Discussion:1099MISC or Stock Sale

Taxpayer years ago bought stock in a startup company.

The company has since went bankrupt. Most of the taxpayers have reported this loss on their respective Schedule D.

Now, the originator of the bankrupt company, is reimbursing some of the shareholders a portion of their investment, and he is going to issue the shareholders a 1099MISC, so that he can take the repayments as a business deduction. He is rationalizing that the repayments to the shareholders are a "commission" payment.

I prepare the 1040 for a few of these taxpayers. We don't want to show the repayment as business income. How can I avoid that? They are in reality receiving some of their investment back. But the IRS will be receiving the 1099MISC and matching that up to the taxpayers return.

What's the best way to handle this?

The old corp's owner must have a new corp and wants to deduct the monies somewhere in a new corp.... Hence the 1099s. Just a thought hehe.

But, the taxpayers/investors/shareholders are then stuck paying income tax AND self employment tax on the proceeds. How can this be avoided?

But anyways, unless you want a IRS note which might require a follow up with your client, I'd put it line 21. In the end it is your client that has to deal with what he/she chooses. IMO.

I see your point, but the first thing I would ask the payer is how you justify the payment as an expense. What is the economic subsistence?

Also San Diego, the payer is justifying his treatment because the bankrupt corp, had some "venture capitalist" involved, which the payer then used those same VC's for other deals. The payer is rationalizing that if it wasn't for the investors and the first bankrupt company, he never would have met the VC, to do the other deals (other entities). So, he looks at it as a "commission" payment for getting hooked up with the VC's. A long shot, huh. But in reality he is repaying some of the money, to save his reputation.