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Overview
Taxation IRS Codes Go to: Internal Revenue Code: 104 130 468b
104. Compensation for injuries or sickness (a) In general.--Except in the case of amounts attributable to (and not in excess of) deductions allowed under section 213 (relating to medical, etc., expenses) for any prior taxable year, gross income does not include-- (1) amounts received under workmen's compensation acts as compensation for personal injuries or sickness; (2) the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness; (3) amounts received through accident or health insurance (or through an arrangement having the effect of accident or health insurance) for personal injuries or sickness (other than amounts received by an employee, to the extent such amounts (A) are attributable to contributions by the employer which were not includible in the gross income of the employee, or (B) are paid by the employer); (4) amounts received as a pension, annuity, or similar allowance for personal injuries or sickness resulting from active service in the armed forces of any country or in the Coast and Geodetic Survey or the Public Health Service, or as a disability annuity payable under the provisions of section 808 of the Foreign Service Act of 1980; and (5) amounts received by an individual as disability income attributable to injuries incurred as a direct result of a violent attack which the Secretary of State determines to be a terrorist attack and which occurred while such individual was an employee of the United States engaged in the performance of his official duties outside the United States. For purposes of paragraph (3), in the case of an individual who is, or has been, an employee within the meaning of section 401(c)(1) (relating to self- employed individuals), contributions made on behalf of such individual while he was such an employee to a trust described in section 401(a) which is exempt from tax under section 501(a), or under a plan described in section 403(a), shall, to the extent allowed as deductions under section 404, be treated as contributions by the employer which were not includible in the gross income of the employee. For purposes of paragraph (2), emotional distress shall not be treated as a physical injury or physical sickness. The preceding sentence shall not apply to an amount of damages not in excess of the amount paid for medical care (described in subparagraph (A) or (B) of section 213(d)(1)) attributable to emotional distress. (b) Termination of application of subsection (a)(4) in certain cases.-- (1) In general.--Subsection (a)(4) shall not apply in the case of any individual who is not described in paragraph (2). (2) Individuals to whom subsection (a)(4) continues to apply.--An individual is described in this paragraph if-- (A) on or before September 24, 1975, he was entitled to receive any amount described in subsection (a)(4), (B) on September 24, 1975, he was a member of any organization (or reserve component thereof) referred to in subsection (a)(4) or under a binding written commitment to become such a member, (C) he receives an amount described in subsection (a)(4) by reason of a combat-related injury, or (D) on application therefor, he would be entitled to receive disability compensation from the Veterans' Administration. (3) Special rules for combat-related injuries.--For purposes of this subsection, the term "combat-related injury" means personal injury or sickness-- (A) which is incurred-- (i) as a direct result of armed conflict, (ii) while engaged in extrahazardous service, or (iii) under conditions simulating war; or (B) which is caused by an instrumentality of war. In the case of an individual who is not described in subparagraph (A) or (B) of paragraph (2), except as provided in paragraph (4), the only amounts taken into account under subsection (a)(4) shall be the amounts which he receives by reason of a combat-related injury. (4) Amount excluded to be not less than veterans' disability compensation.-- In the case of any individual described in paragraph (2), the amounts excludable under subsection (a)(4) for any period with respect to any individual shall not be less than the maximum amount which such individual, on application therefor, would be entitled to receive as disability compensation from the Veterans' Administration. (c) Application of prior law in certain cases.--The phrase "(other than punitive damages)" shall not apply to punitive damages awarded in a civil action-- (1) which is a wrongful death action, and (2) with respect to which applicable State law (as in effect on September 13, 1995 and without regard to any modification after such date) provides, or has been construed to provide by a court of competent jurisdiction pursuant to a decision issued on or before September 13, 1995, that only punitive damages may be awarded in such an action. This subsection shall cease to apply to any civil action filed on or after the first date on which the applicable State law ceases to provide (or is no longer construed to provide) the treatment described in paragraph (2). (d) Cross references.-- (1) For exclusion from employee's gross income of employer contributions to accident and health plans, see section 106. (2) For exclusion of part of disability retirement pay from the application of subsection (a)(4) of this section, see section 1403 of Title 10, United States Code (relating to career compensation laws).
130. Certain personal injury liability assignments (a) In general.--Any amount received for agreeing to a qualified assignment shall not be included in gross income to the extent that such amount does not exceed the aggregate cost of any qualified funding assets. (b) Treatment of qualified funding asset.--In the case of any qualified funding asset-- (1) the basis of such asset shall be reduced by the amount excluded from gross income under subsection (a) by reason of the purchase of such asset, and (2) any gain recognized on a disposition of such asset shall be treated as ordinary income. (c) Qualified assignment.--For purposes of this section, the term "qualified assignment" means any assignment of a liability to make periodic payments as damages (whether by suit or agreement), or as compensation under any workmen's compensation act, on account of personal injury or sickness (in a case involving physical injury or physical sickness)-- (1) if the assignee assumes such liability from a person who is a party to the suit or agreement, or the workmen's compensation claim, and (2) if-- (A) such periodic payments are fixed and determinable as to amount and time of payment, (B) such periodic payments cannot be accelerated, deferred, increased, or decreased by the recipient of such payments, (C) the assignee's obligation on account of the personal injuries or sickness is no greater than the obligation of the person who assigned the liability, and (D) such periodic payments are excludable from the gross income of the recipient under paragraph (1) or (2) of section 104(a). The determination for purposes of this chapter of when the recipient is treated as having received any payment with respect to which there has been a qualified assignment shall be made without regard to any provision of such assignment which grants the recipient rights as a creditor greater than those of a general creditor. (d) Qualified funding asset.--For purposes of this section, the term "qualified funding asset" means any annuity contract issued by a company licensed to do business as an insurance company under the laws of any State, or any obligation of the United States, if-- (1) such annuity contract or obligation is used by the assignee to fund periodic payments under any qualified assignment, (2) the periods of the payments under the annuity contract or obligation are reasonably related to the periodic payments under the qualified assignment, and the amount of any such payment under the contract or obligation does not exceed the periodic payment to which it relates, (3) such annuity contract or obligation is designated by the taxpayer (in such manner as the Secretary shall by regulations prescribe) as being taken into account under this section with respect to such qualified assignment, and (4) such annuity contract or obligation is purchased by the taxpayer not more than 60 days before the date of the qualified assignment and not later than 60 days after the date of such assignment.
468B Special rules for designated settlement funds (a) In general.--For purposes of section 461(h), economic performance shall be deemed to occur as qualified payments are made by the taxpayer to a designated settlement fund. (b) Taxation of designated settlement fund.-- (1) In general.--There is imposed on the gross income of any designated settlement fund for any taxable year a tax at a rate equal to the maximum rate in effect for such taxable year under section 1(e). (2) Certain expenses allowed.--For purposes of paragraph (1), gross income for any taxable year shall be reduced by the amount of any administrative costs (including State and local taxes) and other incidental expenses of the designated settlement fund (including legal, accounting, and actuarial expenses)-- (A) which are incurred in connection with the operation of the fund, and (B) which would be deductible under this chapter for purposes of determining the taxable income of a corporation. No other deduction shall be allowed to the fund. (3) Transfers to the fund.--In the case of any qualified payment made to the fund-- (A) the amount of such payment shall not be treated as income of the designated settlement fund, (B) the basis of the fund in any property which constitutes a qualified payment shall be equal to the fair market value of such property at the time of payment, and (C) the fund shall be treated as the owner of the property in the fund (and any earnings thereon). (4) Tax in lieu of other taxation.--The tax imposed by paragraph (1) shall be in lieu of any other taxation under this subtitle of income from assets in the designated settlement fund. (5) Coordination with subtitle F.--For purposes of subtitle F-- (A) a designated settlement fund shall be treated as a corporation, and (B) any tax imposed by this subsection shall be treated as a tax imposed by section 11. (c) Deductions not allowed for transfer of insurance amounts.--No deduction shall be allowable for any qualified payment by the taxpayer of any amounts received from the settlement of any insurance claim to the extent such amounts are excluded from the gross income of the taxpayer. (d) Definitions.--For purposes of this section-- (1) Qualified payment.--The term "qualified payment" means any money or property which is transferred to any designated settlement fund pursuant to a court order, other than-- (A) any amount which may be transferred from the fund to the taxpayer (or any related person), or (B) the transfer of any stock or indebtedness of the taxpayer (or any related person). (2) Designated settlement fund.--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. An election under this section shall be made at such time and in such manner as the Secretary shall by regulation prescribe. Such an election, once made, may be revoked only with the consent of the Secretary. (3) Related person.--The term "related person" means a person related to the taxpayer within the meaning of section 267(b). (e) Nonapplicability of section.--This section (other than subsection (g)) shall not apply with respect to any liability of the taxpayer arising under any workers' compensation Act or any contested liability of the taxpayer within the meaning of section 461(f). (f) Other funds.--Except as provided in regulations, any payment in respect of a liability described in subsection (d)(2)(D) (and not described in subsection (e)) to a trust fund or escrow fund which is not a designated settlement fund shall not be treated as constituting economic performance. (g) Clarification of taxation of certain funds.--Nothing in any provision of law shall be construed as providing that an escrow account, settlement fund, or similar fund is not subject to current income tax. The Secretary shall prescribe regulations providing for the taxation of any such account or fund whether as a grantor trust or otherwise.
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