Internal Revenue Code, Section 130 Certain Personal Injury Liability Agreements

This section of the Code, added by the Periodic Payment Settlement Act of 1982, permits the amount of money used to purchase an annuity or government obligation to fund payments of a settlement agreement for a personal injury suit to be excluded from the assignee’s gross income. The Taxpayer Relief Act (formerly called the Balanced Budget Act) of 1997 added workers’ compensation payments under IRC § 104(a)(1) to the language of IRC § 130, making them eligible for qualified assignment the same as physical injury or physical sickness tort claim payments under IRC § 104(a)(2), but applicable to claims under workmen’s compensation acts filed after the date of the enactment of the Taxpayer Relief Act (August 5, 1997).

(a) In General: Any amount received for an agreement to a qualified assignment shall not be included in gross income to the extent that such amount does not exceed the aggregate cost of any qualified funding assets.

(b) Treatment of Qualified Funding Asset: In the case of any qualified funding asset:

(1) the basis of such asset shall be reduced by the amount excluded from gross income under subsection (a) by reason of the purchase of such asset, and

(2) any gain recognized on a disposition of such asset shall be treated as ordinary income.

(c) Qualified Assignment: For the purpose of this section, the term “Qualified Assignment” means any assignment of a liability to make periodic payments as damages (whether by suit or agreement) on account of personal injury or sickness or as compensation under any workmen’s compensation act:

(1) if the assignment assumes such liability from a person who is party to the suit or agreement or the workmen’s compensation claim, and

(2) if:

(a) such payments are fixed and determinable as to amount and time of payment,

(b) such periodic payments cannot be accelerated, deferred increased or decreased by the recipient as such payments,

(c) the assignee does not provide to the recipient of such payments rights against the assignee which are greater than those of a general creditor,

(d) the assignee’s obligation on account of the personal injuries or sickness is no greater than the obligation of the person who assigned the liability, and

(e) such periodic payments are excludable from the gross income of the recipient under paragraph (1) or (2) of section 104(a).

(d) Qualified Funding Asset: For purposes of this section, the term “Qualified Funding Asset” means any annuity contract issued by a company licensed to do business as an insurance company under the laws of any State, or any obligation of the United States, if:

(1) such annuity contract or obligation is used by the assignee to fund periodic payments under any qualified assignment,

(2) the periods of the payments under the annuity contract or obligation are reasonably related to the periodic payments under the qualified assignment, and the amount of any such payment under the contract or obligation does not exceed the periodic payment to which it relates.

(3) such annuity contract or obligation is designated by the taxpayer (in such manner as the secretary shall by regulations prescribe) as being taken into account under this section with respect to such qualified assignment, and

(4) such annuity contract or obligation is purchased by the taxpayer not more than sixty days before the date of the qualified assignment and not later than sixty days after the date of such assignment.

NOTE: Tax laws and rulings are subject to change at any time.

By Richard B. Risk, Jr., Esq., and reprinted with expressed permission.