After the
Treasury hearing on February 23, 2010, S2KM asked structured settlement
industry members who spoke at the hearing to comment on their
reactions. John McCulloch, Vice-President of Integrated Financial Settlements, and Dick Risk, Attorney at the Risk Law Firm, provided their thoughts below.
John McCulloch, Vice-President, Integrated Financial Settlements
S2KM: The Treasury panel
noted that private letter rulings are not “black-letter law” more than
once when you discussed the “observable bodily harm” understanding of
“physical,” which stems from a 2000 private letter ruling. Did their
comments or questions change how you thought about that standard at
all?
McCulloch:
While PLR’s may not be cited as precedent, courts routinely include
them and cite them in their analysis and they are generally a good
indication of the Service’s thoughts on a specific issue. The “bruise
ruling” has been the only guidance, informal though it may be, on what
the Service considers a physical injury. My thoughts on the matter
haven’t changed; taxpayers need clarity when it comes to certain types
of injuries that fall within a grey area.
S2KM: One member of the Treasury panel
asked you if it would be difficult to prove that a tort caused
plaintiff an increase in blood pressure. Does this suggest to you that
proving that a significant increase in blood pressure resulted from,
for example, sexual harassment, could render a portion of sexual
harassment damages non-taxable? How might this impact the argument that
damages for causing a plaintiff’s mental chemistry to change should be
non-taxable because they are on account of “physical” injuries or
“physical” sickness?
McCulloch:
I was pleased she was open to this line of reasoning, but I think it
would be very difficult to sustain. Congressional intent in 1996 was to
eliminate the exclusion being used for employment cases. The change in
the law shut the door pretty firmly on employment damages and it would
likely take a change in the law to open that door again. While the tax
arguments can be made, one must balance that with any revenue loss that
would be incurred when exempting all non-physical injuries from
taxation.
S2KM:
In arguing for more damages to be excluded as “physical,” you limited
your recommendation to sexual abuse and wrongful imprisonment damages.
Why?
McCulloch:
These are two types of cases that are clearly distinguishable and have
well-documented, long term effects, as opposed to being short lived or
transitory emotional/mental distress damages. As there was no
Congressional intent to tax these two types of claims in the 1996, it
followed that they should be excluded. Attempting to define what “is”
physical on a broad basis is too difficult; taking specific types of
injuries and making them per se physical resolves the difficulty in
trying to make a broad, one-size fits all standard. Further, because
these are two very small groups of claimants, the revenue loss would be
negligible.
S2KM:
From a structured settlement industry perspective, was this hearing a
success? What could or should the different groups in the industry have
done better?
McCulloch:
It’s too early to tell what the results will be, whether it was
successful or not. I was pleased the Service and Treasury were
receptive to my comments, asked a lot of questions and encouraged me to
seek further support from the Hill.
Dick Risk, Attorney, Risk Law Firm
Risk offered two comments after the hearing. First, what he, as commissioner of the IRS, would say to staff.
The proposed revision is deficient, as pointed out in the written
public comments and in the testimony at the hearing, as it fails to
“prescribe all needful rules and regulations for the enforcement” of
Code section 104, as the law requires. The clarification of the
single-claimant issue can be resolved with a single paragraph,
consistent with congressional history, court decisions and the agency’s
previous rulings, without creating new policy. The definition of
“personal physical injury or physical sickness,” as Congress has
prescribed, which other commentators have recommended, also merits
inclusion in this regulation. Fix it and publish it again as a revised
proposal. I do not concur that the revision should be made final in its
current state. Your duty is to serve the people, not operate for the
convenience of the staff. Further, it is abusive to the people you are
here to serve to have suggested during the hearing that they start the
process over again by requesting that the single-claimant issue be
placed on the Priority Guidance Plan, without giving any assurance that
the result would be any different than when the request was first made,
in June 2003, accepted as a project in April 2004, and finally
abandoned in late 2009.
Second, his overall take of the hearing.
I am extremely disappointed at the staff’s position in favor of pushing
through a shoddy and deficient product for its own convenience that
fails to address legitimate issues brought to its attention by comments
from the public, rather than doing the job right.
S2KM Footnote: S2KM readers can find the various hearing-related writings of structured settlement commentators here .
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