact that I volunteered the information rather than ignored the change. It's likely the same with a litigation settlement payout from within a TIRA.

Eric Hines
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