David Higgins, of Higgins Settlement Law, LLP, submitted a legislative recommendation on January 11, 2011 proposing a change to how plaintiffs enter into structured settlements. Higgins is the author of the Periodic Payments Settlement Act of 1982 and served as the first Executive Director and the first General Counsel of the National Structured Settlement Trade Association (NSSTA).
Higgins submitted his recommendation to Senator Max Baucus (Chairman of the Senate Finance Committee), Congressman Dave Camp (Chairman of the House Committee on Ways and Means), and Michael Mundaca (Assistant Secretary of the Treasury for Tax Policy).
S2KM asked Jeremy Babener, formerly a Tax Policy Fellow at the U.S. Treasury’s Office of Tax Policy, now a Tax LL.M. at NYU School of Law, to provide S2KM readers with the following summary of Higgins' proposal.
David Higgins has recommended a "rollover provision" to replace Section 130 of the Tax Code. His proposal would allow personal injury plaintiffs to accept a check from defendants and invest the money within a given period (likely limiting the investment options to annuities and Treasury bonds), without losing the tax benefit currently available to them only by agreeing to a structured settlement with a counter-party.
Currently, when a personal injury plaintiff receives a defendant’s settlement check, successful investment of the money results in taxable income (with few exceptions). Alternatively, a plaintiff can agree to a structured settlement, in which case plaintiff only receives the settlement money (in fact, and for tax purposes) over time. Often, the defendant will transfer money and liability to an assignment company, which is thereafter responsible for plaintiff’s periodic payments.
The tax savings can be significant. But, to take advantage of the benefit, plaintiff must come to an agreement regarding the future income stream with a counter-party. Section 130 of the Tax Code allows an assignment company to exclude the portion of the transferred money used to fund the liability payments, but comes with various requirements (e.g. the liability payments required must be “fixed and determinable”).
Higgins, who played a central role in the 1982 legislation governing the taxation of structured settlements, recommends that Section 130 be repealed and replaced by a provision that allows for personal injury plaintiffs to access the same tax savings, even when plaintiffs actually receive the settlement money and subsequently invest. Higgins’ letter refers to a limited period in which plaintiffs might have to re-invest the settlement money received. Such “rollover” type provisions, though inconsistent with tax doctrines like “constructive receipt” and “economic benefit” have been allowed for certain retirement income.
“Section 130,” Higgins argues, “adds considerable complexity to a structured settlement transaction.” Though light on specifics, Higgins seems to suggest maintaining many of the limitations of Section 130 required to take advantage of the current tax benefit. For example, he writes, “The limitation to annuities and Treasury bonds seems to be working well.” He implies that the “fixed and determinable” requirement should also be kept, arguing that it has been stretched to the breaking point (based on a past IRS decision approving of qualified assignments including variable amounts based on a mutual fund portfolio). These types of limitations were put in place to protect the plaintiff from dissipating the settlement money. Higgins suggests the implementation of non-alienation requirements, though it is unclear if these would change plaintiffs’ current ability to factor.
Higgins notes potential opposition that might be voiced by the Treasury, with respect to part of the tax benefit, and the insurance industry, objecting to “expanding the exclusive distribution channels for settlement annuities that such simplification would create.” Ending with rhetorical flare, Higgins writes, “Simplification is, I suppose, not simple.” Given the considerable effort expended to establish the original legislation in the early 1980s (much of it documented in Higgins’ letter), and the similar experience in the late 1990s and early 2000s with respect to legislation on factoring, he is probably correct.
Babener's articles on the taxation of personal injury awards, structured settlements, and qualified settlement funds, are available on his web site www.taxstructuring.com. His upcoming article, "Death Then Taxes: Anticipating the Taxation of Personal Injury Proceeds at Victim's Death," will be published by Trusts & Estates Magazine in March, 2011.
For a history and analysis of the Periodic Payment Settlement Act of 1982, see "Structured Settlements and Periodic Payment Judgments" co-authored by Daniel Hindert, Joseph Dehner and Patrick Hindert.
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