Delaware Conditions to transfers of structured settlement payment rights.

TITLE 10
Courts and Judicial Procedure
Special Proceedings
CHAPTER 66. STRUCTURED SETTLEMENTS
§ 6601. Conditions to transfers of structured settlement payment rights.
No direct or indirect transfer of structured settlement payment rights shall be effective and no structured settlement obligor or annuity issuer shall be required to make any payment directly or indirectly to any transferee of structured settlement payment rights unless the transfer has been authorized in advance in a final order of a court of competent jurisdiction or responsible administrative authority, based on express findings by such court or responsible administrative authority that:
(1) the transfer complies with the requirements of this chapter and will not contravene other applicable law;
(2) not less than 10 days prior to the date on which the payee first incurred any obligation with respect to the transfer, the transferee has provided to the payee a disclosure statement in bold type, no smaller than 14 points, setting forth:
a. the amounts and due dates of the structured settlement payments to be transferred;
b. the aggregate amount of such payments;
c. the discounted present value of such payments, together with the discount rate used in determining such discounted present value;
d. the gross amount payable to the payee in exchange for such payments;
e. an itemized listing of all brokers' commissions, service charges, application fees, processing fees, closing costs, filing fees, administrative fees, legal fees, notary fees and other commissions, fees, costs, expenses and charges payable by the payee or deductible from the gross amount otherwise payable to the payee;
f. the net amount payable to the payee after deduction of all commissions, fees, costs, expenses and charges described in subparagraph e. of this paragraph;
g. the quotient (expressed as a percentage) obtained by dividing the net payment amount by the discounted present value of the payments; and
h. the amount of any penalty and the aggregate amount of any liquidated damages (inclusive of penalties) payable by the payee in the event of any breach of the transfer agreement by the payee;
(3) The transfer is fair and reasonable and in the best interests of the payee and the payee's dependents;
(4) The payee has received independent professional advice regarding the legal, tax and financial implications of the transfer;
(5) If the transfer would contravene the terms of the structured settlement:
a. The transfer has been expressly approved in writing by:
1. Each interested party; provided, however, that the approval of the annuity issuer and the structured settlement obligor shall not be required if all other interested parties approve the transfer and waive any and all rights to require that the transferred payments be made to the payee in accordance with the terms of the structured settlement; and
2. Any court or government authority, other than the court or responsible administrative authority from which authorization of the transfer is sought under this chapter, which previously approved the structured settlement; and
b. Signed originals of all approvals required under subparagraph a. of this paragraph have been filed with the court or responsible administrative authority from which authorization of the transfer is sought under this chapter, and originals or copies have been furnished to all interested parties; and
(6) The transferee has given written notice of the transferee's name, address and taxpayer identification number to the annuity issuer and the structured settlement obligor and has filed a copy of such notice with the court or responsible administrative authority. (72 Del. Laws, c. 303, § 1.)
§ 6602. Definitions.
The following words, terms and phrases, when used in this chapter, shall have the meanings ascribed to them, except where the context clearly indicates a different meaning:
(a) "Annuity issuer" shall mean an insurer that has issued an insurance contract used to fund periodic payments under a structured settlement;
(b) "Applicable law" shall mean:
(1) The federal laws of the United States;
(2) The laws of this State, including principles of equity applied in the courts of this State; and
(3) The laws of any other jurisdiction:
a. Which is the domicile of the payee or any other interested party;
b. Under whose laws a structured settlement agreement was approved by a court; or
c. In whose courts a settled claim was pending when the parties entered into a structured settlement agreement;
(c) "Dependents" shall include a payee's spouse and minor children and all other family members and other persons for whom the payee is legally obligated to provide support, including alimony;
(d) "Discounted present value" shall mean the fair present value of future payments, as determined by discounting such payments to the present using the most recently published applicable federal rate for determining the present value of an annuity, as issued by the United States Internal Revenue Service;
(e) "Favorable tax determination" shall mean, with respect to a proposed transfer of structured settlement payment rights, any of the following authorities that definitively establishes that the federal income tax treatment of the structured settlement for the parties to the structured settlement agreement and any qualified assignment agreement, other than the payee, will not be affected by such transfer:
(1) A provision of the United States Internal Revenue Code, United States Code Title 26 [26 U.S.C. § 130], as amended from time to time, or a United States Treasury regulation adopted pursuant thereto;
(2) A revenue ruling or revenue procedure issued by the United States Internal Revenue Service;
(3) A private letter ruling by the United States Internal Revenue Service with respect to such transfer;
(4) A decision of the United States Supreme Court or a decision of a lower federal court in which the United States Internal Revenue Service has acquiesced;
(f) "Federal hardship standard" shall mean a federal standard applicable to transfers of structured settlement payment rights based on findings of a court or responsible administrative authority regarding the payees' needs, as contained in the United States Internal Revenue Code, United States Code Title 26, as amended from time to time, or in a United States Treasury regulation adopted pursuant thereto;
(g) "Independent professional advice" shall mean the advice of an attorney, certified public accountant, actuary or other licensed professional adviser:
(1) Who is engaged by a payee to render advice concerning the legal, tax and financial implications of a transfer of structured settlement payment rights;
(2) Who is not in any manner affiliated with or compensated by the transferee of such transfer; and
(3) Whose compensation for rendering such advice is not affected by whether a transfer occurs or does not occur.
(h) "Interested parties" shall mean, with respect to any structured settlement, the payee, any beneficiary designated under the annuity contract to receive payments following the payee's death, the annuity issuer, the structured settlement obligor, and any other party that has continuing rights or obligations under such structured settlement;
(i) "Payee" shall mean an individual who is receiving tax-free damage payments under a structured settlement and proposes to make a transfer of payment rights thereunder;
(j) "Qualified assignment agreement" shall mean an agreement providing for a qualified assignment within the meaning of § 130 of the United States Internal Revenue Code, United States Code Title 26 (26 U.S.C. § 130), as amended from time to time;
(k) "Responsible administrative authority" shall mean, with respect to a structured settlement, any government authority vested by law with exclusive jurisdiction over the settled claim resolved by such structured settlement;
(l) "Settled claim" shall mean the original tort claim or workers' compensation claim resolved by a structured settlement;
(m) "Structured settlement" shall mean an arrangement for periodic payment of damages for personal injuries established by settlement or judgment in resolution of a tort claim or for periodic payments in settlement of a workers' compensation claim;
(n) "Structured settlement agreement" shall mean the agreement, judgment, stipulation or release embodying the terms of a structured settlement, including the rights of the payee to receive periodic payments;
(o) "Structured settlement obligor" shall mean, with respect to any structured settlement, the party that has the continuing periodic payment obligation to the payee under a structured settlement agreement or a qualified assignment agreement;
(p) "Structured settlement payment rights" shall mean rights to receive periodic payments (including lump sum payments) under a structured settlement, whether from the settlement obligor or the annuity issuer, where:
(1) The payee, the settlement obligor, the annuity issuer, or any other interested party is domiciled in this State;
(2) The structured settlement agreement was approved by a court or responsible administrative authority in this State; or
(3) The settled claim was pending before the courts of this State when the parties entered into the structured settlement agreement;
(q) "Terms of the structured settlement" shall include, with respect to any structured settlement, the terms of the structured settlement agreement, the annuity contract, any qualified assignment agreement and any order or approval of any court or responsible administrative authority or other government authority authorizing or approving such structured settlement;
(r) "Transfer" shall mean any sale, assignment, pledge, hypothecation or other form of alienation or encumbrance made by a payee for consideration;
(s) "Transfer agreement" shall mean the agreement providing for transfer of structured settlement payment rights from a payee to a transferee; and
(t) "Transferee" or "payor" shall mean the person, firm or entity purchasing or receiving the assignment, pledge, hypothecation or other form of alienation or encumbrance made by a payee for consideration under a structured settlement agreement. (72 Del. Laws, c. 303, § 1; 75 Del. Laws, c. 148, § 1.)
§ 6603. Jurisdiction; procedure for approval of transfers.
(a) The Superior Court shall have non-exclusive jurisdiction over any application for authorization, under § 6601 of this title, of a transfer of structured settlement payment rights, except that if the structured settlement payment rights are held by a trustee, the Court of Chancery shall have exclusive jurisdiction over any application for authorization of a transfer of such rights.
(b) Not less than 20 days prior to the scheduled hearing on any application for authorization of a transfer of structured settlement payment rights under § 6601 of this title, the transferee shall file with the court and serve on any other government authority which previously approved the structured settlement and on all interested parties a notice of the proposed transfer and application of its authorization, including in such notice:
(1) A copy of the transferee's application;
(2) A copy of the transfer agreement;
(3) A copy of the disclosure statement required under § 6601(b) of this title;
(4) Notification that any interested party is entitled to support, oppose or otherwise respond to the transferee's application, either in person or by counsel, by submitting written comments to the Court or responsible administrative authority or by participating in the hearing; and
(5) Notification of the time and place of the hearing and notification of the manner in which and the time by which written responses to the application must be filed (which shall be not less than 15 days after service of the transferee's notice) in order to be considered by the court or responsible administrative authority.
(c) Those parties, persons and officials named in § 6603(b) of this title shall have standing to raise, appear and be heard on any matter relating to an application for authorization of a transfer of structured settlement payment rights under this chapter.
(d) In cases where the payee shall not be represented by counsel, or where the payee and the transferee shall be represented by the same counsel, and the court, in the exercise of its reasonable discretion, finds that the payee does not adequately comprehend the substance of the transaction, the court may appoint an attorney ad litem who shall advise the court if, in their opinion, the requirements of § 6601 of this title have been met. The costs and fees incurred by such attorney ad litem shall be borne by the payor or transferee and shall not be passed on to the payee or deducted from the payee's structured settlement agreement proceeds, provided that such costs do not exceed $500. (72 Del. Laws, c. 303, § 1; 75 Del. Laws, c. 148, §§ 2, 3; 75 Del. Laws, c. 301, § 4.)
§ 6604. No waiver; no penalties.
(a) The provisions of this chapter shall not be waived.
(b) No payee who proposes to make a transfer of structured settlement payment rights shall inure any penalty, forfeit any application fee or other payment, or otherwise incur any liability to the proposed transferee based on any failure of such transfer to satisfy the conditions of § 6601 of this title. (72 Del. Laws, c. 303, § 1.)

Ohio Transfer of structural settlement payment rights definitions.

As used in this section and sections 2323.581 to 2323.587 of the Revised Code:
(A) “Annuity issuer” means an insurer that has issued an insurance contract that is used to fund periodic payments under a structured settlement.
(B) “Applicable law” means any of the following, as applicable in interpreting the terms of a structured settlement agreement:
(1) The laws of the United States;
(2) The laws of this state, including principles of equity that are applied in the courts of this state;
(3) The laws of any other jurisdiction if any of the following applies:
(a) The laws of that other jurisdiction govern the structured settlement.
(b) A court or a responsible administrative authority approved the structured settlement agreement under the laws of that other jurisdiction.
(c) The transfer of payments under the structured settlement is subject to the laws of that other jurisdiction.
(C) “Dependent” means a spouse of a payee, a minor child of a payee, or any other member of the family of a payee or other person whom, by law or by court order or decree, the payee is legally obligated to support.
(D) “Discounted present value” means the fair present value of the future payments under a structured settlement that is determined by discounting those payments to the present, using the most recently published applicable federal rate for determining the present value of an annuity as issued by the United States internal revenue service.
(E) “Independent professional advice” means the advice of an attorney, a certified public accountant, an actuary, or any other licensed professional adviser if all of the following apply:
(1) The payee has engaged the services of the licensed professional adviser to render advice concerning the legal and other implications of a transfer of structured settlement payment rights.
(2) The licensed professional adviser has signed a statement to the effect that the licensed professional adviser rendered advice to the payee concerning the legal and other implications of a transfer of structured settlement payment rights.
(3) The licensed professional adviser is not affiliated in any manner with, referred by, or compensated in any manner by the transferee of the structured settlement payment rights.
(4) The compensation of the licensed professional adviser is not affected by whether or not a transfer of structured settlement payment rights occurs.
(F) “Interested party” includes the payee with respect to a structured settlement, the annuity issuer, the structured settlement agreement obligor, and any other party that has continuing rights or obligations under the structured settlement agreement.
(G) “Payee” means an individual who is receiving periodic payments under a structured settlement agreement that are excludable from the individual’s gross income under federal income taxation laws applicable to that individual and who proposes to make a transfer of the rights to receive those periodic payments.
(H) “Periodic payments” includes both continuing monthly or other periodic payments and scheduled future lump-sum payments under a structured settlement.
(I) “Qualified assignment agreement” means an agreement that provides for a qualified assignment, as defined in section 130 of the “Internal Revenue Code of 1986,” 100 Stat. 2085, 26 U.S.C.A. 130(c), as amended, through an assignment of the liability under a structured settlement agreement to make periodic payments as damages, on account of personal injury or sickness.
(J) “Responsible administrative authority” means any government authority of another state vested by the law of that state with the original exclusive jurisdiction over the settled claim resolved by a structured settlement.
(K) “Settled claim” means the original tort claim resolved by a structured settlement.
(L) “Structured settlement” means an arrangement for periodic payments of damages for injury to a person that is established by a settlement or a court judgment in resolution of a tort claim.
(M) “Structured settlement agreement” means an agreement, judgment, stipulation, or release that embodies the terms of a structured settlement, including the rights of a payee to receive periodic payments.
(N) “Structured settlement obligor” means the party that has the obligation to make continuing periodic payments to the payee under a structured settlement agreement or a qualified assignment agreement.
(O) “Structured settlement payment rights” means the rights under a structured settlement agreement to receive periodic payments from a structured settlement obligor or an annuity issuer if either of the following applies:
(1) The payee, the structured settlement obligor, or the annuity issuer with respect to the structured settlement agreement is a resident of this state.
(2) The structured settlement agreement was approved by a court in this state.
(P) “Terms of a structured settlement” includes the terms of a structured settlement agreement, an insurance contract, a qualified assignment agreement, and any order or approval by a court, a responsible administrative authority, or other government authority authorizing or approving the structured settlement.
(Q) “Transfer” means a sale, assignment, pledge, hypothecation, or any other form of alienation or encumbrance of structured settlement payment rights made by a payee for consideration.
(R) “Transfer agreement” means an agreement that provides for the transfer of structured settlement payment rights from a payee to a transferee.
(S) “Transferee” means a party acquiring or proposing to acquire structured settlement payment rights through a transfer of those rights.
Effective Date: 10-27-2000

Louisiana Transfer of Structured Settlement Rights

§2715. Transfer of structured settlement rights
A. As used in this Section, the following terms shall mean:
(1) "Annuity issuer" means an insurer that has issued an annuity contract to be used to fund periodic payments under a structured settlement.
(2) "Discounted present value" means the fair present value of future payments, as determined by discounting payments to the present using the most recently published applicable federal rate for determining the present value of an annuity, as issued by the United States Internal Revenue Service.
(3) "Independent professional advice" means advice of an attorney, certified public accountant, actuary, or other licensed professional adviser:
(a) Who is engaged by a payee to render advice concerning the legal, tax, and financial implications of a transfer of structured settlement payment rights;
(b) Who is not affiliated with or compensated by the transferee of the transfer; and
(c) Whose compensation is not affected by whether a transfer occurs.
(4) "Interested parties" means the payee, each beneficiary designated under the annuity contract to receive payments following the payee's death, the annuity issuer, the structured settlement obligor, and any other party that has continuing rights or obligations under a structured settlement.
(5) "Payee" means an individual who receives damage payments that are not subject to income taxation under a structured settlement and proposes to make a transfer of payment rights.
(6) "Structured settlement" means an arrangement for periodic payment of damages for personal injury established by a settlement or judgment in resolution of a tort claim. "Structured settlement" does not include an arrangement for periodic payment of damages for personal injury established by a judgment of confession.
(7) "Structured settlement agreement" means an agreement, judgment, stipulation, or release embodying the terms of a structured settlement.
(8) "Structured settlement obligor" means a party who has the continuing periodic payment obligation to the payee under a structured settlement agreement or a qualified assignment agreement.
(9) "Structured settlement payment rights" means the rights to receive periodic payments, including lump-sum payments under a structured settlement, whether from the settlement obligor or the annuity issuer, if:
(a) The transferee or payee is domiciled in this state;
(b) The structured settlement agreement was approved by a court in this state; or
(c) The settled claim was pending before a court of this state when the parties entered into the structured settlement agreement.
(10) "Terms of the structured settlement" includes the terms of the structured settlement agreement, the annuity contract, a qualified assignment, and an order or approval of a court or responsible administrative authority authorizing or approving a structured settlement.
(11) "Transfer" means a sale, assignment, pledge, hypothecation, or other form of alienation or encumbrance made by a payee for consideration.
(12) "Transfer agreement" means the agreement providing for the transfer of structured settlement payment rights from a payee to a transferee.
(13) "Transferee" means a person who is receiving or will receive structured settlement payment rights from a payee.
B. The direct or indirect transfer of structured settlement payment rights shall not be effective nor shall a structured settlement obligor or annuity issuer be required to make a payment directly or indirectly to a transferee of structured settlement payment rights unless all of the following requirements are met:
(1) The transfer of structured settlement payment rights has been authorized in advance by ex parte order of a court of competent jurisdiction which had jurisdiction over the original tort or workers' compensation claim resolved by the structured settlement or in which the original tort or workers' compensation claim could have been brought, or in the parish where the payee resides at the time of filing the ex parte petition. At least twenty days prior to the issuance of the order, the transferee shall file a petition for transfer with the caption "Ex Parte Petition for Transfer of Structured Settlement Rights by (name of Transferee)."
(2) The transferee shall include with the petition, a copy of the transferee's application, a copy of the transfer agreement, and a disclosure statement to the payee in bold type, no smaller than 14 points, acknowledged by the payee specifying the following:
(a) The amounts and due dates of the structured settlement payments to be transferred.
(b) The aggregate amount of the payments.
(c) The discounted present value of the payments, together with the discount rate used in determining the discounted present value.
(d) The gross amount payable to the payee in exchange for the payments and an itemized listing of all brokers' commissions, service charges, application fees, processing fees, closing costs, filing fees, referral fees, administrative fees, legal fees, notary fees, and other commissions, fees, costs, expenses, and charges payable by the payee or deductible from the gross amount otherwise payable to the payee.
(e) The net amount payable to the payee after deduction of all commissions, fees, costs, expenses, and charges described in Subparagraph (d) of this Paragraph.
(f) The quotient, expressed as a percentage, obtained by dividing the net payment amount by the discounted present value of the payments, which shall be disclosed in the following statement: "The net amount that you will receive from us in exchange for your future structured settlement payments represents ___% of the estimated current value of the payments".
(g) The effective annual interest rate, which rate shall be disclosed in the following statement: "Based on the net amount that you will receive from us and the amounts and timing of the structured settlement payments that you are turning over to us, you will, in effect, be paying interest to us at a rate of ___% per year".
(h) The amount of any penalty and the aggregate amount of any liquidated damages, including penalties, payable by the payee in the event of a breach of the transfer agreement by the payee.
(i) The transferee has given written notice of the transferee's name, address, and taxpayer identification number to the annuity issuer and the structured settlement obligor.
(j) The transfer agreement provides that if the payee is domiciled in this state, any disputes between the parties will be governed, interpreted, construed, and enforced in accordance with the laws of this state and that the domicile state of the payee is the proper place of venue to bring any cause of action arising out of a breach of the agreement.
C. The court shall enter an order approving the transfer based on a finding of all of the following:
(1) That the payee received independent professional advice regarding the legal, tax, and financial implications of the transfer.
(2) That the transferee disclosed to the payee the discounted present value.
D. All costs of court for filing the petition for transfer of structured settlement rights shall be paid by the transferee.
E. If a transfer of structure settlement payment rights has been authorized under this Section, neither the annuity issuer nor the structured settlement obligor shall have any liability to the payee or to any other party for any payment made to the transferee in accordance with the authorization.
F. The provisions of this Section may not be waived.
G. This Section shall not be construed to authorize a transfer of structured settlement payment rights in contravention of applicable law or to give effect to a transfer of structured settlement payment rights that is invalid under applicable law.
H. A provision in a transfer agreement giving a transferee power to confess judgment against a payee is unenforceable to the extent that the amount of the judgment would exceed the amount paid by the transferee to the payee, less any payments received from the structured settlement obligor or the payee.
I. This Section shall not be construed to authorize any transfer of workers' compensation payment rights in contravention of applicable law or to give effect to any transfer of workers' compensation or other payment rights that is invalid under applicable law.
J. Any person who acquires directly or indirectly structured settlement payment rights in a structured settlement factoring transaction in advance of an order required by this Section may be subject to the tax imposed under the Internal Revenue Code, 26 U.S.C. 5891.
Acts 2001, No. 597, §1; Acts 2003, No. 569, §1.

PA Petition to Transfer Structured Settlements

Rule 229.2. Petition to Transfer Structured Settlement Payment Rights
(a) Words used in this rule, which are defined by the Structured Settlement
Protection Act, shall have the meaning set forth in the Act.
Note: See Section 2 of the Act, 40 P.S.
§4002, which defines numerous terms
including “best interests”, “dependents”,
“payee”, “structured settlement obligor”,
and “structured settlement payment
rights.”
(b) A petition to transfer structured settlement payment rights shall be filed in
the county in which the payee is domiciled.
Note: See Section 4 of the Act, 40 P.S.
§4004, providing that the court of
common pleas of the judicial district in
which the payee is domiciled shall have
jurisdiction over the petition.
(c) The parties to the petition shall be the payee and the transferee.
(d) The petition shall be verified by the transferee and shall contain:
(1) a statement setting forth the payment provisions of the structured
settlement agreement and the payment rights that the payee seeks to transfer,
(2) separate paragraphs which in bold type set forth
(i) the net amount payable to the payee after deduction of all
commissions, fees, costs, expenses, and charges, and
(ii) the following statement setting forth the interest rate:
“Based on the net amount that the payee will receive from
this transaction ($________) and the amounts and timing of
the structured settlement payments that would be assigned,
the payee is, in effect, paying interest at a rate of _______%
per year.”
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(3) four attachments:
(i) a Payee’s Affidavit in Support of Petition, in the form
prescribed by subdivision (f) as Attachment 1,
(ii) an initial order of court scheduling the hearing, in the form
prescribed by subdivision (g),
(iii) a certification by an attorney for the transferee representing
to the best of his or her knowledge, information and belief, formed after
reasonable inquiry, that the transfer will comply with the requirements of
the Act and will not contravene any other applicable federal or state
statute or regulation or the order of any court or administrative authority,
and
(iv) a final order of court granting the petition, in the form
prescribed by subdivision (i).
Note: These four attachments are in
addition to any other documents which
are required to support the findings set
forth in Section 3 of the Act, 40 P.S.
§4003.
Subdivision (d) requires that two
documents be verified. As the two
documents contain different information,
each must be verified by a different
person. The petition to transfer
structured settlement payment rights
must be verified by the transferee. The
Payee’s Affidavit in Support of Petition
must be verified by the payee. The
transferee is not required to verify the
information set forth in the Payee’s
Affidavit.
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(e)(1) If the petition and Payee’s Affidavit in Support of Petition meet the
requirements of this rule and contain factual allegations which, if established, will
support the findings set forth in Section 3 of the Act, the court shall promptly enter an
order scheduling a hearing date. The transferee shall give notice of the hearing, in the
form prescribed by subdivision (h), to the payee, the structured settlement obligor, the
annuity issuer, the payee’s spouse and any person who receives child support, alimony
or alimony pendente lite from the payee.
(2) If the petition is denied without a hearing for failure to meet the
requirements of this rule or to contain necessary factual allegations, which will support
the findings set forth in Section 3 of the Act. The court shall state reasons for the denial
and the payee may file an amended petition as of course.
(f) The Payee’s Affidavit in Support of Petition shall be substantially in the
following form:
(Caption)
Payee’s Affidavit in Support of
Petition to Transfer Structured Settlement Rights
I, _____________, the payee, verify that the statements below are true and
correct:
1. Payee’s name, address and age:____________________________________
________________________________________________________________.
2. Marital Status:
____ Never Married; ____ Married; ____ Separated; ____ Divorced
If married or separated, name of spouse:__________________________.
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3. Minor children and other dependents:
Names, ages, and places of residence:___________________________
__________________________________________________________.
4. Income:
(a) Payee’s monthly income and sources:______________________
__________________________________________________________.
(b) If presently married, spouse’s monthly income and sources:_____
__________________________________________________________.
5. Child support, alimony or alimony pendente lite:
Obligation to pay: ___ Yes ___ No
If yes, state the amount of the obligation, to whom payable, and whether there
are arrearages:_________________________________________________________.
6. Previous transfers:
Have you previously filed a petition to transfer payment rights under the
structured settlement that is the subject of this petition? ___Yes ___ No
If yes, for each petition that you filed,
(a) If the transfer was submitted for court approval, list the court, the
case caption and case number, and state whether the court
approved or disapproved the transfer:_______________________
_____________________________________________________
_____________________________________________________.
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(b) If the transfer was approved,
(i) State the name of the transferee and identify (listing due
dates and payment amount(s)) the payments involved in the
transfer:______________________________________________
_____________________________________________________.
(ii) State the amount of money and the manner in which the
money was used:_______________________________________
_____________________________________________________.
(c) Have you ever transferred payments without court approval? If so,
please explain:_________________________________________
_____________________________________________________
_____________________________________________________.
7. Reasons for transfer:
Describe in detail your reasons for the proposed transfer, including an
explanation as to why a sale of a lesser amount of the structured settlement amount will
not better serve your interests:_____________________________________________
_____________________________________________________________________
8. Payment of debts:
If you seek the transfer in order to pay debts, list each debt, including the name
of the creditor and the amount presently owed:
Debt Creditor Amount Owed
________________ __________________ $___________
________________ __________________ $___________
________________ __________________ $___________
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Verification
I verify that the statements made in this affidavit are true and correct. I
understand that false statements herein are made subject to the penalties of 18 Pa.C.S.
§4904, relating to unsworn falsification to authorities.
DATE: _______________ ________________________________
Signature
(g) The initial order of court shall be substantially in the following form:
(CAPTION)
Initial Order of Court
On this _____ day of _________________, 2_____, it is ordered that a hearing
on this Petition to Transfer Structured Settlement Payment Rights will be held on
___________________, in Courtroom _________ at ________ o’clock. The payee
shall bring income tax returns for the prior two (2) years to the hearing.
Within seven (7) days, the transferee shall give notice of the hearing date to the
payee, the structured settlement obligor, the annuity issuer, the payee’s spouse and any
person receiving child support, alimony, or alimony pendente lite. The transferee shall
attach a certificate of service to the notice of hearing date. A copy of the notice with the
certificate of service shall be filed with the court prior to the hearing.
BY THE COURT:
________________________________
J.
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(h) The notice of hearing shall be substantially in the following form:
(CAPTION)
Notice of Hearing on Petition to
Transfer Structured Settlement Payment Rights
To: __________________________________________________________________
You are hereby given notice that ________________________ has filed a
(name of payee)
petition to transfer structured settlement payment rights. A hearing in this matter has
been scheduled on ______________________, 2______ at __________o’clock in
courtroom no._____, courthouse, ______________________________________.
(address)
You are entitled to support, oppose or otherwise respond to the payee’s petition,
either in person or by counsel, by filing written comments with the court prior to the
hearing or by attending the hearing.
_____________ __________________________
Date Transferee
__________________________
__________________________
Address
__________________________
Telephone Number
(i) The final order of court shall be substantially in the following form:
(CAPTION)
Final Order of Court
On this _____ day of _________________, 2_____, it is ordered that the Petition
to Transfer of Structured Settlement Payment Rights is granted.
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The court specifically finds that:
(1) the payee has established that the transfer is in the best interests of the
payee or the payee’s dependents;
(2) based on the certification by an attorney for the transferee, and the court
having not been made aware of any statute, regulation or order that would be
incompatible with the proposed transfer, the transfer will not contravene any applicable
federal or state statute or regulation, or the order of any court or administrative
authority;
(3) the transfer complies with the remaining requirements of the Structured
Settlement Protection Act, including Sections 3(a)(2), 3(a)(4), 3(a)(5) and 3(a)(6);
(4) the payments that are to be transferred are designated as follows:
_____________________________________________________________________
_____________________________________________________________________.
(5) the terms of this order shall survive the death of the payee and shall be
binding on the payee’s heirs, beneficiaries and assigns;
(6) the payee shall receive from the transferee, as of _________________,
the amount of $__________, from which no funds are owed for counsel fees,
administrative fees, or other costs, fees or expenses.
BY THE COURT:
________________________________
J.
Note: The form of order does not
preclude a court from adding additional
language to the order as deemed
appropriate in the individual
circumstances of a case.
-9-
Explanatory Comment
In 2000, the General Assembly passed the Structured Settlement Protection Act,
Act of February 11, 2000, P.L. 1, 40 P.S. §4001 et seq., providing for, inter alia, the
court of common pleas to permit the transfer of structured settlement payment rights
only upon an express finding that the transfer is in the best interests of the payee.
While the Act requires the disclosure of information to the payee concerning the
transfer, it does not specify what factual allegations or other information must be
included in the petition to enable the trial court to make its determination. New Rule
229.2 is intended to provide the additional information necessary for a trial court to
determine whether a petition to transfer structured settlement payment rights satisfies
the best interest standard.
Subdivision (c) of the rule identifies the parties to the petition as the payee and
the transferee. The transferee is required to verify the petition and, in doing so, must
set forth the circumstances surrounding the proposed transfer of structured settlement
payment rights. The petition must contain averments that the requirements of the Act
have been satisfied, e.g., the proper disclosures have been made to the payee. In
contrast, the payee is required through the Payee’s Affidavit in Support of Petition to
provide the necessary information to enable the trial court to determine whether the
transfer is in the best interests of the payee. The court will enter an order scheduling a
hearing date only if the petition and the payee’s affidavit meet the requirements of the
rule and contain factual allegations, which, if established, satisfy the requirements of
Section 3 of the Act, 40 P.S. §4003.
By the Civil Procedural
Rules Committee
R. Stanton Wettick, Jr.
Chair

Tax Treatment of Structured Settlements

INTRODUCTION
The Subcommittee on Oversight of the House Ways and Means Committee has scheduled a public hearing on March 18, 1999, on issues relating to the tax treatment of structured settlement arrangements. This document,(1) prepared by the staff of the Joint Committee on Taxation, describes present law, background and issues relating to structured settlement arrangements, and describes recent proposals to alter the tax treatment of such arrangements.
Part I of this document is a summary of the discussions contained in the remainder of the pamphlet. Part II is a description of present law and background. Part III is a discussion of issues relating to structured settlement arrangements. Part IV describes recent proposals.
I. SUMMARY
Present law and background
A structured settlement arrangement generally provides for periodic payments as damages in cases involving personal physical injuries or physical sickness, or for amounts received under workmen's compensation acts for personal injuries or sickness. An exclusion from gross income is provided to the assignee of a liability in such a case for amounts received for agreeing to the assignment, provided requirements are met relating to the payments. Such payments generally are excludable from income by the recipient, whether received as a lump sum or as periodic payments.
Discussion of issues
The economic benefit in the structured settlement arrangement, as compared to a lump-sum settlement, arises because the Federal government forgoes taxation of the earnings component of each year's annual payment. Economists usually argue that such subsidies distort individual choice and lead to inefficient outcomes. Nevertheless, it can be argued that the choice of the lump sum settlement may create an externality, that is, a cost to taxpayers at large, not borne by the individual who chooses the lump sum settlement. Despite the implicit tax subsidy, the available evidence indicates that the majority of personal injury awards are paid as lump sum payments, not through structured settlement arrangements.
An individual's decision to sell his or her rights at a later date involves the same comparison the individual makes in initially agreeing to a structured settlement arrangement in lieu of a lump sum payment. The individual must weigh the value of the purchase price offered compared to the expected present discounted value of the income stream being sold. Issues arising from the transfer of structured settlement payment streams involve whether such sales are consistent with the purpose of the tax provisions, whether consumer protection or consumer freedom of economic choice is a more important policy, and whether the transfers should be stopped so as to eliminate present-law uncertainty as to their tax results.
Description of proposals
President's fiscal 2000 budget proposal
The President's proposal would impose an excise tax on any person acquiring a payment stream under a structured settlement arrangement. The amount of the excise tax would be 40 percent of the difference between (1) the amount paid by the acquirer to the injured person and (2) the undiscounted value of the acquired income stream. The excise tax would not be imposed if the acquisition were pursuant to a court order finding that the extraordinary and unanticipated needs of the original recipient of the payment stream render the acquisition desirable.
H.R. 263, "The Structured Settlement Protection Act"
H.R. 263, "The Structured Settlement Protection Act" (106th Cong., 1st Sess.) was introduced by Mr. Shaw for himself, Mr. Stark, and others. In general, H.R. 263 would impose a tax on certain acquisitions of structured settlement payment streams, equal to 50 percent of the amount equal to the excess of (1) the aggregate undiscounted amount of structured settlement payments being acquired, over (2) the total amount actually paid by the acquirer to the seller. H.R. 263 would provide an exception if the transfer is undertaken pursuant to the order of the relevant court or administrative authority finding that the extraordinary, unanticipated, and imminent needs of the structured settlement recipient or spouse or dependents render such a transfer appropriate.
II. PRESENT LAW AND BACKGROUND
A structured settlement arrangement generally provides for periodic payments as damages in cases involving personal physical injuries or physical sickness, or for amounts received under workmen's compensation acts for personal injuries or sickness. Present law provides tax-favored treatment for structured settlement arrangements for these payments, under a provision enacted in 1983.(2) In that legislation, the Periodic Payment Settlement Tax Act of 1982, Congress expressed its reasons for making the change to the tax law:
Despite several revenue rulings that indicate that the Internal Revenue Service considers that periodic payments as personal injury damages are excludable from the gross income of the recipient, the committee believes it would be helpful to taxpayers to provide statutory certainty in the area. Likewise, the committee believes that a person who undertakes an assignment of the liability for such payments from the person originally liable should not include amounts received for doing so in gross income if those amounts are used merely to purchase certain types of property to specifically cover the liability.(3)
Under the provision, an exclusion from gross income is provided for amounts received for agreeing to a qualified assignment to the extent that the amount received does not exceed the aggregate cost of any qualified funding asset.(4)
A qualified assignment means any assignment of a liability to make periodic payments as damages (whether by suit or agreement) on account of a personal injury or sickness (in a case involving physical injury or physical sickness), or as compensation under any workmen's compensation act, provided the liability is assumed from a person who is a party to the suit or agreement, and the terms of the assignment satisfy certain requirements. Generally, these requirements are that (1) the periodic payments are fixed as to amount and time; (2) the payments cannot be accelerated, deferred, increased, or decreased by the recipient; (3) the assignee's obligation is no greater than that of the assignor; and (4) the payments are excludable by the recipient under Code section 104(a)(1) as amounts received under workmen's compensation acts as compensation for personal injuries or sickness or under Code section 104(a)(2) as damages on account of personal injuries or sickness.
A qualified funding asset means an annuity contract issued by an insurance company licensed in the United States, or any obligation of the United States, provided the annuity contract or obligation meets statutory requirements. An annuity that is a qualified funding asset is not subject to the rule requiring current inclusion of the income on the contract which generally applies to annuity contract holders that are not natural persons (e.g., corporations) (sec. 72(u)(3)(C)). In addition, when the payments on the annuity are received by the structured settlement company and included in income, the company generally may deduct the corresponding payments to the injured person, who, in turn, excludes the payments from his or her income (sec. 104). Thus, neither the amount received for agreeing to the qualified assignment of the liability to pay damages, nor the income on the annuity that funds the liability to pay damages, generally is subject to tax.
In addition to the exclusion provided under present law for the assignee of the liability, an exclusion is also accorded to the recipient of the payments of damages under a structured settlement arrangement. Present law provides an exclusion from gross income for individuals for amounts received under workmen's compensation acts as compensation for personal injuries or sickness (sec. 104(a)1)). An exclusion from gross income for individuals is also provided for 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 (sec. 104(a)(2)).
If a recipient of damages chooses to receive a lump sum payment, and then to invest it himself, generally the earnings on the investment are includable in income. For example, if the recipient uses the lump sum to purchase an annuity contract providing for periodic payments, then a portion of each payment under the annuity contract is includable in income, and the balance is excludable under present-law rules based on the ratio of the individual's investment in the contract to the expected return on the contract (sec. 72(b)). By contrast, the periodic payments received under a structured settlement arrangement as damages for personal physical injuries or physical sickness generally are fully excludable from the recipient's income (sec. 104(a)(2)).
The exclusion for the liability assignee requires that the payments to the injured person under the qualified assignment cannot be accelerated, deferred, increased, or decreased by the recipient (sec. 130(c)(2)(B)). Consistent with these requirements, it is understood that contracts under structured settlement arrangements generally contain anti-assignment clauses. It is understood, however, that injured persons may nonetheless be willing to accept discounted lump sum payments from certain "factoring" companies in exchange for their payment streams. The tax effect on the parties of these transactions may not be clear under present law.
III. DISCUSSION OF ISSUES
The economic benefit of structured settlement arrangements
Settlements in cases involving damages on account of personal injury or sickness generally are paid in one of two ways. The recipient (the plaintiff in the case) may receive a lump sum settlement, or the recipient may agree to a structured settlement arrangement. The use of a structured settlement arrangement creates an economic benefit. To see this, consider the following simple examples.
Suppose an individual agrees to settle a personal injury claim for $100,000, and this amount is paid to the individual as a lump sum (rather than used to fund a structured settlement arrangement for periodic payments). The $100,000 is excludable from the gross income of the recipient. The recipient could then use the $100,000 to purchase an annuity contract that, given the recipient's age and other relevant factors, would pay the recipient $10,000 per year for the rest of his or her life.(5) Under present law, a portion of each of the annual payments of $10,000 is includible in the recipient's gross income. Generally, each annual payment is partially excludable as tax-free recovery of the investment in the contract (the $100,000 premium), and partially includable based on the expected return on the investment in the annuity contract. As a result, the net after-tax annual payment to the recipient is something less than $10,000. For the sake of the example, assume the recipient's after-tax annual payment is worth $9,500.
Alternatively, the defendant could have agreed to pay $100,000 to purchase a structured settlement arrangement. Under the arrangement, the same annuity contract could be purchased. Under this alternative, the entire $10,000 annual payment would be tax-free to the recipient. Hence, the recipient would be better off. Of course, the benefit of the exclusion of the entire payment under the annuity contract need not accrue solely to the recipient. Another possible outcome is that the defendant could spend somewhat less, say $95,000, and purchase an annuity as part of a structured settlement arrangement that would pay the recipient $9,500 (tax free) annually for the rest of his or her life. Under this scenario, the recipient would be indifferent as between choosing the structured settlement arrangement and receiving a lump sum payment of $100,000 (as described in the preceding paragraph).(6) However, the defendant would save $50,000 in expenditures to settle the case.
As the examples make clear, the economic benefit in the structured settlement arrangement, as compared to a lump-sum settlement, arises because the Federal government forgoes taxation of the earnings component of each year's annual payment. As such, present law provides a tax subsidy for the use of structured settlement arrangements.
Public policy interest in tax subsidy for structured settlement arrangements
Economists usually argue that tax subsidies such as that accorded to structured settlement arrangements distort individual choice and lead to inefficient outcomes. They argue that free choice permits individuals to make the highest and most preferred use of economic resources.
Nevertheless, it can be argued that the choice of the lump sum settlement may create an externality, that is, a cost to taxpayers at large, not borne by the individual who chooses the lump sum settlement. This externality could arise as follows. The amount of damages in a case involving personal physical injuries or physical sickness may be based on the lifetime medical needs of the recipient. If a recipient chooses a lump sum settlement, there is a chance that the individual may, by design or poor luck, mismanage his or her funds so that future medical expenses are not met. If the recipient exhausts his or her funds, the individual may be in the position to receive medical care under Medicaid or in later years under Medicare. That is, the individual may be able to rely on Federally financed medical care in lieu of the medical care that was intended to have been provided by the personal injury award. Such a "moral hazard"(7) potential may justify a subsidy to encourage the use of a structured settlement arrangement in lieu of a lump sum payment to the recipient, to reduce the probability that such individuals need to make future claims on these government programs. Under the structured settlement arrangement, by contrast to the lump sum, it is argued that because the amount and period of the payments are fixed at the time of the settlement, the payments are more likely to be available in the future to cover anticipated medical expenses (assuming the payment stream is not transferred by the recipient).
Some also may argue that it is appropriate for the government to induce injured persons to make choices to protect themselves. They suggest that individuals often are poorly informed about their medical needs and the cost of life-long care.
Critics of this view counter that while it may be appropriate for the government to ensure actions in the best interests of minors and incompetent adults, that competent adults should be free to make their own choices, at no financial penalty. Proponents of the tax subsidy note that present law does not mandate a choice, but rather only offers a financial inducement.
Utilization of structured settlement arrangements
Despite the implicit tax subsidy, the available evidence indicates that the majority of personal injury awards are paid as lump sum payments, not through structured settlement arrangements.(8) There are several possible explanations for this result.
Recipients may have unrealistic or inaccurate information regarding their mortality risk and potential returns from investment. If a recipient believes his life will be shorter than actuaries estimate, or if he believes that he can generate investment returns greater than those that appear to be offered under the structured settlement arrangement's annuity contract, he will estimate that the economic value of the lump sum payment is greater than the expected present value of the structured settlement arrangement. In a simple sense, the allure of a substantial one-time payment may be irresistible.
Another possibility is that defendants' offers of structured settlement arrangements leave recipients largely indifferent between a lump sum settlement and a structured settlement arrangement. That is, in their offering of structured settlement arrangements, the defendants may be trying to retain the entire tax benefit for themselves. Because each recipient only negotiates with one defendant, the recipient cannot comparison shop. The defendant's motivation generally would be to minimize the cost of attaining a settlement, and thus the defendant may have little incentive to offer some of the tax benefit to the recipient.
Why might an individual choose to sell rights to an existing structured settlement arrangement?
Some individuals who have elected structured settlement arrangements have later sold some or all of the rights to their payments under the arrangement. As time passes, individuals' needs and desires change. Some individuals may find that technological change has enabled them to receive the medical care they require on an on-going basis at a lower annual cost than when they chose the structured settlement arrangement. Other individuals may reason that they could earn a higher annual income if they invested the funds themselves, such as by using the proceeds to start their own business. An individual's decision to sell his or her rights at a later date involve the same comparison the individual makes in initially agreeing to a structured settlement arrangement in lieu of a lump sum payment. The individual must weigh the value of the purchase price offered compared to the expected present discounted value of the income stream being sold. The individual may choose to sell because, erroneously or correctly, he discerns that either his mortality risk or his investment return will be different from those underlying the existing structured settlement arrangement. For example, if the individual has reason to believe that his life span will be shorter than that assumed in the structured settlement arrangement, then the individual may prefer to sell the structured settlement payment stream so that he can have larger annual payments, albeit for a shorter period of time. The informed individual will realize that in selling the structured settlement arrangement, he may well be converting tax-free investment returns into taxable returns when invested by the individual outside of the structured settlement arrangement. It is also possible that a recipient may have misunderstood at the time of entering into the structured settlement agreement that the then-current value of the payment stream was less than the total gross amount of the payments, and the recipient may subsequently have come to understand that the value of deferred payments generally is no greater than the amount of the lump sum, at any particular time.
Issues arising from transfer of structured settlement payment streams
Consistency with purpose for tax subsidy of structured settlements.--Transfer of the payment stream under a structured settlement arrangement arguably subverts the purpose of the structured settlement provision of the Code to promote periodic payment for injured persons. Some argue that the real purpose of the provision is to protect injured persons by ensuring that they have a source of income even though their capacity to earn income may have been impaired.(9) Further, subsequent purchases of the payment stream under a structured settlement arrangement by so-called "factoring" companies often occurs at deep discount. It is argued that the potential for deep discounting of the value of the payment stream may financially disadvantage injured persons that the provision was designed, in part, to protect. It could be said that the tax law already provides an incentive for structured settlement arrangements, and if practices have evolved that are inconsistent with this purpose, addressing them should be viewed as proper.
On the other hand, if the market for the sale of rights to structured settlement arrangements is competitive, the seller should receive the full fair market value of his or her annuity. If this is the case, a seeming deep discount may merely reflect the competitive market's pricing of the individual's mortality risk and the opportunity cost of investment funds. The seemingly large discount may only be such in comparison to the sum of an undiscounted stream of annuity payments.
Consumer protection and consumer sovereignty.-- Both the President's proposal and H.R. 263 (described below) seek to discourage the subsequent sale of payment streams under a structured settlement arrangement by imposing an excise tax. The President's proposal and H.R. 263 arguably respond to the public policy concern of "moral hazard," with the result that costs that would have been covered by the structured settlement payment stream are later thrust upon the taxpaying public. The President's proposal states that "recipients of structured settlements are less likely than recipients of lump sum awards to consume their awards too quickly and require public assistance."(10) The President's proposal also suggests that consumer protection is necessary, suggesting that some individuals are willing to accept what are termed "heavily discounted lump sum payments."(11)
By imposing the excise tax on the amount of the discount, rather than on the entire amount of the payment stream acquired, it could be said that H.R. 263 and the President's current proposal are well targeted to the aspect of the transaction that could financially disadvantage the injured person: the amount of the discount. (By contrast, an earlier proposal in the President's fiscal year 1999 budget would have imposed the excise tax on the entire amount of the payment stream that was acquired.) It could nevertheless be argued that acquirers still have an economic incentive to acquire payment streams, so long as the tax on the discount is less than the rate which would discourage the acquisition transactions completely. Thus, if 40 percent (50 percent in the case of H.R. 263) is not the tax rate at which transactions could no longer be profitable for the acquirers, it could be said that the provision does not achieve the purpose of protecting the injured person by preventing the sale of the payment stream. Conversely, if 40 percent or 50 percent is that tax rate, then the proposals could be assessed as effective at achieving that purpose. If transactions were to continue after imposition of the tax, sellers of payment streams would be worse off than before the tax, because acquirers would discount more deeply the purchase of the payment stream to achieve the same profit level they did before the tax. Critics could argue that if the tax rate is set at a level that does not totally discourage the transactions, then the proposal would fail to achieve its goal of protecting the original recipients of payment streams.
Opponents of these proposals ask why, if the Code permits individuals to choose between a lump sum payment and a structured settlement arrangement at the time of settlement of a personal injury claim, the Code should discourage a subsequent reconsideration of that decision. They note that, in selling all or part of the payment stream from a structured settlement arrangement, the individual is left in a position similar to that he or she would have been in by initially choosing a lump sum payment. Opponents of the proposal argue that effectively locking individuals into a previously negotiated payment stream is antithetical to the normal rules that apply in a market economy of permitting a fully informed individual to make a choice that he or she deems to be in his or her best interest. Generally in a market economy, consumer choice is given deference.
Opponents may also argue that it is not the function of the tax law to prevent injured persons or their legal representatives from transferring rights to payment. Arguably, consumer protection and similar regulation is more properly the role of the States than of the Federal government.
Proponents of the proposal argue that choices may not be fully informed. As discussed above, if an individual has an unrealistic view of his or her mortality prospects and investment opportunities, that individual may make a poor choice.
Elimination of uncertainty under present law.--An additional result of the proposals may be to limit the uncertainty arising under present law from the acquisition with respect to the tax treatment of payors under existing structured settlement arrangements. H.R. 263 explicitly provides that the acquisition of the payment stream does not violate the requirement of present-law section 130 that the payments cannot be accelerated, deferred, increased, or decreased by the recipient (although the President's proposal does not explicitly so provide).
On the other hand, it could be argued that limiting or stopping the acquisition transactions through imposition of tax on them is not the most efficient way to provide certainty in the tax law. Some argue, further, a subsequent transfer of a payment stream does not give rise to constructive receipt of the value of the retained payment stream to the transferor under present law, so there is no reason to believe that the exclusion for the assignee of the liability under section 130 of the Code is jeopardized by the transfer. Thus, they argue, there is no need for legislation to clarify this point.
IV. DESCRIPTION OF PROPOSALS
A. President's Fiscal 2000 Budget Proposal
The President's proposal would impose an excise tax on any person acquiring a payment stream under a structured settlement arrangement. The amount of the excise tax would be 40 percent of the difference between (1) the amount paid by the acquirer to the injured person and (2) the undiscounted value of the acquired income stream. The excise tax would not be imposed if the acquisition were pursuant to a court order finding that the extraordinary and unanticipated needs of the original recipient of the payment stream render the acquisition desirable.
The proposal would be effective for acquisitions occurring after the date of enactment. No inference would be intended as the contractual validity of the acquisition transaction or its effect on the tax treatment of any party other than the acquirer.
The proposal is similar to a provision contained in the President's budget proposals for fiscal year 1999, except that under that proposal, the amount of the excise tax would have been 20 percent of the consideration for acquiring the payment stream.
B. H.R. 263, "The Structured Settlement Protection Act"
H.R. 263, "The Structured Settlement Protection Act" (106th Cong., 1st Sess.) was introduced by Mr. Shaw for himself, Mr. Stark, and others.(12) In general, H.R. 263 would impose a tax on certain acquisitions of structured settlement payment streams, equal to 50 percent of the amount equal to the excess of (1) the aggregate undiscounted amount of structured settlement payments being acquired, over (2) the total amount actually paid by the acquirer to the seller.
H.R. 263 provides that a tax is imposed on any person who acquires, directly or indirectly, structured settlement payment rights in a structured settlement factoring transaction a tax equal to 50 percent of the factoring discount (as defined in the bill). The bill provides an exception in the case of a structured settlement factoring transaction in which the transfer of structured settlement payment rights is (1) otherwise permissible under applicable law, and (2) undertaken pursuant to the order of the relevant court or administrative authority finding that the extraordinary, unanticipated, and imminent needs of the structured settlement recipient or spouse or dependents render such a transfer appropriate. For this purpose, the bill defines a relevant court or administrative authority to mean the court or administrative authority that has jurisdiction over the underlying action that was resolved by the structured settlement, or if no action was brought, a court that would have such jurisdiction, or that has jurisdiction by reason of the residence of the structured settlement recipient.
The bill defines a structured settlement factoring transaction as a transfer of structured settlement payment rights (including portions of structured settlement payments) made for consideration by means of sale, assignment, pledge, or other form of encumbrance or alienation for consideration.
Factoring discount is defined under the bill as the amount equal to the excess of (i) the aggregate undiscounted amount of structured settlement payments being acquired in the structured settlement factoring transaction, over (ii) the total amount actually paid by the acquirer to the person from whom such structured settlement payments are acquired.
The bill would specifically provide that the occurrence of a structured settlement factoring transaction does not affect the tax treatment of the parties to the structured settlement under Code sections 72, 130 and 461(h). Thus, the bill would clarify that the exclusion for the assignee of the liability that is currently provided under section 130 would not be affected by the factoring transaction.
The bill would impose a reporting requirement on the person making the structured settlement payments. The bill would be effective for structured settlement factoring transactions occurring after the date of enactment of the bill.
FOOTNOTES
1. This document may be cited as follows: Joint Committee on Taxation, Tax Treatment of Structured Settlement Arrangements, (JCX-15-99), March 16, 1999.
2. P.L. 97-473, Jan. 14, 1983 (97th Cong., 2d Sess.).
3. The rulings referred to in the committee report are Rev. Rul. 77-230, 1977-2C.B. 214; Rev. Rul. 79-220, 1977-2 C.B. 74, and Rev. Rul. 79-313, 1979-2 C.B. 75. Report of the House Committee on Ways and Means to accompany H.R. 5470, H.R. Rep. No 97-832, 97th Cong., 2d Sess., 4; similar language appears in the Report of the Senate Committee on Finance to accompany H.R. 5470, the Periodic Payment Settlement Act of 1982, S. Rep. No. 97-646, 97th Cong., 2d Sess., 4. The conference agreement followed the House bill. Conference Report to accompany H.R. 5470, the Periodic Payment Settlement Act of 1982, H. Rep. No. 97-984, 97th Cong., 2d Sess., 12.
4. Section 130 of the Internal Revenue Code of 1986 (the "Code").
5. The seller of an annuity contract, usually an insurance company, invests the $100,000 premium in a portfolio of assets such that the income from the assets and the spreading of mortality risk across numerous individuals enables the seller to pay the recipient $10,000 per year for life and generate some profit for the seller.
6. The recipient would not be indifferent as between the lump sum and the structured settlement arrangement, however, if the present value of the structured settlement arrangement differs from the amount of the lump sum.
7. "Moral hazard" generally refers to the situation where the insured through his or her actions can affect the probability with which an insurance payout will occur, or can affect the size of the payout that will occur.
8. See Insurance Services Office, Inc., NAIC Closed Claim Survey for Commercial General Liability, "Survey Result,"1997, Table 15. This study reports under a 1997 survey that for losses over $75,000, 215 claims out of a total of 1,763 claims, or 12.2 percent, used structured settlements (in lieu of another method of payment of the claim such as a lump sum). The NAIC Closed Claim Survey for Commercial General Liability was conducted by ISO DATA, Inc., a wholly owned subsidiary of Insurance Services Office, Inc., under the auspices of the National Association of Insurance Commissioners ("NAIC"). The survey gathered information on commercial general liability bodily injury claims, excluding medical malpractice. The large claim sample consisted of 1,763 claims that closed between July 1, 1997, and October 31, 1997, with loss payments to the claimant of $75,000 or more. Twenty-nine insurers, representing 66 percent of the target general liability market, participated in the survey.
9. While the legislative history of the Periodic Payment Settlement Tax Act of 1982 does not explicitly so provide, a Senate floor statement by Senator Baucus, upon introduction of similar legislation in 1981 (S. 1934, The Periodic Payment Settlement Act of 1981, 97th Cong., 1st Sess.), referred to the advantages of periodic payments over lump sums in that they "provide plaintiffs with a steady income over a long period of time and insulate them from pressures to squander their awards." Vol. 127, Part 23 Cong. Rec. 30462 (Dec. 10, 1981).
10. Department of the Treasury, General Explanations of the Administration's Revenue Proposals, February 1999, 192.
11. Ibid.
12. The bill is similar to H.R. 4314 (105th Cong., 2d Sess.), introduced in 1998 by Mr. Shaw for himself, for Mr. Stark, and others, and also to S. 2543 (105th Cong., 2d Sess.), introduced in the Senate by Senator Chafee, for himself, for Senator Baucus, and others.
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