§5891 — Title 26 Internal Revenue Code | U.S. Code

Summary

Companies that buy the rights to someone's structured settlement payments, usually paying a lump sum now in exchange for the future payments, owe a tax equal to 40 percent of the factoring discount. The factoring discount is the gap between the total future payments being bought and the amount actually paid for them. A structured settlement here means periodic payments for personal injury damages or workers' compensation that are tax-free to the recipient. The 40 percent tax does not apply if a court (or the responsible administrative authority) approves the transfer in advance under a state law, finding that the deal does not break any law and is in the best interest of the person selling, taking into account the welfare and support of that person's dependents. A factoring deal does not change the original tax treatment of the structured settlement for the parties who set it up, as long as the rules were met when it was created.

Title 26, §5891

Internal Revenue Code — Source: USLM XML via OLRC

(a)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)(1)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)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)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)For purposes of this section—

(A)The term “applicable State court” means, with respect to any applicable State statute, a court of the State which enacted such statute.

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

(c)For purposes of this section—

(1)The term “structured settlement” means an arrangement—

(A)which is established by—

(i)suit or agreement for the periodic payment of damages excludable from the gross income of the recipient under section 104(a)(2), or

(ii)agreement for the periodic payment of compensation under any workers’ compensation law excludable from the gross income of the recipient under section 104(a)(1), and

(B)under which the periodic payments are—

(i)of the character described in subparagraphs (A) and (B) of section 130(c)(2), and

(ii)payable by a person who is a party to the suit or agreement or to the workers’ compensation claim or by a person who has assumed the liability for such periodic payments under a qualified assignment in accordance with section 130.

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

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

(A)the aggregate undiscounted amount of structured settlement payments being acquired in the structured settlement factoring transaction, over

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

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

(d)(1)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)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