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Old 01-29-2018, 07:50 PM
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Unexpected Windfall - Most Tax Efficient Reporting?

Hey all,

I am in a unique situation for the 2017 tax year only and was wondering if someone could help direct me to the proper or most beneficial way to report an unexpected windfall.

I was a minority shareholder (for over a year) in a corporation. Due to a number of business disputes (breach of duties, etc) lawyers were involved (fees were paid) and ultimately the matter was settled. The minority shareholders were bought out of the company and my original investment was returned three-fold, with the addition of future payments capped at a certain amount. In the settlement, there was no designation that the lump sum was to be a return of capital, a sale of stock at a certain price, or a capital gain. Additionally, my income for the year was significantly lower than normal due to issues with the company - so I am not claiming a large windfall on top of a large salary.

Can anyone help me determine the most tax-efficient way to claim this windfall? I've couple approaches.

1. Deduct the original investment amount and attorney fees as "Return of Capital," using the future payments as the 100% gain portion instead of spreading the deduction out over the long course of the future payments. My primary concern with this is the lump sum received was larger than the original investment, so the ROC takes about 1/3 of the lump sum and may leave the 2/3 with a very high capital gains taxed at normal income rate?

2. Leveraging my lower-than-average income the past year, claiming capital gains and deducting attorney's fees as they exceed 2% of my AGI as the attorney's fees were clearly business related (attorney's used to recover investment income I would have paid tax on anyway.)

I'm open to hearing anything and everything. Further, is this something a representative at a place like TurboTax would be able to help answer, or should I find someone with some more expertise (and if so, where?)



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