Internal Revenue Code, Section 5891 Structured Settlement Factoring Transactions

This section was added to the Code effective January 23, 2002, imposing a 40 percent tax on the “factoring discount” (a term of art defined in this statute) in any transaction not pre-approved by an “applicable state court.” The jurisdiction can be either the state in which the payee is domiciled or in the state in which either the party to the structured settlement (usually the assignee) or the person issuing the funding asset (usually an annuity) is domiciled. More than two-thirds of the states have enacted “applicable state statutes.” The state court must determine that the transfer does not contravene any federal or state statute or court order, and that it is “in the best interest of the payee, taking into account the welfare and support of the payee’s dependents.”

(a) IMPOSITION OF TAX—There is hereby imposed on any person who acquires directly or indirectly structured settlement payment rights in a structured settlementfactoring transaction a tax equal to 40 percent of the factoring discount as determined under subsection (c)(4) with respect to such factoring transaction.

(c)(4) FACTORING DISCOUNT—The term “factoring discount” means an amount equal to the excess of—

(A) the aggregate undiscounted amount of structured settlement payments being acquired in the structured settlement factoring transaction, over
(B) the total amount actually paid by the acquirer to the person from whom such structured settlement payments are acquired.

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

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