by John Darer® CLU ChFC MSSC RSP CLTC
Surprise! Surprise! The estimated tax revenue loss for structured settlement tax subsidy may not be as big as previously thought, after The Joint Committee on Taxation (JCT) released its Estimates of Federal Tax Expenditures.
Observes Patrick Hindert of S2KM:
“The first surprise: for what appears to be the first time, the JCT staff actually calculates an estimated tax revenue loss for the “exclusion of investment income from structured settlement arrangements” in its annual JCT Report.
The second surprise: the JCT Report estimates the structured settlement tax revenue loss to be “de minimis” – meaning less that $50 million for Fiscal Years 2010-2014 or less than $12.5 million per year.”
“Party pooper” Hindert notes that the revenue loss “appears especially small compared with statements from structured settlement and some settlement planning consultants aggressively promoting structured settlement tax savings for injury victims”. Is he (1) implying that the tax subsidy is not what it is cracked up to be, or (2) is he implying that not enough people are benefitting from the tax subsidy, or (3) is “Hedwig” simply using this as another gratuitous reason to trash structured settlement and settlement planning consultants?
In his 2009 paper titled “Justifying the Structured Settlement Tax Subsidy: The Use of Lump Sum Settlement Monies“, that was heavily promoted by Hindert,- NYU LLM tax candidate Jeremy Babener estimated the value of the subsidy to be between $360 million and $840 million per year. His paper suggested that an empirical study to justify the “structured settlement tax subsidy” might be necessary to support the overwhelming anecdotal evidence. I don’t think I’m alone in observing that Hindert aggressively used the Babener paper to aggressively promote strategic reevaluation of the structured settlement industry.
Hindert then explores how Babener derived his numbers (should one read that as ” how can one backpedal credibly” ?) In recent history Hindert made an outrageous miscalculation of the value of the potential damages* in the Spencer v Hartford case in order to trash the structured settlement industry).
The Longstanding Tax Exclusion for Personal Injury Damages
Origin with The Revenue Act of 1918
There is a long standing exclusion for personal injury damages. The Revenue Act of 1918 is the origin of the exclusion for personal injury** damages presently encapsulated in IRC Section 104(a)(2).
When one boils down a properly constructed personal injury structured settlement transaction, each of the future periodic payments is considered payment of damages under IRC 104(a)(2).
The current JCT estimate for the overall damages exclusion under 104(a)(2) 2010-2014 is $7.9 billion. THERE’S “the beef”.
Anyone Else want to Take a Swing at the Structured Settlement Tax Subsidy” Pinata?
Related Reading
“Taxing Structured Settlements” by Gregg Polsky and Brant J. Hellwig Boston College Law Review 39-94 January 1, 2010
Structured Settlements | Tax Benefits of Structured Settlements (4structures.com)
and Notes
* see Spencer v Hartford -2 April 7, 2009. Hindert estimated $712MM. The settlement paid was for about 1/10th that number just over one year later. See Spencer v Hartford Settlement: 10% of Predicted Damages Explained – Structured Settlements 4Real®Blog March 5, 2010
** current exclusion is “the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness”
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