Background and Summary
This S2KM blog post summarizes a legal research paper by Jeremy Babener titled "Structured Settlements and Single-Claimant Qualified Settlement Funds: Regulating in Accordance with Structured Settlement History" (QSF paper).
Babener's QSF paper will be published in the NYU Journal of Legislation & Public Policy in March 2010. Babener has made available an online abstract of his QSF paper. S2KM has received an advanced copy of Babener's QSF paper which S2KM will review and discuss as part of S2KM's 2009 blog series Single Claimant 468B QSF Update.
S2KM previously published a series of blog posts titled "Dissipation Studies" featuring a paper by Babener titled "Justifying the Structured Settlement Tax Subsidy: The Use of Lump Sum Settlements," (dissipation paper) which will be published in the NYU Journal of Law & Business in November 2009.
Babener's QSF paper consists of 68 pages organized into seven sections (summarized below) with 453 footnotes. The footnotes reference Babener's extensive research including interviews with a cross-section of structured settlement industry participants.
Babener's QSF paper traces how far Congress and the IRS have eroded the original application of two tax doctrines, economic benefit and constructive receipt, to structured settlements.
Babener recommends the United States Treasury eliminate any ambiguity about 468B single-claimant QSFs and allow such use consistent with existing structured settlement public policy and structured settlement tax law.
Abstract - In his SSRN online abstract, Babener:
- Introduces a primary assertion and theme: defendants have captured much of the benefit of the structured settlement tax subsidy.
- Questions whether and why economic benefit and constructive receipt should be different for single and multi-claimant QSFs.
- Argues those tax doctrines are no longer strictly applicable to structured settlements.
- Recommends that Treasury clarify and extend QSFs to single claimants consistent with structured settlement public policy and tax history.
Introduction - Babener begins his analysis of structured settlement public policy by focusing on dissipation and the tax doctrines of constructive receipt and economic benefit. He explains the original incentive for injury victims to sacrifice control to qualify for the structured settlement tax subsidy. He argues that subsequent laws, regulations and rulings have substantially deconstructed these two tax doctrines as applied to structured settlements while continuing to fulfill the original purpose of the 1982 structured settlement legislation.
What is a Structured Settlement?
- Discusses the use and popularity of structured settlements.
- Explains how the tax subsidy increases the value of a structured settlement.
- Outlines a typical structured settlement to show how the tax subsidy works.
The First Stage: Birth, Subsidy, Justification, and Doctrine
- Details the early history of structured settlements including pre-1980 PLRs and the passage of the 1982 legislation.
- Highlights the original application of the economic benefit and constructive receipt doctrines to structured settlements.
- Finds no explicit Congressional justification for structured settlements in legislative history until 2001 when Congress:
- Enacted IRC 5891;
- Retroactively identified "avoiding dissipation" as the justification for the structured settlement tax subsidy.
Allowing Constructive Receipt and Economic Benefit
- Narrates the erosion of the constructive receipt and economic benefit tax doctrines as applied to structured settlements.
- Highlights as legislative examples:
- Technical and Miscellaneous Revenue Act of 1988 - allowing "secured creditor status"; and
- Victims of Terrorism Tax Relief Act of 2001 - allowing transfers of payment rights ("factoring") pursuant to state protection statutes.
- Analyzes how factoring both undermines and promotes the purpose of the structured settlement tax subsidy.
- Suggests this erosion of constructive receipt and economic benefit for structured settlements can be seen as advancing the purpose of the original 1982 legislation.
Helping the Wrong Party
- Explains how defendants save money on claims by capturing part of the structured settlement tax subsidy.
- Argues that such defense business practices and results detract from the purpose of the structured settlement tax subsidy.
The Next Step Away from the Two Tax Doctrines: QSFs
- Describes how some injury victims and their advisers utilize single-claimant QSFs to:
- Control the purchase of structured settlement annuities; and
- Capture increased structured settlement benefits.
- Identifies and analyzes the arguments against single claimant QSFs.
- Explains why some industry stakeholders view "one or more" as ambiguous.
- Argues the IRS should apply the tax doctrines of constructive receipt and economic benefit to single claimant QSFs consistent with how the IRS and Congress have done so historically for structured settlements - narrowly or not at all.
- Suggests that such increased erosion of these tax doctrines to structured settlements is consistent with past erosion and serves the purpose of the original 1982 legislation that created the tax subsidy.
Conclusion - restates Babener's thesis and recommendations.
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