A Single Claimant Qualified Settlement Fund Bradley J. Frigon, JD, LLM (Tax), CELA Law Offices of Bradley J. Frigon 6500 S. Quebec St., Suite 330 Englewood, Colorado 80111 (720) 200-4025 (720) 200-4026 (fax) bfrigon@bjflaw.com Bjflaw.com

Political Forces at Work Many liability carriers with captive insurance companies and defense structured settlement professionals do not want single plaintiff QSF. Plaintiff structured settlement professionals are very much in favor of single plaintiff QSF.

Qualified Settlement Fund There is nothing under Section 468B, or the regulations that restrict the use of a QSF to multiple plaintiffs. Reg. Sec. 1.468B-1(c)(2) provides that a QSF can be established “to resolve or satisfy one or more contested or uncontested claims the have resulted or may result from an event (or a series of events) that has occurred and that has given rise to at least one claim asserting liability.” On the other hand, all the examples provided in the regulations under Section 468B refer to multiple claimants or class actions.

Economic Benefit Under the economic benefit doctrine, a taxpayer is considered in actual receipt of income when assets are unconditionally and irrevocably paid into a fund or trust to be used for the taxpayer’s sole economic benefit. Sproull v. Comm’r 16 T.C. 244 (1951).

Qualified Assignment under Section 130 Section 130 provides that any amount received by a qualified assignee by means of a “qualified assignment” is not included in the qualified assignee’s gross income to the extent that such amount does not exceed the aggregate cost of any “qualified funding asset” used to satisfy the liability. A qualified assignment is any assignment to make periodic payments as damages by suit or agreement on account of a physical personal injury or sickness if: The assignee assumes the liability from a person who is a party to the underlying lawsuit, settlement agreement or wc claim; The periodic payments are fixed and determinable at the time of payment; The periodic payments cannot be accelerated, deferred, increased or decreased by the recipient; The assignee’s obligation on account of the personal injuries or sickness is no greater than that of the assignor; and The periodic payments are excludable from the gross income of the recipient under Sec. 104.

Where it all Started A settling plaintiff with vested rights under a trust fund that are “greater than those of a general creditor” may be considered to have an economic benefit to the income under Sproull.

1988 Amendment to Section 130 When Section 130 was originally enacted, the statute provided that the party making a qualified assignment could not assign payment rights “greater than those of a general creditor.” An amendment to Section 130 in 1988 removed the “greater than those of a general creditor” language so the rights of a person receiving a structured annuity has the authority to enforce payments and the their authority is not limited by the tax law. The 1988 amendment states that “no amount is currently includable in the recipient’s income solely because the recipient is provided creditor rights that are greater than the rights of a general creditor.

Economic Benefit Doctrine as Applied to QSF Whether a QSF holding funds from a PI settlement involving a single plaintiff can accomplish a qualified assignment under Section 130. If the taxpayer has received an “economic benefit,” the funds held in the trust are immediately includable in the taxpayer’s gross income. Although a PI settlement may be excluded from income under Section 104(a)(2), the income generated from the fund may be subject to income tax.

Is the QSF a Party to the Lawsuit? There cannot be a qualified assignment since the assignee has not assumed a liability from a person who is a “party to the lawsuit or settlement. In case of a QSF, a “transferor” is a person that transfers money or property to the QSF to resolve or satisfy claims against another person. If the claimant, under the economic benefit doctrine, is considered to have received the settlement proceeds at the time of payment to the QSF, then the transferor would be the claimant and not the defendant. As a result, the requirements of Rev. Proc. 93-34 would not be satisfied.

Rev. Proc. 93-34 The IRS issued Rev. Proc. 93-34 to clarify rules as to when a DSF or a QSF will be considered a “party to the suit or agreement” under Section 130.

Rev. Proc. 93-34 A qualified settlement fund will be treated as “a party to the suit or agreement” within the meaning of Section 130(c)(1) of the Code if each of the following requirements are satisfied: 1. the claimant agrees in writing to the assignee’s assumption of the qualified settlement fund’s obligation to make periodic payments to the claimant; 2. the assignment is made with respect to a claim on account of a physical injury or physical sickness; 3. each qualified funding asset purchased by the assignee in connection with the assignment by the QSF relates to the liability to a single claimant to make periodic payments of damages; 4. the assignee is not related to the transferor (or transferors) to the QSF within the meaning of Sections 267 or 707(b)(1); 5. the assignee is neither controlled by, nor controls, directly or indirectly, the QSF

Nothing Prohibiting a Single Plaintiff Like Section 468B which refers to “one or more claims”, Rev. Proc. 93-34 does not restrict its application to multiple plaintiffs. It specifically refers to “a claim” and a “liability to a single claimant.”

Order of Events Petition court to approve creation of QSF, and appoint independent trustee. Defendant’s liability to the plaintiff is assigned to the trustee of the QSF in exchange for a full and final release of the defendant and the defendant’s insurance carrier. Money is paid into the trust and defendant has no further involvement. Remember, this is only a problem if you are going to structure part of the settlement. The QSF as “a party to the lawsuit” executes a “qualified assignment under Section 130.

Additional Factors Does it help if there are claims and liens to resolve in the case ? Does it help if at the time of the settlement, it is unknown if the settlement will be paid directly to the plaintiff on to a SNT? Does it help if the plaintiff does not have capacity and court approval of the settlement is necessary? Does it help if the court order creating the QSF requires prior court approval of any payment?

Is there a new Rev. Proc or Ruling in Our Future? Several requests have been made to the IRS to clarify its position on a single plaintiff QSF and to issue a new Rev. Proc. The requests have been pending since for more than three years. Don’t look for any legislation. Will not get the IRS to issue a PLR.