PRIA, Government Policy, Made Personal

Summary

A person who buys structured settlement payment rights in a factoring deal must pay a tax equal to 40% of the "factoring discount." The tax does not apply if the transfer was approved ahead of time by a final court order or by the agency that handled the original case. That approval must say the transfer is legal and is in the payee’s best interest, and it must be issued under the proper state law or by the agency with exclusive jurisdiction. A qualified approval is final and settles the tax exception. Defined terms in one line each: structured settlement — periodic payments of damages or workers’ compensation; structured settlement payment rights — the right to receive those payments; structured settlement factoring transaction — selling, assigning, pledging, or otherwise transferring those payment rights for money (but not creating a blanket bank security interest without enforcement, and not a later resale of already bought rights); factoring discount — the total undiscounted payments being sold minus the amount actually paid to buy them; responsible administrative authority — the agency that handled the original case; State — includes Puerto Rico and U.S. possessions. If the settlement met the tax rules when set up, later factoring does not change those tax treatments, and the payer does not have to withhold tax because of the factoring.

Title 26, §5891

Internal Revenue Code, Source: USLM XML via OLRC

(a)Imposition of tax

There is hereby imposed on any person who acquires directly or indirectly structured settlement payment rights in a structured settlement factoring transaction a tax equal to 40 percent of the factoring discount as determined under subsection (c)(4) with respect to such factoring transaction.

(b)Exception for certain approved transactions

(1)In general

The tax under subsection (a) shall not apply in the case of a structured settlement factoring transaction in which the transfer of structured settlement payment rights is approved in advance in a qualified order.

(2)Qualified order

For purposes of this section, the term “qualified order” means a final order, judgment, or decree which—

(A)finds that the transfer described in paragraph (1)—

(i)does not contravene any Federal or State statute or the order of any court or responsible administrative authority, and

(ii)is in the best interest of the payee, taking into account the welfare and support of the payee’s dependents, and

(B)is issued—

(i)under the authority of an applicable State statute by an applicable State court, or

(ii)by the responsible administrative authority (if any) which has exclusive jurisdiction over the underlying action or proceeding which was resolved by means of the structured settlement.

(3)Applicable State statute

For purposes of this section, the term “applicable State statute” means a statute providing for the entry of an order, judgment, or decree described in paragraph (2)(A) which is enacted by—

(A)the State in which the payee of the structured settlement is domiciled, or

(B)if there is no statute described in subparagraph (A), the State in which either the party to the structured settlement (including an assignee under a qualified assignment under section 130) or the person issuing the funding asset for the structured settlement is domiciled or has its principal place of business.

(4)Applicable State court

For purposes of this section

(A) In general

(B)Special rule

In the case of an applicable State statute described in paragraph (3)(B), such term also includes a court of the State in which the payee of the structured settlement is domiciled.

(5)Qualified order dispositive

A qualified order shall be treated as dispositive for purposes of the exception under this subsection.

(c)Definitions

For purposes of this section

(1) Structured settlement

(2)Structured settlement payment rights

The term “structured settlement payment rights” means rights to receive payments under a structured settlement.

(3)Structured settlement factoring transaction

(A)In general

The term “structured settlement factoring transaction” means 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.

(B)Exception

Such term shall not include—

(i)the creation or perfection of a security interest in structured settlement payment rights under a blanket security agreement entered into with an insured depository institution in the absence of any action to redirect the structured settlement payments to such institution (or agent or successor thereof) or otherwise to enforce such blanket security interest as against the structured settlement payment rights, or

(ii)a subsequent transfer of structured settlement payment rights acquired in a structured settlement factoring transaction.

(4)Factoring discount

The term “factoring discount” means an amount equal to the excess of— (A)

(B)the total amount actually paid by the acquirer to the person from whom such structured settlement payments are acquired.

(5)Responsible administrative authority

The term “responsible administrative authority” means the administrative authority which had jurisdiction over the underlying action or proceeding which was resolved by means of the structured settlement.

(6)State

The term “State” includes the Commonwealth of Puerto Rico and any possession of the United States.

(d)Coordination with other provisions

(1)In general

If the applicable requirements of section 72, 104(a)(1), 104(a)(2), 130, and 461(h) were satisfied at the time the structured settlement involving structured settlement payment rights was entered into, the subsequent occurrence of a structured settlement factoring transaction shall not affect the application of the provisions of such sections to the parties to the structured settlement (including an assignee under a qualified assignment under section 130) in any taxable year.

(2)No withholding of tax

The provisions of section 3405 regarding withholding of tax shall not apply to the person making the payments in the event of a structured settlement factoring transaction.

Notes & Related Subsidiaries

Statutory Notes and Related Subsidiaries

Effective Date

Pub. L. 107–134, title I, § 115(c), Jan. 23, 2002, 115 Stat. 2438, provided that: “(1) In general.—The

Amendments

made by this section [enacting this chapter] (other than the provisions of section 5891(d) of the Internal Revenue Code of 1986, as added by this section) shall apply to structured settlement factoring transactions (as defined in section 5891(c) of such Code (as so added)) entered into on or after the 30th day following the date of the enactment of this Act [Jan. 23, 2002]. “(2) Clarification of existing law.—section 5891(d) of such Code (as so added) shall apply to structured settlement factoring transactions (as defined in section 5891(c) of such Code (as so added)) entered into before, on, or after such 30th day. “(3) Transition rule.—In the case of a structured settlement factoring transaction entered into during the period beginning on the 30th day following the date of the enactment of this Act and ending on July 1, 2002, no tax shall be imposed under section 5891(a) of such Code if—“(A) the structured settlement payee is domiciled in a State (or possession of the United States) which has not enacted a statute providing that the structured settlement factoring transaction is ineffective unless the transaction has been approved by an order, judgment, or decree of a court (or where applicable, a responsible administrative authority) which finds that such transaction—“(i) does not contravene any Federal or State statute or the order of any court (or responsible administrative authority); and “(ii) is in the best interest of the structured settlement payee or is appropriate in light of a hardship faced by the payee; and “(B) the person acquiring the structured settlement payment rights discloses to the structured settlement payee in advance of the structured settlement factoring transaction the amounts and due dates of the payments to be transferred, the aggregate amount to be transferred, the consideration to be received by the structured settlement payee for the transferred payments, the discounted present value of the transferred payments (including the present value as determined in the manner described in section 7520 of such Code), and the expenses required under the terms of the structured settlement factoring transaction to be paid by the structured settlement payee or deducted from the proceeds of such transaction.”

§5891 Structured Settlement Factoring Transactions