[Congressional Record Volume 144, Number 136 (Friday, October 2, 1998)]
[Senate]
[Pages S11340-S11342]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. CHAFEE (for himself, Mr. Baucus, Mr. Grassley, Ms. 
        Moseley-Braun, Mr. Kerrey, and Mr. Rockefeller):
  S. 2543. A bill to amend the Internal Revenue Code of 1986 to impose 
an excise tax on persons who acquire structured settlement payments in 
factoring transactions, and for other purposes; to the Committee on 
Finance.


                  structured settlement protection act

 Mr. CHAFEE. Mr. President, today I am introducing legislation, 
together with Senators Baucus, Grassley, Moseley-Braun, Rockefeller, 
and Kerrey of Nebraska, the Structured Settlement Protection Act. 
Companion legislation has been introduced in the House as H.R. 4314, 
cosponsored by Representative Clay Shaw and Pete Stark and a broad 
bipartisan group of members of the House Ways and Means Committee.
  The Act protects structured settlements and the injured victims who 
are the recipients of the structured settlement payments from the 
problems caused by a growing practice known as structured settlement 
factoring.
  Structured settlements were developed because of the pitfalls 
associated with the traditional lump sum form of recovery in serious 
personal injury cases, where all too often a lump sum meant to last for 
decades or even a lifetime swiftly eroded away. Structured settlements 
have proven to be a very valuable tool. They provide long-term 
financial security in the form of an assured stream of payments to 
persons suffering serious, often profoundly disabling, physical 
injuries. These payments enable the recipients to meet ongoing medical 
and basic living expenses without having to resort to the social safety 
net.
  Congress has adopted special tax rules to encourage and govern the 
use of structured settlements in physical injury cases. By encouraging 
the use of structured settlements Congress sought to shield victims and 
their families from pressures to prematurely dissipate their 
recoveries. Structured settlement payments are nonassignable. This is 
consistent with worker's compensation payments and various types of 
Federal disability payments which are also non-assignable under 
applicable law. In each case, this is done to preserve the injured 
person's long-term financial security.

  I am very concerned that in recent months there has been sharp growth 
in so-called structured settlement factoring transactions. In these 
transactions, companies induce injured victims to sell off future 
structured settlement payments for a steeply-discounted lump sum, 
thereby unraveling the structured settlement and the crucial long-term 
financial security that it provides to the injured victim. These 
factoring company purchases directly contravene the intent and policy 
of Congress in enacting the special structured settlement tax rules. 
The Treasury Department shares these concerns as is evidenced with a 
similar proposal included in the Administration's FY 1999 budget.
  Court records from across the country are shedding light on factoring 
company purchases of structured settlement payments from gravely-
injured victims. Recent cases involve a quadriplegic in Oklahoma, a 
paraplegic in Texas, a person in Connecticut with traumatic brain 
injuries dating from childhood, and an injured worker receiving 
workers' compensation in Mississippi. Realizing the long-term risk 
being inflicted on these seriously-injured individuals, this 
legislation has the active support of the National Spinal Cord Injury 
Association, as well as the American Association of Persons With 
Disabilities (AAPD).
  The National Spinal Cord Injury Association recently wrote to the 
Chairman of the Finance Committee strongly supporting the legislation. 
They state: ``[o]ver the past 16 years, structured settlements have 
proven to be an ideal method for ensuring that persons with 
disabilities, particularly minors, are not tempted to squander 
resources designed to last years or even a lifetime. That is why the 
National Spinal Cord Injury Association is so deeply concerned about 
the emergence of companies that purchase payments intended for disabled 
persons at drastic discount. This strikes at the heart of the security 
Congress intended when it created structured settlements.''
  It is appropriate to address this problem through the federal tax 
system because these purchases directly contravene the Congressional 
policy reflected in the structured settlement tax rules and jeopardize 
the long-term financial security that Congress intended to provide for 
the injured victim. This problem is nationwide, and it is growing 
rapidly.
  Accordingly, the legislation we are introducing would impose 
substantial penalty tax on a factoring company that purchases the 
structured settlement payments from the injured victim. This is a 
penalty, not a tax increase. Similar penalties are imposed in a variety 
of other contexts in the Internal Revenue Code to discourage 
transactions that undermine Code provisions, such as private foundation 
prohibited transactions and greenmail. The factoring company would pay 
the penalty only if it engages in the transaction that Congress has 
sought to discourage. An exception is provided for genuine court-
approved hardship cases to protect the limited instances where a true 
hardship warrants the sale of a structured settlement.
  This bipartisan legislation, which is supported by the Treasury 
Department, should be enacted as soon as possible to stem this growing 
nationwide problem.
  Mr. President, I ask unanimous consent that the text of the bill and 
a summary be printed in the Record.
  There being no objection, the items were ordered to be printed in the 
Record, as follows:

                                S. 2543

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

[[Page S11341]]

     SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE.

       (a) Short Title.--This Act may be cited as the ``Structured 
     Settlement Protection Act''.
       (b) Amendment of 1986 Code.--Except as otherwise expressly 
     provided, whenever in this Act an amendment or repeal is 
     expressed in terms of an amendment to, or repeal of, a 
     section or other provision, the reference shall be considered 
     to be made to a section or other provision of the Internal 
     Revenue Code of 1986.

     SEC. 2. IMPOSITION OF EXCISE TAX ON PERSONS WHO ACQUIRE 
                   STRUCTURED SETTLEMENT PAYMENTS IN FACTORING 
                   TRANSACTIONS.

       Subtitle E is amended by adding at the end thereof the 
     following new chapter:

       ``CHAPTER 55--STRUCTURED SETTLEMENT FACTORING TRANSACTIONS

``Sec. 5891. Structured settlement factoring transactions.

     ``SEC. 5891. STRUCTURED SETTLEMENT FACTORING TRANSACTIONS.

       ``(a) Imposition of Tax.--There is hereby imposed on any 
     person who acquires directly or indirectly structured 
     settlement payment rights in a structured settlement 
     factoring transaction a tax equal to 50 percent of the 
     factoring discount as determined under subsection (c)(4) with 
     respect to such factoring transaction.
       ``(b) Exception for Court-Approved Hardship.--The tax under 
     subsection (a) shall not apply in the case of a structured 
     settlement factoring transaction in which the transfer of 
     structured settlement payment rights is--
       ``(1) otherwise permissible under applicable law, and
       ``(2) undertaken pursuant to the order of the relevant 
     court or administrative authority finding that the 
     extraordinary, unanticipated, and imminent needs of the 
     structured settlement recipient or the recipient's spouse or 
     dependents render such a transfer appropriate.
       ``(c) Definitions.--For purposes of this section--
       ``(1) Structured settlement.--The term `structured 
     settlement' means an arrangement--
       ``(A) established by--
       ``(i) suit or agreement for the periodic payment of damages 
     excludable from the gross income of the recipient under 
     section 104(a)(2), or
       ``(ii) agreement for the periodic payment of compensation 
     under any workers' compensation act that is excludable from 
     the gross income of the recipient under section 104(a)(1), 
     and
       ``(B) where the periodic payments are--
       ``(i) of the character described in subparagraphs (A) and 
     (B) of section 130(c)(2), and
       ``(ii) payable by a person who is a party to the suit or 
     agreement or to the workers' compensation claim or by a 
     person who has assumed the liability for such periodic 
     payments under a qualified assignment in accordance with 
     section 130.
       ``(2) Structured settlement payment rights.--The term 
     `structured settlement payment rights' means rights to 
     receive payments under a structured settlement.
       ``(3) Structured settlement factoring transaction.--The 
     term `structured settlement factoring transaction' means a 
     transfer of structured settlement payment rights (including 
     portions of structured settlement payments) made for 
     consideration by means of sale, assignment, pledge, or other 
     form of encumbrance or alienation for consideration.
       ``(4) Factoring discount.--The term `factoring discount' 
     means an amount equal to the excess of--
       ``(A) the aggregate undiscounted amount of structured 
     settlement payments being acquired in the structured 
     settlement factoring transaction, over
       ``(B) the total amount actually paid by the acquirer to the 
     person from whom such structured settlement payments are 
     acquired.
       ``(5) Relevant court or administrative authority.--The term 
     `relevant court or administrative authority' means--
       ``(A) the court (or where applicable, the administrative 
     authority) which had jurisdiction over the underlying action 
     or proceeding that was resolved by means of the structured 
     settlement, or
       ``(B) in the event that no action or proceeding was 
     brought, a court (or where applicable, the administrative 
     authority) which--
       ``(i) would have had jurisdiction over the claim that is 
     the subject of the structured settlement, or
       ``(ii) has jurisdiction by reason of the residence of the 
     structured settlement recipient.
       ``(d) Coordination With Other Provisions.--
       ``(1) In general.--In any case where the applicable 
     requirements of sections 72, 130, and 461(h) were satisfied 
     at the time the structured settlement was entered into, the 
     subsequent occurrence of a structured settlement factoring 
     transaction shall not affect the application of the 
     provisions of such sections to the parties to the structured 
     settlement (including an assignee under a qualified 
     assignment under section 130) in any taxable year.
       ``(2) Regulations.--The Secretary is authorized to 
     prescribe such regulations as may be necessary to clarify the 
     treatment in the event of a structured settlement factoring 
     transaction of amounts received by the structured 
     settlement recipient.''

     SEC. 3. TAX INFORMATION REPORTING OBLIGATIONS.

       Subpart B of part III of subchapter A of chapter 61 is 
     amended by adding at the end thereof the following new 
     section:

     ``SEC. 6050T. REPORTING REQUIREMENTS REGARDING STRUCTURED 
                   SETTLEMENT FACTORING TRANSACTIONS.

       ``(a) In General.--In the case of a transfer of structured 
     settlement payment rights in a structured settlement 
     factoring transaction--
       ``(1) described in section 5891(b) and of which the person 
     making the structured settlement payments has actual notice 
     and knowledge, such person shall make such return and furnish 
     such written statement to the acquirer of the structured 
     settlement payment rights as would be applicable under the 
     provisions of section 6041 (except as provided in subsection 
     (c) of this section), or
       ``(2) subject to tax under section 5891(a) and of which the 
     person making the structured settlement payments has actual 
     notice and knowledge, such person shall make such return and 
     furnish such written statement to the acquirer of the 
     structured settlement payment rights at such time, and in 
     such manner and form, as the Secretary shall by regulations 
     prescribe.
       ``(b) Coordination With Other Provisions.--The provisions 
     of this section shall apply in lieu of any other provisions 
     of this part to establish the reporting obligations of the 
     person making the structured settlement payments in the event 
     of a structured settlement factoring transaction. The 
     provisions of section 3405 regarding withholding shall not 
     apply to the person making the structured settlement payments 
     in the event of a structured settlement factoring 
     transaction.
       ``(c) Definition.--For purposes of this section, the term 
     `acquirer of the structured settlement payment rights' shall 
     include any person described in section 7701(a)(1).''

     SEC. 4. EFFECTIVE DATE.

       The amendments made by this Act shall be effective with 
     respect to structured settlement factoring transactions (as 
     defined in section 5891(c)(3) of the Internal Revenue Code of 
     1986, as added by this Act) occurring after the date of 
     enactment of this Act.
                                  ____


          Summary of the Structured Settlement Protection 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 settlements and raise such serious 
     concerns for structured settlements and the injured victims 
     that it is appropriate to impose a more stringent excise tax 
     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 by the factoring 
     company to the injured victim.
       Similar to the stuff excise taxes imposed on prohibited 
     transactions in the private foundation and pension contexts--
     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 proposal, the excise tax 
     imposed on the factoring company under this legislation would 
     use a more stringent tax rate of 50 percent and would apply 
     it 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 
     or 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

[[Page S11342]]

     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 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 hardship exception under this 
     legislation is not intended to override any Federal or State 
     law prohibition of 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, 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. Sections 72, 130 
     and 461(h) had 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. Sections 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 has 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, for purposes of the reporting 
     obligations, 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.
                                 ______