by John Darer CLU ChFC CSSC
Robert W. Wood, of San Francisco's Wood & Porter's Structured Settlements: Factoring Vs. Commute? was published in Tax Notes on December 25, 2006 as an apparent Merry Christmas gift to factoring companies. Commentary has recently appeared from Patrick Hindert and Matt Bracy. Time to get out the tweezers! 
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IRC Section 5891(c)(3)(A) defines a "structured settlement factoring transaction" broadly to include an "alienation for consideration," (see direct quote from the Code below) which should clearly include a commutation
" In general 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.
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"IRC Section 5891 also protects the taxpayer from negative tax consequences from such a "structured settlement factoring transaction," as long as the requirements of section 130 were met at the time of the settlement, which does not appear to require an ongoing prohibition on accelerations; otherwise, why use the words, "at the time of the settlement."?
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Section 130 only prohibits accelerations "by the recipient," which suggests that the recipient must have a right to effectuate the acceleration, which right I understand does not exist in the business model of Wood's major target.
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Without any analysis or reasoning, Mr. Wood treats the annuity owners the same as their affiliated annuity issuers; this seems like quite a leap.
- While Wood is a highly respected by many (including this writer) and a well published attorney, what is intriguing is that Wood's piece seems to be aimed squarely at an insurance company for whom it is believed that Wood was paid significant amounts of legal fees for his legal advice.
- Who paid Wood to write this article or what stimulus inspired him to write it? On or about November 17, 2006 I was contacted by a representative of a factoring company, who alleged that he had recently been undercut by a unit of Berkshire Hathaway (when the seller had agreed to the higher discount rate offered by the caller's company). Tough break for the factor, who had incurred Court costs, but better for the consumer? Fair or unfair? The caller proceeded to ask me about the original intent of the Periodic Payment Settlement Act of 1982 and spilled that he and or others had the theory that it turns out is borne out in Wood's publication. Hmmmmm…..
- Adding further to the intrigue is that at a time when most people were still in Egg Nog Fog, Patrick Hindert of S2KM had the time to write a very lengthy piece commenting on Wood's article. Was this just a scoop or was there some tie in or tip off? Hindert, a former President of the National Structured Settlement Trade Association ("NSSTA") and Executive Director of The Society of Settlement Planners ("SSP") has been unrelenting with "blinders on" in his writings and actions (see www.s2kmblog.typepad.com ), prioritizing factoring and transferring of structured settlement payments at or above all industry issues. At times industry insiders are curious as to what his motivation is and what side he is actually on. Hindert and I differ on our views of the industry as I related in Structured Settlement Market Definition-Point-Counterpoint in response to a presentation he made at the meeting of the National Association of Settlement Purchasers. Note the contact from the factoring rep was only days after Hindert's presentation and attendance at NASP.
- Why would an annuity issuer want to participate in such transactions? It's not hard to see when you have your obligees getting pillaged by some factoring companies discounting at rates of close to 20% (see my Structured Settlement Transfers What's Your Deep Discount Rate? Hindert himself told me at a Regional meeting of NSSTA in Washington in 2005 and on several other occasions that the annuity issuers or the assignees could put the factoring companies out of business, or severely hamper them, by doing it themselves (I have reason to believe that the same message was delivered to others), paying better rates and giving a better deal to consumers who found themselves in desperate circumstances. Even if the rate could be beaten by a third party factoring company then at least the consumer would have a rate ceiling.
As my readers know I am not opposed to the concept of factoring, which may be the only way an individual can access capital in certain select circumstances. I am however fervently opposed to the lack of regulation of such companies and their advertising practices which allow them to fly under the radar at a mocking advantage over regulated insurance agents, securities brokers and banks and at a crippling disadvantage to consumers. While some companies have set a positive example, or cleaned up their act, there remain a great number in the factoring industry whose abusive practices I have highlighted and will continue to expose in this forum.
I think it's egregious that any factoring company would charge a credit card type discount rate when the payment rights they are purchasing are from an annuity issuer rated "AAA" or "AA+". They then go out into the capital markets seeking money to support their purchases and brag about a AAA credit rating that is in great part based on the underlying assets.
Frankly if all settlement purchaser companies would drop their discount rates below 9%, keep their costs low and fair, ban the practice of factoring any structured settlement in force less than 2 years and stop the practice of advertising what they are not, the ride "on the road we travel" would be to a much better place.
In the meantime a PLR would probably be a good move.
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