639 / What are the tax consequences if a structured settlement is sold?
The 40 percent tax applies only to the “factoring discount.” The factoring discount is defined as the amount in excess of a fraction, the numerator of which is the aggregate undiscounted amount of structured settlement payments being acquired and the denominator of which is the total amount actually paid by the purchaser to the plaintiff who is selling the payment rights.2
The 40 percent tax does not apply if the sale of the structured settlement payment rights is approved in advance by a court order, which can result if the court finds that the sale is in the best interest of the plaintiff (as, for example, if the plaintiff needs the purchase price to pay medical expenses or support dependents).3 See Q 635 for more details.
1. IRC § 5891.
2. IRC §§ 5891(a), 5891(c)(4).