Taxes on a bankruptcy claim
As an employee of a company that filed for bankruptcy I had some unsecured general claims for deferred compensation. I sold those claims and declared the full amount of the sale as normal taxable income in the year of sale on my tax return. When the company emerged from bankruptcy they settled the claim by issuing stock to the entity that bought the claims from me but sold some of the stock to pay for whithholding taxes that they then credited to my tax account. They plan to issue a W2 showing me as the beneficiary of the full amount of the claim paid and the amount of tax paid. The company that bought the claim quite understandably wants that tax credit and has requested that I pay them a proportion of the credit I will apparently have. However, from my perspective I had already fully declared the income I actually received and cannot see why I would have to report the same income twice, especially when I only ever received it once! If the company gives me a W2 showing the full gross income and the tax whithheld then theoretically the two would offset and I would have no additional liability but then if I have paid out the tax credit I will actually be out by the amount I paid out as the actuall tax credit would not be re-claimable if the income report stands.
I want the company that bought the claim to have the full value of what they bought but am at a loss of how to make that happen as the company refuses to change their handling of the payment. Will the IRS accept me showing a deduction equal to the full amount of the W2 issued (I have not been an employee for the last two and a half years) so that I could then hand over some cash for the tax credit and not be losing overall? Was the company right to make this deduction knowing that I was no longer the beneficiary of the payment or is there some other solution that leaves everybody happy. I would appreciate any thoughts/guidance you could give.