by John Darer® CLU ChFC MSSC CeFT RSP CLTC
A respected industry colleague , who is not a tax attorney, remarked that Revenue Ruling 79-220 supports a structured settlement directly to the heirs of a decedent for pre-death pain & suffering and other elements of damages associated with the decedent's claims, as opposed to direct actions of survivors like wrongful death claims.
Let's look at the the express language of Revenue Ruling 79-220
Revenue Ruling 79-220, 1979-2 C.B. 74. An insurance company purchased and retained exclusive ownership in a single premium annuity contract to fund monthly payments agreed to in the settlement of a damage suit. The issue was whether the exclusion from gross income under IRC §104(a)(2) applied to the full amount of monthly payments received in the settlement or only to the discounted present value of such payments. Payments were to be the same amount each month, guaranteed for the lifetime of the plaintiff or 20 years, whichever was longer. The IRS said the recipient may exclude the full amount of the payments from gross income under section 104(a)(2) of the Code, and that payments made to the estate after the recipient’s death are also fully excludable from taxable income.
- Let's make clear what we are discussing are structures set up AFTER the deceased plaintiff's death. This article is not referring to cases that are settled with a structure before the person dies and the the payment stream from the structure is paid to the named beneficiaries on record with the structured annuity issuer.
- Revenue Ruling 79-220 refers to a buy and hold transaction when most of the transactions today are made via qualified assignment (corporate ownership of annuities is unfavorable tax wise, unless there is a IRC 130(c) exclusion)
- The issue related to structuring pre-death pain & suffering and claims of the decedent relates to qualified assignments and the express language of IRC 130(c) which only permits damages excludable under IRC 104(a)(1) and 104(a)(2) to be assigned.
- Revenue Ruling 79-220 clearly states that "payments made to an estate after the recipient's death are fully excludable from taxable income".
- Revenue Ruling 79-220 DOES NOT state that payments made to an heir via an estate are fully excludable under IRC 104(a)(2). They may not be income taxable, BUT do such distributions come under a different tax code section that is not included in IRC 130(c)?
- An heir is defined as a " person who inherits some or all of the estate of a recently deceased person. The legal successor is usually selected because he or she is related to the deceased by a direct bloodline or has been designated in a will or by a legal authority.
- The unwind exclusion in every qualified assignment permits the assignee to jettison the obligation and the annuity if IRC 130(c) is not satisfied. This could cause a massive taxable event to the a United States tax paying Defendant or insurer.
- Without a Private Letter Ruling [or change/clarification to IRC 130(c)] are both Defendants/ Insurers and even plaintiffs leaving themselves exposed?
Do cases involving large amounts of pre-death pain and suffering come up every day? Perhaps not, but judging from one New York lawyer's blog they come up often enough to require vigilance.
The New York Injury Cases Blog, written by Plaintiff lawyer John M . Hochfelder of White Plains, New York is a good resource for news on pain & suffering.
Hochfelder speaks of a $3,500,000 verdict was upheld on appeal in Rivera v. City of New York (2d Dept. 2011).
During the terrible final 4 3/4 hours of Anna Rivera's life, she suffered enormous physical pain and terror from:
- unrelenting pain while gasping for air and struggling to survive;
- extreme fright, anxiety and confusion at not being allowed the presence of and comfort from her parents
- panic and fear from being physically restrained to the bed without the paralytic and sedatives
- choking and gagging from the endotracheal tube while having to endure the invasive intubation procedures three times without anesthetics, sedatives and muscle relaxants
- severe agitation from fighting and bucking against the endotracheal tub
Other cases cited by Hochfelder...
- Reed v. City of New York (1st Dept. 2003) - $5,000,000 ($2,500,000 past - 6 years, $2,500,000 future - 30 years); 43 year old; brain damage with progressive tissue loss in lobes
- Paek v. City of New York (1st Dept. 2006) - $4,300,000 ($1,300,000 past - 6 years, $3,000,000 future - 40 years); 36 year old; traumatic brain injury with severe cognitive dysfunction
- Weldon v. Beal (2d Dept. 2000) - $5,000,000 ($2,000,000 past - 12 years, $3,000,000 future - 15 years); 26 year old; anoxic brain damage
- Evans v. St. Mary's Hospital (2d Dept. 2003) - $1,800,000 ($800,000 past - 13 years, $1,000,000 future - 31 years); 28 year old; anoxic brain damage
- Schaffer v. Batheja (2d Dept. 2010), about which Hochfelder wrote in detail, here. The court approved a pre-death pain and suffering award of $2,500,000 for a woman in a coma who was only sporadically aware of her condition (she'd lapsed into a coma due to medical malpractice) for the 4 1/2 years until she died.
One of the nation's Leading authorities on settlement tax law, Robert Wood of San Francisco's Wood & Porter, refers to the IRS application of "narrow and unforgiving reading of the scope of section 104" in his article " The Uncertain Effects of a General Release" (May, 2, 2011 Tax Notes) . What makes anyone believe that they will be any less "narrow and unforgiving" on the subject of Section 130(c)?
The stakes are high for defendants and insurers, and even plaintiffs who could lose secured creditor status if an IRC 130(c) unwind were to go into effect.
Where is the tax support to justify an allocation to wrongful death ostensibly to accomodate the amount someone wants to structure, or the structure broker wants to sell, after the case has been pleaded for years on pain and suffering of the decedent in order to jack up the numbers?
is there any structured settlement broker or settlement planner that has enough errors and omissions to cover the taxes and penalties resulting from a mistake?
It would be a good thing for the life insurance companies issuing structured annuities and/or other stakeholders to obtain an IRS Private Letter Ruling or a fix to IRC 130(c) to be absolutely sure that payments made to an heir for the claims of an estate for damages paid to the estate for pre-death pain & suffering qualify under IRC 130(c).
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