646 / Can a designated settlement fund (DSF) or qualified settlement fund (QSF) make a qualified assignment of its obligations to make periodic payments under a structured settlement?

Yes. If the DSF or QSF meets certain requirements, it can make a qualified assignment (see Q 645) of its obligations under a structured settlement. In order for an assignment of a defendant’s obligations under a structured settlement to constitute a “qualified assignment” for tax purposes, the IRC requires that the assignee assume the liability from an original party to the lawsuit or agreement.¹ The IRS has provided the following guidance for determining when a DSF or QSF can be treated as an original party for purposes of Section 130(c):

(1)     the plaintiff receiving periodic payments under the structured settlement must agree to the assignment by the DSF or QSF in writing,

(2)     the assignment must relate to a claim for personal physical injury or sickness and either (a) the claim is being satisfied under a DSF established pursuant to a court order that completely extinguishes the defendant’s tort liability with respect to the claim or (b) the claim is being satisfied under a QSF established to resolve or satisfy liability (whether contested or uncontested) that resulted from an event that has already occurred and given rise to at least one claim asserting liability,

(3)     each qualified funding asset (see Q 645) purchased by the assignee in connection with the assignment by the DSF or QSF relates to a liability to a single plaintiff to make periodic payments for damages,

(4)     the assignee is not related to the defendant who transferred the claim to the DSF or QSF, and

(5)     the assignee does not control the DSF or QSF.²

In addition to these requirements, the DSF or QSF must continue to satisfy all other requirements of IRC Section 130 in order for the assignment to be qualified.

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1.     IRC § 130(c).

2.     Rev. Proc. 93-34, 1993-28 IRB 49.