§468B Special rules for designated settlement funds

Summary

Treats money or property a taxpayer puts into a court-ordered settlement fund as the time the taxpayer’s obligation is met, and taxes the fund itself. The fund pays tax at the top individual income-tax rate in effect for that year (the rate used under section 1(e)). The fund’s taxable income can be lowered by normal administrative and incidental costs (like legal, accounting, actuarial fees, and state or local taxes) that would be deductible for a corporation. When the taxpayer makes a qualified payment to the fund, that payment is not counted as the fund’s income, the fund’s basis in any property equals its fair market value at transfer, and the fund is treated as the owner of the property and any earnings. This tax replaces other taxes on income from the fund’s assets, and for tax procedure rules the fund is treated like a corporation and the tax like a corporate tax. A “qualified payment” is money or property sent to the fund under a court order, except amounts that can be sent back to the taxpayer or transfers of the taxpayer’s stock or debt. A “designated settlement fund” is a court-ordered fund set up mainly to resolve present and future personal-injury, death, or property-damage claims, that ends the taxpayer’s tort liability, is run mostly by independent managers, won’t send out money except as qualified payments, and in which the taxpayer has no beneficial interest and makes the required election. The rules don’t apply to workers’ compensation liabilities or certain contested liabilities. Payments to other trusts or escrows don’t count as performance unless regulations say so. Generally such funds are taxable, but a narrowly defined consent-decree environmental fund held and controlled by a government entity and returning leftover money to that government is tax-exempt.