by John Darer CLU ChFC MSSC CeFT RSP CLTC
Good tax policy would eliminate the exemption from the excise tax on structured settlement factoring transact.ions, which would reduce one of the many ways that disabled people, caregiving women and poor communities of color are deprived of resources asserts Karen Czapanskiy. a professor at University of Maryland Carey School of Law in Baltimore Maryland at time of posting.
What are Structured Settlement Factoring Transactions?
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. [see IRC §5891 (c)(3)(A)]
Excise Tax on Structured Settlement Factoring Transactions Explained
IRC section 5891(a) imposes a tax equal to 40% of the factoring discount on any person who acquires directly or indirectly structured settlement payment rights in a structured settlement factoring transaction that does not qualify for exemption under conditions that are specified in section 5891(b). The tax was implemented by the Victims of Terrorism Tax Relief Act of 2001, December 21, 2001, Public Law 107-134.
In general, section 5891 applies to structured settlement factoring transactions entered into on or after February 22, 2002. The amount of the excise tax is 40% of the excess of (1) the aggregate undiscounted amount of the payments being acquired, over (2) the total amount actually paid to acquire them. The 40% excise tax does not apply, however, if the transfer is approved in advance in a final order, judgment or decree that: (1) finds that the transfer does not contravene any Federal or State statute or the order of any court or responsible administrative authority, (2) finds that the transfer is in the best interest of the payee, taking into account the welfare and support of the payee’s dependents; and (3) is issued under an applicable State statute by an applicable State court or, if applicable, by a “responsible administrative authority” with exclusive jurisdiction over the claim or proceeding resolved by the structured settlement. [Source : Internal Revenue Service | Structured Settlement Factoring Audit Technique Guide p5]
Rationale for Good Tax Policy Per Professor Czapanskiy
- It’s time for some good tax policy opines Czapanskiy, in a paper published October 27, 2020 and cited below.
- The excise tax applicable to (structured settlement) factoring transactions provides a significant disincentive to investors who might otherwise want to buy the stream of income generated in a structured settlement.
- Exempting the transactions from the excise tax means that factoring companies can, with little difficulty and little cost, strip assets from disabled people, their families and their communities.
- Even if public benefits might make up some of the lost income, which is unlikely, access to such benefits, as a practical matter, is uneven and unpredictable.
- Further, a stream of income payable over a period of years rather than for (just) the lifetime of the payee is an inheritable asset, so it provides stable support for the injured parent and some wealth for the uninjured child. A regular source of income for the payee relieves a supporting parent of some level of financial anxiety and may permit a mother to develop assets of her own. A custodial parent may be able to provide more for her child if the payee has the resources to pay child support and to cover other expenses to enhance a child’s development.
- Finally, the community where many payees live can see them as a source of growth rather than as a source of problems. The profits gained by investors in structured settlement factoring transactions are substantial. The benefits that would be gained if the assets remained in the ownership of community members, on the other hand, would be even more valuable. Young people of color who, because of childhood lead exposure, were deprived of the capacity to earn a living, will not need to live hand to mouth, without the dignity of a regular and predictable source of income. Mothers who won a judgment for their children to provide a substitute for their lost earnings will not need to provide for them financially throughout their adulthood. Children of payees and caregiving mothers and kin of those children will not suffer the loss and anxiety that accompany irregular and low monthly income. A community that has more than its share of disability, imposed by a history of discriminatory practices in employment, housing and transportation, will not also see the assets of some of its most vulnerable members stripped away in exchange for pennies on the dollar.
- Good tax policy, asserts Czapanskiy, would eliminate the exemption from the excise tax, which would reduce one of the many ways that disabled people, caregiving women and poor communities of color are deprived of resources.
Czapanskiy cites as examples:
Czapanskiy, Karen, Tax Policy, Structured Settlements and Factoring: Making Exploitation Easy and Profitable (October 23, 2020). 93 University of Detroit Mercy Law Review 455 (2020), U of Maryland Legal Studies Research Paper No. 2020-19, Available at SSRN: https://ssrn.com/abstract=3717751
Is the seller going to get more or less if they have to sell under those conditions?
I would expect that the structured settlement secondary market players would argue that starving the money supply by increasing the likelihood of the excise tax to 100%, might actually hurt the people that Professor Czapanskiy proposes to help, through increased costs.
That being said, the track record of the secondary market is not very good. The last 7 years have brought to light some questionable transactions with horrible optics. The National Association of Settlement Purchasers has seen a company associated with its President front and center in multiple contested transactions involving the pillaging of a minor's structured settlement a Pennsylvania case named Barber, the essence of which is captured in this meme.