Brokerage Settlement award

Technical topics regarding tax preparation.
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MA
My partner has picked up a new client whose mother received a settlement from one of the big brokerage houses related to an investment in Puerto Rico bonds. The client was told to give this paper work (it was a Form 4684 with instructions for Casualty and Theft Losses) to their accountant and they should qualify.

We doubted you could claim a Bernie Madoff type theft claim when it was just a brokerage account buying a risky investment but it led to other questions. Client received two 1099 Misc with amount in Box 3 other income. The one from the brokerage account was for $250k which was the gross amount of the settlement. The one from her lawyer was the net amount (lawyer took 40% plus fees) in the amount of $135k.

Question 1 is can she deduct the legal fees and report the net on the other income line of her tax return. Our reading says probably not. (we'll call this ok option)

Question 2 is there a possibility we can avoid paying tax on the settlement entirely as this is more of a "restorative payment" I did a search for similar items on this site and found a Finra settlement(best option)

Question 3 is can she call the settlement capital gain income. She has a very large capital loss on the 2019 year related to the sale of her position in those Puerto Rico bonds. (better option)

Question 4 is the Casualty and Theft deduction an option. We think if you have recovery then no 4684 and there is minimal loss but maybe their is some type of legislation specific to these Puerto Rico debt situation that grants relief to investors like I believe there was for Madoff (worst case option?)
 

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