Structured Settlements

Qualified Assignments

While some defendants are willing to enter into a settlement agreement based on periodic payments and assume full responsibility for such, others are interested in terminating their continuing liability to make the periodic payments to the claimant. To accomplish this relief, a third party acceptable to both claimant and defendant would receive a lump sum (the exact amount necessary to purchase the funding device, e.g. an annuity or US treasury product) from the defendant, and the defendant would be completely relieved from any further obligations to the claimant. Under these circumstances, the assuming third party would not realize gross income when it receives the lump sum, according to Private Letter Ruling 8038044; June 24, 1980.

The above tax positions were formalized on January 14, 1983, when the President signed Revenue Bill HR 5470, which amended Section 104(a)(2) to specifically exclude from the gross income of a claimant, moneys received as compensation for sickness or injuries:

“...whether by suit or agreement and whether as lump sums or as periodic payments.” A companion section of that Revenue Bill became the new Section 130 of the IRS Code, which specifically deals with the Assignment Agreement.

Now, when the lump sum is transferred to the assuring party, it is not considered to be gross income, to the extent that such amount does not exceed the aggregate cost of any “qualified funding asset.” It is interesting to note that the only qualified funding assets under the Section are: “...any annuity contract issued by a company licensed to do business as an insurance company under the law of any state (an annuity)... or obligation of the United States (US Treasury Bond).

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