Historical Review of Changes Affecting Structured Settlements

1954     IRS Code Section 104 was created to ensure cash settlements of personal injury cases are tax exempt. It was revised to include settlements involving periodic payments in 1983.

1960s   The origin of periodic payments is associated with the Thalidomide tragedy of the 1960s (which caused severe birth defects), resulting in more claims than the manufacturers could pay. Periodic payments were first made by means of a trust, compensating the injured party to a greater degree than would have been possible through a lump sum cash settlement.

1979     Revenue Ruling 79-220. This is a letter written by the IRS to the public which serves as a guideline to assure that payments will flow tax-exempt on personal injury, structured settlement cases.

1983     Periodic Payment Act (Also known as 97-473 and Section 130). This act made the various tax rulings into law and created IRS Section 130 which allowed for the assignment of obligations to a third party.

1983     Private Ruling 8333035. This is a response from the IRS to a private party regarding the taxability of annuity benefits where the cost had been revealed.

1986     Tax Reform Act of 1986. This act separated personal and physical injuries, allowing only physical injuries to be assigned under Section 130. In addition, the act amended Section 72U, further defining the conditions under which annuity owners of non-qualified and workers’ compensation annuity policies would be taxed for the interest earned in any taxable year. This includes only owners which are not natural persons.

1988     The Technical and Miscellaneous Revenue Act of 1988 (TAMRA) removed language from Section 130 of the IRS Code that read “the assignee does not provide to the recipient of such payments rights against the assignee which are greater than those of a general creditor.” To date, there has been no ruling by the IRS to assure us of correct procedures to follow to ensure there are no adverse tax consequences for the plaintiff if he or she has a secured creditor status.

1991     Private Ruling 9125017. This is a response from the IRS to a private party regarding the taxability of annuity benefits where secured creditor status and a guarantee had been included.

1992     Private Ruling 9253045 was issued on an individual case where the plaintiff perfected a security interest in the annuity contract by filing notice in his state and in the assignment company’s state and had possession of the annuity issued by Integrity Life. The IRS ruled that this would not cause him to be taxed on the present value of the annuity contract in the year in which he received it.

1992     Section 468(B) covers in detail the tax treatment of money going in and out of Designated Settlement Funds and Qualified Settlement Funds.

1993     Revenue Procedure 93-34 allows physically injured individuals receiving settlements from mass tort claims (468(B)) to structure their settlements and allows the fund to assign its obligation to a third party.

1996     Small Business Job Protection Act of 1996 removed the exclusion of damages from gross income on damages received on punitive and non-physical injury awards.

1997     Balanced Budget Act of 1997 amended Section 130(c) to include assignment of worker’s compensation cases filed after 08/05/1997.