An explanation of IRS Code section 130 was given during discussions of possible taxation of companies that bought future payments under those structured settlements. “By enacting the PPSA, Congress expressed its support of structured settlements, and sought to shield victims and their families from pressures to prematurely dissipate their recoveries.” 145 Cong. Rec. S52281-01 (daily ed. May 13, 1999) (statement of Sen. Chaffee).
Congress was willing to afford such tax advantages based on the belief that the loss in income taxes would be more than made up by lower expenditures on public assistance programs for those who suffered significant injuries. A strict requirement for a structured settlement to qualify for this tax break was that the tort victim was barred from accessing their periodic payments before they came due. It was for this reason that the annuity had to be owned by another who had control over it. The tort victim could not be seen to have “constructive receipt” of the annuity funds prior to their periodic payments. If the tort victim could cash in the annuity at any time, it was possible that the IRS might find constructive receipt.
“Congress conditioned the favorable rules on a requirement that the periodic payments cannot be accelerated, deferred, increased or decreased by the injured person. Both the House Ways and Means and Senate Finance Committee Reports stated that the periodic payments as personal injury damages are still excludable from income only if the recipient is not in constructive receipt of or does not have the current economic benefit of the sum required to produce the periodic payments.”
Testimony of Tax Legislative Counsel Joseph M. Mikrut to the Subcommittee on Oversight of the Committee of Ways and Means, March 18, 1999. “These factoring transactions directly undermine the policy objective underlying the structured settlement tax regime, that of protecting the long term financial needs of injuries persons . . . “ (Id.)
Mr. Mikrut was testifying in favor of imposing a punitive tax on factoring companies that engaged in pursuit of structured settlement payments. Despite the use of non-assignment clauses in annuity contracts to secure the tax advantages for tort victims. companies cropped up that tried to advantage of these individuals in ”factoring” transactions, purchasing their periodic payments in return for a deeply discounted lump sump payment. Congress felt that factoring company purchases of structured settlement payments “so directly subvert the Congressional policy underlying structured settlements and raise such serious concerns for the injured victims,” that bills were proposed in both the Senate and the House to penalize companies which engage in such transactions. (Id.)