The Facebook IPO was predicted to do so well to the point that is was actually h yped. That was then.

Now lawsuits are piling up. If you lost your money, you may have a claim. But if you do, will it go into your pocket or must you split it w ith the IRS? Say you purchased Facebook stock for $38, and it drops to $30, and then you get $5 back in a settlement. Do you have to report it as revenue? Like so much in th e tax world, it depends. An individual settling a claim that he lost out due to misrepresentation by a fi rm, bank, or broker typically has a motivation to say the loss was capital in na ture and that any resulting settlement should be capital too. The IRS, on the ot her hand, has a motivation to treat the earnings as standard revenue. To resolve this standoff, look towards the origin of the claim. In investment lo ss cases, the litigant will often claim the recovered funds are nontaxable as a recovery of basis, or represent capital gain. Usually, this invites questions in to what the plaintiff has already done on his taxation assessment in regards to this investment loss. If the complainant has already claimed a tax loss on the investment, then that t ax loss must be taken into account in figuring out how the profits of any ultima te recovery will be treated. In the typical investment loss case, the plaintiff is saying the defendant s conduct (accounting problems, mismanagement, conversion, f raud, etc.) lead straight to the loss or devaluation in price of the plaintiff s inv estment. The complainant shouldn t get favorable taxation on the recovery and a tax deduction for the investment loss. One key issue is what causes capital treatment. A capital gain is normally outli ned by reference to the gain on the sale of a capital asset. See IRS Tax Topic 4 09, Capital Gains and Losses. The mere settlement of a lawsuit is usually not a disposition, but within the context of recovering damages in lawsuits, the court s and IRS have often permitted capital gain treatment even though you still hold the investment. Suppose you purchased Facebook stock for $38, it drops to $18, and you later rec over $20. Depending on your circumstances, it might be treated as a recovery of your basis and therefore nontaxable regardless of if you still hold the stock. Investment related recoveries are more common today than in the past. More firms , banks, brokers, and investment agencies fall subject to these claims now than ever before. The tax issues for the recovering taxpayers regularly revolve aroun d standard income rules versus capital gain. The point is that the IRS profits c ould be huge, so plan ahead. If you re facing IRS tax problems, do not hesitate to call the professionals at JG T ax Group. We can help answer any tax-related questions you may have.