Federal Tax Rules

There are several Internal Revenue Codes and rulings that regulate the concept of structured settlements. The Internal Revenue Service Code Section 104(a) allowed that damages for personal injuries were excludable from gross income. Revenue Ruling 79-220 raised the question of whether the total amount of the monthly payments received in settlement or just the discounted present value of such payments, which is the premium for the annuity, would be excluded from gross income. This ruling determined that the full amount of monthly payments should be excluded from the injured party’s gross income, tax free.

The Periodic Payment Settlement Act of 1982 codified all of the prior revenue rulings. In order to provide a tax-free benefit to the injured party, such periodic payments are required to be fixed and determinable as to amount and time of payment. They cannot be accelerated, deferred, increased, or decreased by the injured party. More importantly, this law allowed defendants to assign their obligations to make future periodic payments to a third party without retaining a future obligation to the injured party. This law enables the defendant to enter into a structured settlement without retaining a future obligation to the injured party because that obligation under the settlement agreement has been assigned to a third party.

On August 5, 1997, Section 130 of the Internal Revenue Code was amended to permit seriously-injured workers’ compensation injured parties the same financial security and stability and tax-free settlements that were previously available only to tort victims.