Los Angeles tax attorney David Higgins has submitted a legislative recommendation to for a "rollover provision" to replace Section 130 of the Internal Code. His proposal would allow personal injury plaintiffs to accept a check from defendants and invest the money within a given period (likely limiting the investment options to annuities and Treasury bonds), without losing the tax benefit currently available to them only by agreeing to a structured settlement with a counter-party.
Higgins, according to Jeremy Babener, a Tax LL.M at New York University Law School (who reviewed the submission at the request of Patrick Hindert of S2KM and TSSG), recommends that IRC Section 130 be repealed and replaced by a provision that allows for personal injury plaintiffs to have a tax exemption, even when plaintiffs actually receive the settlement money and subsequently invest. Higgins’ letter refers to a limited period in which plaintiffs might have to re-invest the settlement money received. Such “rollover” type provisions, though inconsistent with tax doctrines like “constructive receipt” and “economic benefit” have been allowed for certain retirement income.
I have a great deal of respect for David Higgins, as an attorney I've had the experience of working with, but the recommendation seems to have a narrow application (personal injury) and in my opinion, judging solely on Babener's commentary, the variables have not been completely thought through.
A. IRC 130 also applies to workers compensation claims. What of those claimants under the recommendation?
B. What about wrongful death claimants?
C. Would there be any limit to the "rollover" in Higgins proposal? There are no dollar amount limitations on qualified assignments, other than capacity of its related annuity issuer.
D. What appetite would Congress have for an "unlimited rollover" when a Bill to establish the more modest Disability Savings Account is "Missing in Action"?
The Disability Savings Act of 2008, was introduced by then Senator Christopher Dodd (D-CT) on March 11, 2008 as Senate Bill 2741 (related 2743), would have amended the Internal Revenue Code to allow a tax exemptionfor disability savings accounts (DSA) that have a value of $250,000 or less and established for beneficiaries under the age of 65 who are blind or disabled. The proposed act:
- Would have allowed tax-free distributions from such accounts for certain services provided to account beneficiaries, including education services, respite care, clothing, therapy, nutritional management, and funeral and burial expenses.
- Would have allowed tax credits for contributions of up to $2,000 made to a disability savings account (DSA) and for certain entities that maintain disability savings accounts.
- Would have permitted disability savings accounts to be disregarded in determining eligibility for Medicaid benefits and certain other means-tested federal programs.
- Requires the Secretary of Health and Human Services to establish a program for marketing, outreach, and education related to disability savings accounts.
- My May 29, 2009 post on the Disability Savings Act of 2008 saw the DSA as positive thing and not a threat to structured settlements.
- If there were an "unlimited rollover" how would that impact public benefits? Under the DSA proposal, which is not active, there was only a "limited diregard".
E. If one looks across "The Pond" for inspiraton, the UK system for periodical payments does not involve a qualified assignment company or anything like it. Its legislation "specifically extends the tax exemption for periodical payments in a personal injury case to annuity payments made under an annuity purchased or provided
- in accordance with a court order, agreement or Motor Insurers’ Bureau undertaking - see IPTM5020 - or a varying order - see IPTM5030
- by the person by whom the periodical payments under such an order, agreement or undertaking would otherwise fall to be made".
As with periodical payments generally, "the link with the court order or agreement is crucial". If, for instance, the court order for damages provided for a lump sum to be paid to the injured person who subsequently used it to purchase an annuity "then the annuity payments would not be exempt from tax". First, the annuity was not purchased in accordance with the order. Secondly, it was purchased by the injured person, not the person by whom the payments would otherwise fall to be made. Source: Her Majesty's government
Where, however, a defendant or insurer initially directly funds periodical payments of damages for personal injury specified in the court order and then purchases an annuity for the injured person to meet the payments, the payments under the new method of funding will remain tax exempt. This will be the case even if an annuity is not specifically provided for in the order, because the Damages Act permits such a change without court approval.
Note that the UK system DOES NOT extend the tax exemption to survivors of periodical payment annuitants.
F. By eliminating section 130, wouldn't that also wreak havoc on plaintiffs' settlement planning, particularly in a declining or volatile interest rate environment? Under the current system a defendant or insurer, guided by their settlement consultant, might elect to pre fund the structured settlement before releases are signed so that cases involving a protracted court approval process do not effectively penalize the plaintiff. Under Higgins recommendation what defendant or insurer is going to part with cash without a release? The more complex the case is as to number of Defendants and/or insurers, the more difficult it would be.
G. So who or what is the motivation behind Higgins' tax recommendation?
- To give plaintiffs' greater control? Don't they already have that through qualified settlement funds and Rev Proc 93-34? Yet the single claimant 468B question was taken off the Treasury Priority list in 2009 after many years. Then a wild strategy to attempt to "back door" the concept by Dick Risk and Jack Meligan in February 2010 at a public hearing about expanding the damages eligible under the IRC 104(a)(2) income exemption was unsuccessful. One can't help wondering if there is any connection.
- To facilitate an end around 28 CFR 50.24 and 28 U.S.C. Section 519 (and applicable statutory note) with respect to structured settlements or annuities entered into by the United States to resolve claims filed under the Federal Tort Claims Act?
- A creative attempt to obviate the need for Defendants to have settlement consultants on certain types of transactions?
- To sufficiently commoditize structured settlements so that transaction oriented advisors and companies (versus planners) can more easily prosper?
Surely given this country's state of affairs there are more poignant potential tax changes and/or rulings that can help grow the settlement industry and provide more value to plaintiffs and defendants.
Frankly I am surprised that Higgins did not first post the suggestions on the HIggins Settlement Law Blog and open it up to an industry debate. It will be interesting to see which, if any, special interest groups come out in support of the recommendation.