By Jeremy Babener, S2KM Contributing Author
Yesterday, February 23, 2010, the Treasury conducted a hearing on
proposed regulations to section 104 of the Tax Code. This article
summarizes the hearing, as relevant to parties in the structured
settlement industry.
As written previously, the proposed regulations would, in essence:
- Eliminate
the requirement that damages be based on “tort or tort type rights” in
order to qualify for the section 104(a)(2) tax exclusion, and
- Incorporate
1996 legislation requiring that personal injuries and sickness damages
be “physical” in order to qualify for the section 104(a)(2) exclusion.
The Treasury received several written submissions from the structured settlement community, including letters from:
- Joseph Ricci, Executive Director, National Structured Settlements Trade Association (NSSTA)
- John Stanton, Counsel, NSSTA
- John McCulloch, Vice-President, Integrated Financial Settlements
- Dick Risk, Attorney, Risk Law Firm
- David Higgins, Attorney, Higgins Settlement Law
- Jack Meligan, President, Settlement Professionals Inc.
McCulloch, Stanton, Risk, and Meligan spoke at the Treasury hearing. As
in their written submissions, the speakers focused on two questions.
First, when do personal injury damages constitute “physical” injury
damages, such that they may be excluded from plaintiffs’ taxable
income? Second, can settlement monies be directed into qualified
settlement funds (QSFs) in single-claimant cases without triggering
economic benefit? If so, the structured settlement tax subsidy would be
available to settlements involving single-claimant QSFs.
Of the five speakers (including one from the Consumers for Civil
Justice who spoke briefly), only McCulloch focused on the “physical”
issue, while the other three argued single-claimant QSFs.
John McCulloch:
McCulloch argued that the damages received by victims of prolonged
sexual abuse or false imprisonment should always be deemed “physical,”
whether or not evidence is available to demonstrate physical injury.
This would, he argued, appropriately expand the “observable bodily
harm” understanding of “physical” from private letter ruling in 2000.
His arguments, which mirrored those in his written submission, were
previously reviewed here.
Treasury Panel Response:
The panel queried McCulloch on both substantive and procedural grounds. McCulloch was asked whether his rule would define sexual abuse and wrongful imprisonment as “physical,” or establish an irrebuttable presumption
that such damages are “physical.” Very likely, the question was asked
with a 2008 private letter ruling in mind, which presumed physicality
where the injury took place long ago. McCulloch suggested that neither
sexual abuse nor wrongful imprisonment cases should be considered
non-physical.
It is noteworthy that two of the panel members stressed the
non-precedential nature of private letter rulings. While private letter
rulings are certainly non-precedential, the panel seemed to imply that
the “observable bodily harm” language from the 2000 private letter
ruling is simply irrelevant for future interpretations of “physical.”
The panel also asked McCulloch a procedural question, one repeated in
the single-claimant QSF discussion: Even if Treasury agrees, could it
change the proposed regulations without being forced to conduct another
notice and comment hearing?
Dick Risk and Jack Meligan:
Dick Risk and Jack Meligan both recommended that the Treasury issue
regulations explicitly holding the economic benefit doctrine not to be
triggered in the context of single-claimant QSFs. Each argued that such
regulations are necessary as a result of the power imbalance in
plaintiff-defendant negotiations.
Treasury Panel Response:
It became immediately apparent that the panel believed regulations
concerning the single-claimant QSF issue could not be added to the
proposed regulations without necessitating a new notice and comment
period. It seemed implicit in the panel’s comments that the appropriate
time to request regulations on the QSF issue would be the next time
that taxpayers are asked for proposed issues. When asked why the issue
had been removed after several years on the IRS Priority Guidance Plan,
those on the panel declined to respond.
One member of the panel was particularly interested in the need for
single-claimant QSF guidance based on the alleged power imbalance in
plaintiff-defendant negotiations. Why, Risk was asked, is guidance
necessary to establish a balance if single-claimant QSFs are already
occurring? Moreover, how, since most plaintiffs have representation
with knowledge of structured settlements, is there still an imbalance?
Risk and Meligan both suggested that this imbalance is inherent in
personal injury settlement negotiations, unless the defendant can be
removed from the scene and replaced with a QSF.
John Stanton:
Stanton briefly repeated the procedural point of those on the panel
that the current hearing was the wrong time and place for the
single-claimant QSF issue to be discussed. He also urged that since
current tax law of structured settlements has served all parties well,
the Treasury should not make changes on the QSF front. The Treasury had
no comments or questions for Stanton.
Series Note:
This article is the third in a series on the February 23, 2010 Treasury hearing on proposed regulations concerning section 104.
S2KM Footnote:
- Jeremy
Babener and S2KM Limited have agreed to feature occasional articles
written by Babener on S2KM's blog. Except for articles including Jeremy
Babener's byline or interviews featuring Babener, he does not
contribute to or endorse S2KM opinions or writing.
- Babener's articles also appear on S2KM's structured settlement public policy wiki.
- Babener
is a third year law student at NYU School of Law, and has written
extensively about structured settlements (articles available at TaxStructuring.Com).
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