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In a series of twelve Private Letter Rulings (which cannot be cited as precident) the IRS has ruled that the sale of settlement rights received by the survivors and/or decedents estates will be considered non-taxable.
In the case, the estates of those killed sued and received a financial award for the wrongful death and intentional infliction of emotional distress. The estates were granted summary judgement by the palintiffs and awarded an unstated aggregate recovery of compensatory damages, interest, and putnative damages.
The defendent appealed the summary judgement, and while on appeal, the estates/beneficiaries sold the rights to the award to an investor for an immediate cash payment. The estates/beneficiaries looked to the IRS for guidance concening the taxability of this transaction.
The IRS looked at §104(a)(2) and Regulation §1.104-1(c) which governs that awards received on account of personal physical injury or sickness are non-taxable. Additionally, §1605 of the Small Business Job Protection Act of 1996 expands the definition to include those pertaining to the wrongful death and emotional distress attributable to a physical injury.
In general, if you are trading the rights to a future payment, the lump-sum payment will maintain the same tax characteristics as the future payment. In the case of a lottery winner, the trade of annuity rights for a lump-sum causes ordinary income. This has been taken through the courts, as many lottery winners attempted to modify the tax characteristics by claiming that it shoudl be a capital gain transaction.
Citations: PLR200942007 (Jul. 06, 2009)
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Aaron Blau, E.A. is the Vice President of the Central Arizona Chapter of Enrolled Agents and a member of the Government Relations Committee of the National Association of Enrolled Agents. The opinions and ideas expressed here are in no way representative of the official position of the National Association of Enrolled Agents, Arizona Society of Enrolled Agents or the Central Arizona Chapter of Enrolled Agents.
For official comments, please e-mail NAEA Director of Communications at mlockwood@naea.org or Arizona Society president stefaniecampbell@aztaxpros.org.
IRS CIRCULAR 230 DISCLOSURE:
"To ensure compliance with the requirements imposed by the IRS, we inform you that, to the extent this communication (or any attachment) addresses any tax matter, it was not written to be (and may not be) relied upon to (i) avoid tax-related penalties imposed under the Internal Revenue Code, or (ii) promote, market or recommend to another party any transaction or matter addressed herein (or in any such attachment). In addition, nothing herein is intended to convey an expression of an opinion as to the likelihood a tax position would ultimately prevail if challenged by the IRS. This communication is intended solely for the person to whom it is addressed; no one else should rely on the tax advice provided herein. The person to whom this advice is addressed is under no obligation to keep the advice or matters related to the advice confidential."
For official comments, please e-mail NAEA Director of Communications at mlockwood@naea.org or Arizona Society president stefaniecampbell@aztaxpros.org.
IRS CIRCULAR 230 DISCLOSURE:
"To ensure compliance with the requirements imposed by the IRS, we inform you that, to the extent this communication (or any attachment) addresses any tax matter, it was not written to be (and may not be) relied upon to (i) avoid tax-related penalties imposed under the Internal Revenue Code, or (ii) promote, market or recommend to another party any transaction or matter addressed herein (or in any such attachment). In addition, nothing herein is intended to convey an expression of an opinion as to the likelihood a tax position would ultimately prevail if challenged by the IRS. This communication is intended solely for the person to whom it is addressed; no one else should rely on the tax advice provided herein. The person to whom this advice is addressed is under no obligation to keep the advice or matters related to the advice confidential."
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