by John Darer CLU ChFC MSSC CeFT RSP CLTC
Structured attorney fees are the subject of a poorly worded blog post about an IRS Private Letter Ruling in a Legal blog
IRS Private Letter Ruling 199943002 is an older ruling that predates the introduction of variable structured settlements by Metropolitan Life Insurance Company
Here is an excerpt…
“Since Metlife received favorable tax guidance on periodic payments that were backed by the SP500 in 2003, many firms have successfully leveraged this practice to the betterment of their trial lawyers clients’ lives”.
But the Actual MetLife PLR was from October 29, 1999
Here is the actual question raised in the submission for what became IRS Private Letter Ruling 199943002 on October 29, 1999:
Periodic Payments Determined by “an Objective Formula”
Whether periodic payments of damages that are calculated pursuant to an objective formula based on the performance of the Standard & Poor’s 500 Stock Index and/or a mutual fund portfolio designed to achieve long-term growth of capital and moderate current income are “fixed and determinable as to amount and time of payment” under § 130(c)(2)(A)
The settlement agreement will require the defendant to make periodic payments both of a specified dollar amount (specified payments) and of a variable amount (variable payments) due on specific payment dates. The amounts of the variable payments will be calculated pursuant to an objective formula based on the performance of the Standard & Poor’s 500 Stock Index and/or a mutual fund portfolio designed to achieve long-term growth of capital and moderate current income. Under the objective formula the variable payments will increase if the net investment return of the portfolio is greater than the period equivalent of an assumed annual investment rate of percent and assumed annual equivalent expense charges of percent; will decrease if the net investment return is less than the period equivalent of percent; and will remain the same if the net investment return just equals the period equivalent of percent.
Key takeaways
- The S&P 500 does not back any structured settlements or periodic payments for structured attorney fees or structured settlements for plaintiffs.
- “Backed” and “based” are two different things. “Based on an objective formula based on the performance of the S&P 500” does not equal “backed by the S&P 500”.
- In the context of IRS PLR 199943002, the terms “objective formula” and “fixed and determinable” are more significant than the term ” Standard & Poors 500 Stock Index”
- The MetLife Private Letter Ruling was published in 1999 as is evident from the the plain text of the ruling and the number of the ruling, sourced directly from the IRS.
What is the S&P 500?
The Standard & Poor’s 500, often abbreviated as the S&P 500, is an unmanaged American stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ. The S&P 500 index components and their weightings are determined by S&P Dow Jones Indices.