Schedule C has a box called Material Participation yes, no.
Yes. Schedule C has such a box…for a trade or business reported on Schedule C…which you don’t have.
Pub 925: There are two kinds of passive activities.
Right. And you don’t have a trade or business and you don’t have a rental activity.
Creating a supposedly operating business in which no one materially participates seems a bit of a stretch.
Oh, I think he’d have to argue that the attorney working the case put in more hours than the taxpayer. Othewise, arguendo, if the taxpayer did more work than any other individual, it wouldn’t be a passive activity as to the taxpayer. But that is just for argument’s sake, since we don’t have an activity here to begin with. If we did, the taxpayer should haul off and take big SEP and SE Health deductions…along with attorney fees (assuming they’re not already deductible above the line…but putting them on Sch C will save SE tax, of course).
Are you saying you don't think this taxpayer is in the business of receiving settlements?
Yes. The only cases I know of where trade or business status is accorded to something like this involves a qui tam claim. See the Bagley case. I think you’ll find that a case like that is way different than an employee who has a termination grievance and then gets the settlement reported on a 1099.
It's fine to report this thing on Schedule C, because taxpayers have to report their income. But doing so doesn’t mean you have an activity to which the passive rules would apply, like I originally said.
I’m working on a 1040 right now. A ton of investment interest expense will go unused. Therefore, I’ll report the guy’s wages on Schedule B to free up some of that interest expense…if I report the wages as interest income, doesn’t that mean it’s investment income?