by Structured Settlement Watchdog®
The IRS has issued a response to three scenarios that may have a chilling effect on the structured settlement factoring companies and their investors
Forum shopping has been the scourge of the structured settlement secondary market. It is common knowledge that some sleazy structured settlement
Forum Shopping fraud may impact structured settlement sellers and investors in structured settlement payment rights
factoring companies (settlement purchasers), including certain members of the National Association of Settlement Purchasers (NASP) have solicited residents of one state and move them to another state, creating a fiction, in order to do the structured settlement factoring deal in which they inveigle unsophisticated structured settlement annuitants to be complicit in a fraud on the courts. There has been litigation and there is now pending litigation alleging such frauds and now there will likely be future litigation seeking to overturn orders procured on the basis of the frauds.
Forum shopping frauds have the potential to impact both structured settlement annuitants and investors in structured settlement derivatives (that have been deceptively and falsely marketed as annuities by certain actors), including seniors and retirees and injury victims directly, or through their trusts.
The Office of General Counsel of the IRS issued a memorandum on November 28, 2016 in response to three scenarios and the imposition of the 40% Federal Excise Tax under IRC 5891.
Payee, an individual, is domiciled in State A. Payee receives a stream of payments from a structured settlement, as defined in § 5891(c)(1) below. After several years of receiving the payments under the structured settlement, Payee decides to sell the future payment rights to Factor, a factoring company. Factor and Payee enter into an agreement pursuant to which Factor will acquire Payee’s structured settlement payment rights in exchange for a lump sum.
State A has a Structured Settlement Protection Act (SSPA), which requires that transfers of structured settlement payment rights must receive advance court (or administrative authority) approval in order to be valid. The SSPA meets the requirements for an “applicable state statute” within the meaning of § 5891(b)(3). Factor does not file a petition to acquire Payee’s payment rights in a court in State A, but files the petition in State B. In its petition, Factor represents that Payee is domiciled in State B, despite Payee having been domiciled in State A when the petition was filed, and at all times during the approval process
In addition, Factor represents to the court that the transfer meets all the conditions found in § 5891(b)(2)(A)(i) and (ii). The State B court approves the transfer of Payee’s structured settlement payment rights to Factor, and orders the person funding the structured settlement to redirect the payments to Factor, as transferee. Factor begins to receive payments pursuant to the State B court’s order
IRS Concludes that In Scenario 1, because Factor obtained a court order from a state other than the state of Payee’s domicile and the state of Payee’s domicile has a Structured Settlement Protection Act, Factor did not obtain a “qualified order” within the meaning of § 5891(b)(2) approving the transfer of the structured settlement payment rights, and therefore the tax imposed by § 5891(a) may be asserted against Factor.
The facts are the same as the facts in Scenario 1, except that subsequent to the order issued by the court in State B, the Service initiates an examination of Factor’s company records to determine any tax liability under § 5891. The Service proposes asserting the tax on the transaction described in Scenario 1 arguing that the structured settlement factoring transaction does not meet the exception to the tax in § 5891(b) because Factor did not obtain a “qualified order” under § 5891(b)(2). In an attempt to remedy the situation, Factor files a petition in a court in State A to approve the transfer pursuant to the original State B court order. The court in State A approves the original transfer. Factor provides the State A court’s order to the Service, and argues that the transfer has been approved in a “qualified order” and thus no tax is due. [ think as an example Camacho and Rubino forgeries of structured settlement transfer documents]
IRS Concludes in Scenario 2, Factor did not obtain a “qualified order” in advance of the transfer of the structured settlement payment rights but subsequently did obtain a court order from the state of the Payee’s domicile after the transfer of the structured settlement payment rights. However, the latter court order did not approve the transfer of such rights “in advance in a qualified order” as required by § 5891(b)(1). The tax imposed by § 5891(a) can be asserted against Factor.
The facts are the same as the facts in Scenario 1, except that Payee decides to sell the future payment rights to Parent, a factoring company. In addition, in its petition to the court in State B, Parent requests that the court approve and order the assignment of the payments to Subsidiary, which is wholly-owned by Parent and finances Parent’s factoring transactions. The State B court approves the transfer, and per the request of Parent, orders the person funding the structured settlement to redirect the payments to Subsidiary. Subsidiary begins to receive payments under the structured settlement pursuant to the State B court order.
The IRS concluded in Scenario 3, Parent did not obtain a “qualified order” within the meaning of § 5891(b)(2) approving the transfer of the structured settlement payment rights, and therefore the tax imposed by § 5891(a) may be asserted against Parent. If, for example, upon examination, your office determines that Subsidiary indirectly acquired the structured settlement payment rights or Parent is a shell company, a conduit for the payments to Subsidiary, or is acting as a straw man, then there is support in § 5891(a) for asserting the tax against Subsidiary.
It will be interesting to see what bubbles up to the surface in the near future. Stay tuned.
Download IRS Memorandum 11-28-16 re IRC 5891
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