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IRS § 5891 Memo on Structured Settlement Factoring Excise Tax | Forum Shoppers in Cross Hairs

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 investors in structured settlement receivables falsely marketed as annuities (including seniors, retirees and even certain injury victims).

Forum shopping has been the scourge of the structured settlement secondary market.  It is common knowledge that some sleazy structured settlement 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.

Forum Shopping fraud may impact structured settlement sellers and investors in structured settlement receivables

 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 receivables (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.

Scenario 1:
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.

Scenario 2:

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.

Scenario 3:

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.

Relevant Reading

Download IRS Memorandum 11-28-16 re IRC 5891

 

 

Cedric Martez Thomas "Was Looking For a 2nd Chance" He Chose Novation", Got Burned For $1MM Plus

by Structured Settlement Watchdog®

Novation Settlement Solutions keeps trotting out Hector Picard, a remarkable adaptive triathlete as its spokesman with the message "When  Hector Picard Was Looking For a Second Chance He Chose Novation" and the sales pitch "Get Your Second Chance Now".  Whatever Novation may have got right on Hector Picard they got horribly wrong on Cedric Martez Thomas.

Cedric Martez Thomas went to Novation for a second chance and he got burned for over ONE MILLION DOLLARS.  That's just a fraction of how much more Cedric Martez Thomas would have received had he not done business with Novation Funding LLC/ 365 Advance Services. Novation had enough fat in that deal to (figuratively) warm a colony of fur seals.

Elephant seal bellows "Novation Melt The Fat in The Thomas Deal"

It's personally sickening to me to see Novation, a member of the National Association of Settlement Purchasers, prattle on about Hector Picard when they completely hosed young Cedric Martez Thomas. The Cedric Martez Thomas case is one more example of why members of the National Association of Settlement Purchasers are sometimes referred to as vultures.

Big Reason is Missing From the 5 Reasons Novation Settlement Solutions Stands Out

by Structured Settlement Watchdog®

The missing reason Novation Settlement Solutions stands out is because of its being associated with a structured settlement factoring transaction involving 21 year old Cedric Martez Thomas in Okeechobee Florida, easily one of the worst examples of structured settlement buyer profiteering of 2015.  A competing buyer would have paid about $2.5 million, compared to the stingy $1,037,000 that 365 Advance Services and Novation Settlement Solutions "cobbled together" in exchange for more than $6,600,000 in non-deferred future payments.  Other companies indicated that they too would have paid a lot more.

Structured settlement buyer gluttony?

Together with the Washington Post revelations about the lead paint structured settlement victims of Access Funding,  the multiple lawsuits involving a  serial transactions in a compressed time frame involving other structured settlement buyers, alleged forum shopping and "best interest" in Florida and Virginia involving other buyers, the Cedric Martez Thomas case is a poster child case for what is wrong with the structured settlement factoring industry, in my opinion. I'm not sure that Cedric Martez Thomas even knows just how bad of a deal he got from 365 Advance Services and Novation Funding.

Novation Settlement Solutions, a member of National Association of Settlement Purchasers, as another Novation Funding LLC  D/B/A Novation  Capital,  can continue to put up testimonials from disabled athletes like Hector Picard, to try to paper over the reality of what just happened two months ago to a 21 year old, but this travesty should not be forgotten.

It certainly should give anyone approached by 365 Advance Services or Novation Settlement Solutions 5 good reasons to shop around and then shop around some more.

It certainly should give Florida legislators and the Florida  judiciary reason to consider reforms similar to Maryland.  Perhaps there should be rate caps on the purchase of structured settlement payments that start more or less immediately.

Who is 365 Advance Services?  I'll bet Novation  Settlement Solutions knows.

For details of the Cedric Martez  Thomas structured settlement factoring transaction involving 365 Advance Services and Novation Funding LLC,  please click here. 

According to a sampling of Court records surveyed, Novation Funding LLC does, or has done  business as Novation Settlement Solutions and Novation Capital.

 

Who is 365 Advance Services?

by Structured Settlement Watchdog®

I doubt Cedric Martez Thomas fancies himself as a "sucka". He's a 21 year old with the world at his feet and a cool $1,037,000 in cash coming his way so he can be the next Donald Trump.

Cedric Martez Thomas cut a really bad deal with 365 Advance Services to sell $6.6 million in structured settlement payments for about one fifth that amount  $1,037,000 when our structured settlement secondary market scan says that he could have reaped as much as $2,500,000 in cash.  Too bad he didn't have the capable advice of Number Two,  that Dr. Evil had. The deal was approved in Okeechobee Florida on October 29, 2015. 

 

Cedric Martez Thomas' affidavit submitted with the Petition to Transfer on October 1, 2015, says he wanted to sell his structured settlement payment rights "to invest in real estate".  Just think about the  real estate investing possibilities that Cedric could have had with almost 2 1/2 times more.   I was able to determine that on my first phone call. He could have bought more properties that generated more income. or he could have sold less of his structured settlement to get the $1,037,000 that 365 Advance Services paid him and would have been able to meet his goals and still had a substantial steady income tax free stream of income.

What I find fascinating is that JG Wentworth spends $20 million or more in advertising annually and 365 Advance Services finds this huge deal without any internet presence [ searches for 365 Advance Services comes up empty on Google, Yahoo, Bing  Better Business Bureau] and no advertising.  How is that possible?  How would anyone even know to contact 365 Advance Services?

I checked the Secretaries of State in Florida, New York, California, Nevada, Delaware, Georgia and Wyoming and nothing comes up.

So did an advisor turn Cedric Martez Thomas onto 365 Advance Services?  If so,  did the advisor shop around. Did he or she advise Cedric Martez Thomas that there was in excess of $1.4 million spread in the deal?

One way or another if I had a structured settlement,  I would not recommend that anyone deal with 365 Advance Services because of the plundering  optics on the Cedric Martez Thomas deal. It is clear on this showing that 365 Advance Services had the investor's interest and not the consumer's interest as a priority.