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IRS and Treasury Hold Public Hearing on topic of Section 104(a)(2)
Article by John J. McCulloch, JD, CSSC on February 23, 2010 Hearing by the IRS and Treasury
On February 23rd the IRS and Treasury held a public hearing on the proposed Regulations to Section 104(a)(2) of the Internal Revenue Code. the speakers giving testimony were John J. McCulloch of Integrated Financial Settlements, John Stanton of Hogan & Hartson, Dick Risk of the Risk Law Firm, Jack Meligan of Settlement Professionals and Ed Leyden representing the Consumers for Civil Justice.
This author spoke first on behalf of victims of sex abuse or molestation and long-term wrongful imprisonment as a representative of the structured settlement industry to get clarity surrounding those two groups of claimants. The problem is that Section 104(a)(2) requires but does not define a physical injury, and the nature of sex abuse and wrongful imprisonment often makes identification or reporting of physical injuries problematic. This author introduced into the testimony numerous studies on the long term impact, to both mental and physical well being, of both types of claims. Without specific guidance, not only can we not structure a settlement tax free, neither do the claimants know if their settlement, lump sum or structured settlement, is taxable or not. These claimants deserve clarity.
The arguments were well received by the IRS and Treasury but it remains to be seen if they will adopt the changes we proposed. One hurdle is a procedural challenge, as the proposed Regulations are only to drop the tort type rights requirement, but it was argued this would fit within the scope of such a proposal under a broad interpretation. After about 15 minutes of questions from the Service and Treasury, they urged us to seek help from Congress and Senate as well.
Dick Risk spoke next and asked the IRS to use the proposed regulations as an opportunity to clarify that section 468B qualified settlement funds remain tax free regardless of whether a plaintiff is aware of the amount of the settlement or is the only beneficiary of the fund. Risk stated that he believed a QSF cannot be funded by an insurance company affiliated with the defendant, increasing the plaintiff's control over the investment of the settlement amount and preventing the defendant from profiting in the transaction. Risk was asked by the panel if the mere threat of a QSF could provide plaintiffs with leverage in negotiations. Risk replied they do, but that defendants discourage their use by arguing that single-claimant QSFs are taxable under a constructive receipt/economic benefit doctrine. The panel suggested that Risk bring this issue up in April during comments for the next Priority Guidance Project List, rather than seek a change under the proposed 104 Regulations.
John Stanton spoke next on behalf of NSSTA and argued that the Section 104 regulations were being reviewed and it was not an appropriate place for a revision of the 468B rules. He stated the current system for structured settlements has worked well for a long time and should not be upset.
Ed Leyden followed and asked the government panel to change the proposed Regulations to clarify that the Section 104(a)(2) exemption applies to compensation for physical injury or illness even if physical contact was not the cause of the harm. This was generally supportive of this author's position.
Jack Meligan spoke last on the history of his firm, SPI, his creation of the SSP, his support for Risk's position, and how NSSTA doesn't represent all brokers. Meligan claimed that single claimant QSF's were exploding in use and that he has done over 200.