[Congressional Record Volume 144, Number 101 (Friday, July 24, 1998)]
[Extensions of Remarks]
[Pages E1441-E1442]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                  STRUCTURED SETTLEMENT PROTECTION ACT

                                 ______
                                 

                         HON. E. CLAY SHAW, JR.

                               of florida

                    in the house of representatives

                         Friday, July 24, 1998

  Mr. SHAW. Mr. Speaker, Mr. Speaker, today I rise along with my 
colleague Mr. Stark and a broad bipartisan group of our colleagues from 
the Ways and Means Committee to introduce the Structured Settlement 
Protection Act.
  The Act addresses serious public policy concerns that are raised by 
transactions in which so-called factoring companies purchase recoveries 
under structured settlements from injured victims.
  Recently there has been dramatic growth in these transactions in 
which injured victims are induced by factoring companies to sell off 
future structured settlement payments intended to cover ongoing living 
and medical needs in exchange for a sharply-discounted lump sum that 
then may be dissipated, placing the injured victim in the very 
predicament the structured settlement was intended to avoid.
  As long-time supporters of structured settlements and the 
congressional policy underlying such settlements, we have grave 
concerns that these factoring transactions directly undermine the 
policy of the structured settlement tax rules. The Treasury Department 
shares these concerns.
  Because the purchase of structured settlement payments by factoring 
companies so directly thwarts the congressional policy underlying the 
structured settlement tax rules and raises such serious concerns for 
structured settlements and injured victims, it is appropriate to deal 
with these concerns in the tax context.
  Accordingly, we are proposing legislation to impose a substantial 
excise tax on the factoring company that purchases the structured 
settlement payments from the injured victim. The excise tax would be 
subject to an exception for genuine court-approved hardship cases to 
protect the limited instances of true hardship.
  The following is a detailed discussion of the bill's provisions.

                               Background

       In acting to address the concerns over factoring companies 
     that purchase structured settlement payments from injured 
     victims the Treasury Department noted that: ``Congress 
     enacted favorable tax rules intended to encourage the use of 
     structured settlements--and conditioned such tax treatment on 
     the injured person's inability to accelerate, defer, increase 
     or decrease the periodic payments--because recipients of 
     structured settlements are less likely than recipients of 
     lump sum awards to consume their awards too quickly and 
     require public assistance.'' (U.S. Department of the 
     Treasury, General Explanations of the Administration's 
     Revenue Proposals (Feb. 1998), p. 122).
       Treasury then observed that by enticing injured victims to 
     sell off their future structured settlement payments in 
     exchange for a heavily discounted lump sum that may then be 
     dissipated: ``These `factoring transactions' directly 
     undermine the Congressional objective to create an incentive 
     for injured persons to receive periodic payments as 
     settlements of personal injury claims.'' (Id., at p. 122 
     [emphasis added].)
       The Joint Tax Committee's analysis of the issue echoes 
     these concerns: ``Transfer of the payment stream under a 
     structured settlement arrangement arguably subverts the 
     purpose of the Code to promote structured settlements for 
     injured persons. (Joint Committee on Taxation, Description of 
     Revenue Provisions Contained in the President's Fiscal Year 
     1999 Budget Proposal (JCS-4-98), (February 24, 1998), p. 
     223).
       The Treasury Department in the Administration's FY 1999 
     Budget has proposed a 20-percent excise tax on factoring 
     companies that purchase structured settlement payments from 
     injured victims. Under the Administration's proposal, ``any 
     person purchasing (or otherwise acquiring for consideration) 
     a structured settlement payment stream would be subject to a 
     20 percent excise tax on the purchase price, unless such 
     purchase is pursuant to a court order finding that the 
     extraordinary and unanticipated needs of the original 
     recipient render such a transaction desirable.'' (Treasury 
     General Explanation, at p. 122). The proposal would apply to 
     transfers of structured settlement payments made after date 
     of enactment.

                         Description of the Act


 1. Stringent Excise Tax on Persons Who Acquire Structured Settlement 
                   Payments in Factoring Transactions

       In its analysis of the Administration's proposal, the Joint 
     Tax Committee notes the potential concern that in some cases 
     the imposition of a 20-percent excise tax may result in the 
     factoring company passing the tax along by reducing even 
     further the already-heavily discounted lump sum paid to the 
     injured victim for his or her structured settlement payments. 
     The Joint Committee notes that ``[o]ne possible response to 
     the concern relating to excessively discounted payments might 
     be to raise the excise tax to a level that is certain to stop 
     the transfers (perhaps 100 percent). . . .'' (Joint committee 
     on Taxation, Description of Revenue Provisions Contained in 
     the President's Fiscal Year 1999 Budget Proposal (JCS-4-98) 
     (February 4, 1998), p. 223).
       Factoring company purchases of structured settlement 
     payments so directly subvert the Congressional policy 
     underlying structured settlement and raise such serious 
     concerns for structured settlement and the injured victims 
     that it is appropriate to impose on the factoring company a 
     more stringent excise tax rate applied against the amount of 
     the discount reflected in the factoring transaction (subject 
     to a limited exception described below for genuine court-
     approved hardships).
       Accordingly, the Act would impose on the factoring company 
     that acquires structured settlement payments directly or 
     indirectly from the injured victim an excise tax equal to 50 
     percent of the difference between (I) the total amount of the 
     structured settlement payments purchased by the factoring 
     company, and (ii) the heavily-discounted lump sum paid the by 
     the factoring company to the injured victim.
       Similar to the stiff excise taxes imposed on prohibited 
     transactions in the private foundation and pension context--
     which can range as high as 100 to 200 percent--this stringent 
     excise tax is necessary to address the very serious public 
     policy concerns raised by structured settlement factoring 
     transactions.
       Unlike the Administration's proposed tax imposed on the 
     purchase price paid by the factoring company, the excise tax 
     imposed on the factoring company under the Act would use a 
     more stringent tax rate of 50 percent and would apply to the 
     excess of the total amount of the structured settlement 
     payments purchased by the factoring company over the heavily-
     discounted lump sum paid to the injured victim.
       The excise tax under the Act would apply to the factoring 
     of structured settlements in tort cases and in workers' 
     compensation.
       A structured settlement factoring transaction subject to 
     the excise tax is broadly defined under the Act as a transfer 
     of structured settlement payment rights (including portions 
     of payments) made for consideration by means of sale, 
     assignment, pledge, or other form of alienation or 
     encumbrance for consideration.


   2. Exception from Excise Tax for Genuine, Court-Approved Hardship

       The stringent excise tax would be coupled with a limited 
     exception for genuine, court-approved financial hardship 
     situations. Drawing upon the hardship standard enunciated in 
     the Treasury proposal, the excise tax would apply to 
     factoring companies in all structured settlement factoring 
     transactions except those in which the transfer of structured 
     settlement payment rights (1) is otherwise permissible under 
     applicable Federal and State law and (2) is undertaken 
     pursuant to the order of a court (or where applicable, an 
     administrative authority) finding

[[Page E1442]]

     that ``the extraordinary, unanticipated, and imminent needs 
     of the structured settlement recipient or his or her spouse 
     or dependents render such a transfer appropriate.''
       This exception is intended to apply to the limited number 
     of cases in which a genuinely ``extraordinary, unanticipated, 
     and imminent hardship'' has actually arisen and been 
     demonstrated to the satisfaction of a court (e.g., serious 
     medical emergency for a family member). In addition as a 
     threshold matter the transfer of structured settlement 
     payment rights must be permissible under applicable law 
     including State law. The Act is not intended by way of the 
     hardship exception to the excise tax or otherwise to override 
     any Federal or State law prohibition or restriction on the 
     transfer of the payment rights or to authorize factoring of 
     payment rights that are not transferable under Federal or 
     State law. For example, the States in general prohibit the 
     factoring of workers' compensation benefits. In addition, the 
     State laws often prohibit or directly restrict transfers of 
     recoveries in various types of personal injury cases, such as 
     wrongful death and medical malpractice.
       The relevant court for purposes of the hardship exception 
     would be the original court which had jurisdiction over the 
     underlying action or proceeding that was resolved by means of 
     the structured settlement. In the event that no action had 
     been brought prior to the settlement, the relevant court 
     would be that which would have had jurisdiction over the 
     claim that is the subject of the structured settlement or 
     which would have jurisdiction by reason of the residence of 
     the structured settlement recipient. In those limited 
     instances in which an administrative authority adjudicates, 
     resolves, or otherwise has primary jurisdiction over the 
     claim (e.g., the Vaccine Injury Compensation Trust Fund), the 
     hardship matter would be the province of that applicable 
     administrative authority.


   3. Need to Protect Tax Treatment of Original Structured Settlement

       In the limited instances of extraordinary and unanticipated 
     hardship determined by court order to warrant relief under 
     the hardship exception, adverse tax consequences should not 
     be visited upon the other parties to the original structured 
     settlement. In addition, despite the anti-assignment 
     provisions included in the structured settlement agreements 
     and the applicability of a stringent excise tax on the 
     factoring company, there may be a limited number of non-
     hardship factoring transactions that still go forward. If the 
     structured settlement tax rules under I.R.C. Sec. Sec. 72, 
     130 and 461(h) has been satisfied at the time of the 
     structured settlement, the original tax treatment of the 
     other parties to the settlement--i.e., the settling defendant 
     (and its liability insurer) and the Code section 130 
     assignee--should not be jeopardized by a third party 
     transaction that occurs years later and likely unbeknownst to 
     these other parties to the original settlement.
       Accordingly, the Act would clarify that if the structured 
     settlement tax rules under I.R.C. Sec. Sec. 72, 130, and 
     461(h) had been satisfied at the time of the structured 
     settlement, the section 130 exclusion of the assignee, the 
     section 461(h) deduction of the settling defendant, and the 
     Code section 72 status of the annuity being used to fund the 
     periodic payments would remain undisturbed.
       That is, the assignee's exclusion of income under Code 
     section 130 arising from satisfaction of all of the section 
     130 qualified assignment rules at the time the structured 
     settlement was entered into years earlier would not be 
     challenged. Similarly, the settling defendant's deduction 
     under Code section 461(h) of the amount paid to the assignee 
     to assume the liability would not be challenged. Finally, the 
     status under Code section 72 of the annuity being used to 
     fund the periodic payments would remain undisturbed.
       The Act provides the Secretary of the Treasury with 
     regulatory authority to clarify the treatment of a structured 
     settlement recipient who engages in a factoring transaction. 
     This regulatory authority is provided to enable Treasury to 
     address issues raised regarding the treatment of future 
     periodic payments received by the structured settlement 
     recipient where only a portion of the payments have been 
     factored away, the treatment of the lump sum received in a 
     factoring transaction qualifying for the hardship exception, 
     and the treatment of the lump sum received in the non-
     hardship situation. It is intended that where the 
     requirements of section 130 are satisfied at the time the 
     structured settlement is entered into, the existence of the 
     hardship exception to the excise tax under the Act shall not 
     be construed as giving rise to any concern over constructive 
     receipt of income by the injured victim at the time of the 
     structured settlement.


 4. Tax Information Reporting Obligations With Respect to a Structured 
                    Settlement Factoring Transaction

       The Act would clarify the tax reporting obligations of the 
     person making the structured settlement payments in the event 
     that a structured settlement factoring transaction occurs. 
     The Act adopts a new section of the Code that is intended to 
     govern the payor's tax reporting obligations in the event of 
     a factoring transaction.
       In the case of a court-approved transfer of structured 
     settlement payments of which the person making the payments 
     has actual notice and knowledge, the fact of the transfer and 
     the identity of the acquirer clearly will be known. 
     Accordingly, it is appropriate for the person making the 
     structured settlement payments to make such return and to 
     furnish such tax information statement to the new recipient 
     of the payments as would be applicable under the annuity 
     information reporting procedures of Code section 6041 (e.g., 
     Form 1099-R), because the payor will have the information 
     necessary to make such return and to furnish such statement.
       Despite the anti-assignment restrictions applicable to 
     structured settlements and the applicability of a stringent 
     excise tax, there may be a limited number of non-hardship 
     factoring transactions that still go forward. In these 
     instances, if the person making the structured settlement 
     payments has actual notice and knowledge that a structured 
     settlement factoring transaction has taken place, the payor 
     would be obligated to make such return and to furnish such 
     written statement to the payment recipient at such time, and 
     in such manner and form, as the Secretary of the Treasury 
     shall by regulations provide. In these instances, the payor 
     may have incomplete information regarding the factoring 
     transaction, and hence a tailored reporting procedure under 
     Treasury regulations is necessary.
       The person making the structured settlement payments would 
     not be subject to any tax reporting obligation if that person 
     lacked such actual notice and knowledge of the factoring 
     transaction.
       Under the Act, the term ``acquirer of the structured 
     settlement payment rights'' would be broadly defined to 
     include an individual, trust, estate, partnership, company, 
     or corporation.
       The provisions of section 3405 regarding withholding would 
     not apply to the person making the structured settlement 
     payments in the event that a structured settlement factoring 
     transaction occurs.


                           5. Effective Date

       The provisions of the Act would be effective with respect 
     to structured settlement factoring transactions occurring 
     after the date of enactment of the Act.

     

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