Lemon Law Settlement

[Kimberly K]

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I have searched every publication that applies, the Taxbook and forums, of whether a lemon law settlement is taxable.

Here is the situation: Taxpayer buys a brand new truck in 2009 ($27000), after many months of repairs that were all covered under the manufacturers warranty, decides ( in 2010) to be done with this lemon and tries to get the manufacturer to put them in a new vehicle.

Manufacturer says NO, so the taxpayer contacts a lawyer and wins the claim for repair costs ($2900 was the taxpayers portion) . A few weeks after the taxpayer cashes the settlement check, the manufacturer contacts the taxpayer to put them in the same make and model truck as a trade. But their payments would start all over again.

Is this taxable?

While researching in one of the pubs I found,

" Loss-of-Use OR Loss-In-Value of Property-----settlements may be taxable if the settlement exceeds your basis in the property.

{ Property settlements that are less than the adjusted basis of your property are not taxable and generally do not need to be reported on your return}

{ When property settlements exceed your adjusted basis in the property, the excess is gain. }

I think I am reading too much into this. ( tend to do this in March) Last year when they were waiting on the settlement I told them its taxable, but Attorney fees would be deductible after the 2% floor.

[jainen]

>>wins the claim for repair costs<<

A reimbursement of non-deductible expenses would not be taxable, and related legal fees would not be deductible. Often, however, a settlement is a written agreement that the original claim was NOT valid, no admission of guilt, etc. What does the actual document say?

[Kimberly K]

Thanks Jainen,

The only thing they got was a letter with from the Attorney and the check. " Enclosed please find a check in the amount of $2900.00 representing settlement of your lemon law claim against."

Thats it, no 1099 or anything else for that matter!

[jainen]

>>representing settlement of your lemon law claim against<<

The lawyer said all he got was his out of pocket costs? Nothing else, like maybe at least to cover his own fees? Oh never mind. I'm sure a lemon law lawyer would be very honest, so who needs to see the paperwork? Put it on Line 21 if the client wants to be safe. Otherwise ignore it (if in your professional judgement it is simply a reimbursement). The IRS isn't likely to pay any attention either way.