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51 B.C. L. Rev. 39 (2010)
Taxing Structured Settlements

handle is hein.journals/bclr51 and id is 41 raw text is: TAXING STRUCTURED SETTLEMENTS GREGG D. POLSKY* BRANTJ. HELLWIG** Abstract: Congress has granted a tax subsidy to physically injured tort plaintiffs who enter into structured settlements. The subsidy allows these plaintiffs to exempt the investment yield imbedded within the structured settlement from federal income taxation. The apparent purpose of the subsidy is to encourage physically injured plaintiffs to invest, rather than presently consume, their litigation recoveries. Although the statutory sub- sidy by its terms is available only to physically injured tort plaintiffs, a growing structured settlement industry now contends that the same tax benefit of yield exemption is available to plaintiffs' lawyers and non- physically injured tort plaintiffs under general, common-law tax princi- ples. If the structured settlement industry is correct, then all tort plaintiffs and their lawyers may invest their litigation proceeds in a tax-free manner simply by using structured payment arrangements. Structured arrange- ments, therefore, would be far superior to traditional tax-favored retire- ment accounts (e.g., 401 (k)s, IRAs), which provide the same tax benefit of yield exemption but are subject to significant constraints. Accordingly, if proponents of structured arrangements are correct in their interpreta- tion of the tax law, these arrangements can be described as super-IRAs because they provide full yield exemption without any corresponding limitations or restrictions. This Article examines the taxation of struc- tured payment arrangements, ultimately concluding that the structured settlement industry's positions are unpersuasive. Nevertheless, because of the muddled state of the tax law on the issue, this Article recommends legislative and administrative action to close the yield-exemption loop- hole with respect to its unintended beneficiaries. INTRODUCTION A personal injury plaintiff traditionally receives compensation through a lump-sum payment from the defendant or its insurer. This lump sum could be paid pursuant to a judgment rendered by a court @ 2010 Gregg D. Polsky & Brant J. Hellwig. The authors thank Joseph Dodge and Adam Hirsch for providing useful comments on an earlier draft and Adam Scales for sup- plying background information regarding the structured settlement industry. * Sheila M. McDevitt Professor of Law, Florida State University College of Law. **' Associate Professor of Law, University of South Carolina School of Law. 39

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