Congress added IRC Section 468B to the Internal Revenue Code in 1986 as part of the Tax Reform Act of 1986 to allow defendants and their insurers to obtain immediate tax deductions in tort claims rather than waiting for “economic performance” to occur. IRC Section 468B and related Treasury regulations define two similar types of funding vehicles, “designated settlement fund” (DSF) and “qualified settlement fund” (QSF) to accomplish this objective. When used to settle tort claims involving physical injuries, these funds may also incorporate structured settlements.
IRC Section 468B(d)(2) defines a “designated settlement fund” as follows:
“The term designated settlement fund means any fund—
(A) which is established pursuant to a court order and which extinguishes completely the taxpayer’s tort liability with respect to claims described in subparagraph (D),
(B) with respect to which no amounts may be transferred other than in the form of qualified payments,
(C) which is administered by persons a majority of whom are independent of the taxpayer,
(D) which is established for the principal purpose of resolving and satisfying present and future claims against the taxpayer (or any related person or formerly related person) arising out of personal injury, death, or property damage,
(E) under the terms of which the taxpayer (or any related person) may not hold any beneficial interest in the income or corpus of the fund, and
(F) with respect to which an election is made under this section by the taxpayer.”
Treasury Regulation 1.468B-1(c) defines a “qualified settlement fund” as follows:
“A fund, account, or trust satisfies the requirements of this paragraph(c) if—
(1) It is established pursuant to an order of, or be approved by, the United States, any state (including the District of Columbia), territory, possession, or political subdivision thereof, or any agency or instrumentality (including a court of law) of any of the foregoing and is subject to the continuing jurisdiction of that governmental authority;
(2) It is established to resolve or satisfy one or more contested or uncontested claims that have resulted or may result from an event (or related series of events) that has occurred and that has given rise to at least one claim asserting liability—
(i) Under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (hereinafter referred to as CERCLA), as amended, 42 U.S.C. 9601 et seq.; or
(ii) Arising out of a tort, breach of contract, or violation of law, or
(iii) Designated by the Commissioner in a revenue ruling or revenue procedure; and
(3) The fund, account, or trust is a trust under applicable state law, or its assets are otherwise segregated from other assets of the transferor (and related parties).”
Revenue Procedure 93-34 provides additional rules for either type of 468B Fund to qualify under IRC Section 130 as a “party to a suit or agreement” for the purpose of completing a structured settlement:
1. The claimant must agree in writing to the assumption by a IRC Section 130 Qualified Assignee of the IRC Section 468B Fund’s obligation to make periodic payments;
2. The Qualified Assignment must relate to a claim “on account of personal injury or sickness (in a case involving physical injury or sickness)”;
3. Each Qualified Funding Asset purchased by the Qualified Assignee must relate to a liability to make periodic payments for damages to a single claimant;
4. The Qualified Assignee must not be “related” to the Section 468B Fund;
5. The Qualified Assignee must not be controlled by nor control, directly or indirectly, the Section 468B Fund; and
6. The transaction must meet all other requirements set forth in IRC Section 130.
For additional information, see "Structured Settlement Definition", "Settlement Trusts" and "Introduction to Annuities" as well as “Structured Settlements and Periodic Payment Judgments”.
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