Burgess J.W. Raby and William L. Raby have written a controversial article titled "Attorney Fees and Private Annuity Rules" which appears in the January 22, 2007 issue of "Tax Notes".
Their issue: "When the fees paid to the attorney are spread over time under a structured settlement, do the proposed regulations changing the private annuity rules affect them?"
Their conclusion: "We think it highly likely that if the issue is raised, the structured payments to attorneys would fit within the private annuity rules - and for cases not within the scope of section 104(a), whatever the scope may turn out to be, so too would the payments to the successful plaintiffs."
A summary of their analysis:
- "...until last October, the lawyer did not have to worry that receipt of the defendant's promise to make a series of payments would result in immediate recognition of taxable income" because of "Rev. Rul. 69-74, 1969-1 C.B. 43, the so-called private annuity ruling."
- "However, on October 18, 2006, the IRS published proposed regulations with a proposed effective date of October 18, 2006....".
- "The result, if the proposed regulations are adapted unchanged, will be that the attorney will be immediately taxable on the present value of the future payments as determined under section 7520, which provides for the interest rates to be used in making the present value calculation."
- "The unsecured nature of the obligation, the financial position of the obligor, and even the presence or absence of any collateral security or funding mechanism will be irrelevant to that calculation. "
The article, which includes valuable analyses of Childs v. Commissioner, "the benchmark case in this area", Commissioner v. Banks, and Vincent v. Commissioner, questions whether the Childs' holding is still valid.
For more about structured settlements and attorney compensation, see this link.
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