U.S. Code > Title 26 Internal Revenue Code > Subtitle E—Alcohol, Tobacco, and Certain Other Excise Taxes (§§ 5001—5891) > CHAPTER 55—STRUCTURED SETTLEMENT FACTORING TRANSACTIONS (§ 5891) > § 5891. Structured settlement factoring transactions

§ 5891. Structured settlement factoring transactions

(a) Imposition of tax
There is hereby imposed on any person who acquires directly or indirectly structured settlement payment rights in a structured settlement factoring transaction a tax equal to 40 percent of the factoring discount as determined under subsection (c)(4) with respect to such factoring transaction.
(b) Exception for certain approved transactions
(1) In general
The tax under subsection (a) shall not apply in the case of a structured settlement factoring transaction in which the transfer of structured settlement payment rights is approved in advance in a qualified order.
(2) Qualified order
For purposes of this section, the term “qualified order” means a final order, judgment, or decree which—
(A) finds that the transfer described in paragraph (1)—
(i) does not contravene any Federal or State statute or the order of any court or responsible administrative authority, and
(ii) is in the best interest of the payee, taking into account the welfare and support of the payee’s dependents, and
(B) is issued—
(i) under the authority of an applicable State statute by an applicable State court, or
(ii) by the responsible administrative authority (if any) which has exclusive jurisdiction over the underlying action or proceeding which was resolved by means of the structured settlement.
(3) Applicable State statute
For purposes of this section, the term “applicable State statute” means a statute providing for the entry of an order, judgment, or decree described in paragraph (2)(A) which is enacted by—
(A) the State in which the payee of the structured settlement is domiciled, or
(B) if there is no statute described in subparagraph (A), the State in which either the party to the structured settlement (including an assignee under a qualified assignment under section 130) or the person issuing the funding asset for the structured settlement is domiciled or has its principal place of business.
(4) Applicable State court
For purposes of this section—
(A) In general
The term “applicable State court” means, with respect to any applicable State statute, a court of the State which enacted such statute.
(B) Special rule
In the case of an applicable State statute described in paragraph (3)(B), such term also includes a court of the State in which the payee of the structured settlement is domiciled.
(5) Qualified order dispositive
A qualified order shall be treated as dispositive for purposes of the exception under this subsection.
(c) Definitions
For purposes of this section—
(1) Structured settlement
The term “structured settlement” means an arrangement—
(A) which is established by—
(i) suit or agreement for the periodic payment of damages excludable from the gross income of the recipient under section 104 (a)(2), or
(ii) agreement for the periodic payment of compensation under any workers’ compensation law excludable from the gross income of the recipient under section 104 (a)(1), and
(B) under which the periodic payments are—
(i) of the character described in subparagraphs (A) and (B) of section 130 (c)(2), and
(ii) payable by a person who is a party to the suit or agreement or to the workers’ compensation claim or by a person who has assumed the liability for such periodic payments under a qualified assignment in accordance with section 130.
(2) Structured settlement payment rights
The term “structured settlement payment rights” means rights to receive payments under a structured settlement.
(3) Structured settlement factoring transaction
(A) 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.
(B) Exception
Such term shall not include—
(i) the creation or perfection of a security interest in structured settlement payment rights under a blanket security agreement entered into with an insured depository institution in the absence of any action to redirect the structured settlement payments to such institution (or agent or successor thereof) or otherwise to enforce such blanket security interest as against the structured settlement payment rights, or
(ii) a subsequent transfer of structured settlement payment rights acquired in a structured settlement factoring transaction.
(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.
(5) Responsible administrative authority
The term “responsible administrative authority” means the administrative authority which had jurisdiction over the underlying action or proceeding which was resolved by means of the structured settlement.
(6) State
The term “State” includes the Commonwealth of Puerto Rico and any possession of the United States.
(d) Coordination with other provisions
(1) In general
If the applicable requirements of sections 72, 104 (a)(1), 104 (a)(2), 130, and 461 (h) were satisfied at the time the structured settlement involving structured settlement payment rights was entered into, the subsequent occurrence of a structured settlement factoring transaction shall not affect the application of the provisions of such sections to the parties to the structured settlement (including an assignee under a qualified assignment under section 130) in any taxable year.
(2) No withholding of tax
The provisions of section 3405 regarding withholding of tax shall not apply to the person making the payments in the event of a structured settlement factoring transaction.