[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]
TAX TREATMENT OF STRUCTURED SETTLEMENTS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON OVERSIGHT
of the
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
__________
MARCH 18, 1999
__________
Serial 106-12
__________
Printed for the use of the Committee on Ways and Means
U.S. GOVERNMENT PRINTING OFFICE
58-892 CC WASHINGTON : 1999
------------------------------------------------------------------------------
For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
COMMITTEE ON WAYS AND MEANS
BILL ARCHER, Texas, Chairman
PHILIP M. CRANE, Illinois CHARLES B. RANGEL, New York
BILL THOMAS, California FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York SANDER M. LEVIN, Michigan
WALLY HERGER, California BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana JIM McDERMOTT, Washington
DAVE CAMP, Michigan GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota JOHN LEWIS, Georgia
JIM NUSSLE, Iowa RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania KAREN L. THURMAN, Florida
WES WATKINS, Oklahoma LLOYD DOGGETT, Texas
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
A.L. Singleton, Chief of Staff
Janice Mays, Minority Chief Counsel
______
Subcommittee on Oversight
AMO HOUGHTON, New York, Chairman
ROB PORTMAN, Ohio WILLIAM J. COYNE, Pennsylvania
JENNIFER DUNN, Washington MICHAEL R. McNULTY, New York
WES WATKINS, Oklahoma JIM McDERMOTT, Washington
JERRY WELLER, Illinois JOHN LEWIS, Georgia
KENNY HULSHOF, Missouri RICHARD E. NEAL, Massachusetts
J.D. HAYWORTH, Arizona
SCOTT McINNIS, Colorado
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public
hearing records of the Committee on Ways and Means are also published
in electronic form. The printed hearing record remains the official
version. Because electronic submissions are used to prepare both
printed and electronic versions of the hearing record, the process of
converting between various electronic formats may introduce
unintentional errors or omissions. Such occurrences are inherent in the
current publication process and should diminish as the process is
further refined.
C O N T E N T S
__________
Page
Advisory of March 11, 1999, announcing the hearing............... 2
WITNESSES
U.S. Department of the Treasury, Joseph M. Mikrut, Tax
Legislative Counsel............................................ 8
______
National Association of Settlement Purchasers:
Hon. John E. Chapoton........................................ 15
Donna Kucenski............................................... 46
Timothy J. Trankina.......................................... 15
National Spinal Cord Injury Association, Thomas H. Countee, Jr... 51
National Structured Settlements Trade Association, and Little,
Meyers, Garretson & Associates, Thomas W. Little............... 36
Peachtree Settlement Funding, Timothy J. Trankina................ 15
SUBMISSIONS FOR THE RECORD
American Bankers Association, statement.......................... 73
American Council of Life Insurance, statement.................... 74
Facciani, Gerald D., Henderson, NV, statement.................... 76
J.G. Wentworth, Philadelphia, PA, statement...................... 77
Liberty Funding Corp., North Bergen, NJ:
Fury Nardone, letter......................................... 80
Doreen Kirchoff, letter...................................... 80
Lee Anne Rizzotto, letter.................................... 80
Lisa Terlizzi, letter........................................ 80
Stanton, John B., Hogan & Hartson, L.L.P., letter and attachments 82
TAX TREATMENT OF STRUCTURED SETTLEMENTS
----------
THURSDAY, MARCH 18, 1999
House of Representatives,
Subcommittee on Oversight,
Committee on Ways and Means,
Washington, DC.
The Subcommittee met, pursuant to call, at 1 p.m.,
in room B-318, Rayburn House Office Building, Hon. Amo
Houghton (Chairman of the Subcommittee) presiding.
[The advisory announcing the hearing follows:]
ADVISORY
FROM THE COMMITTEE ON WAYS AND MEANS
SUBCOMMITTEE ON OVERSIGHT
FOR IMMEDIATE RELEASE CONTACT: (202) 225-7601
March 11, 1999
No. OV-3
Houghton Announces Hearing on
Tax Treatment of Structured Settlements
Congressman Amo Houghton (R-NY), Chairman, Subcommittee on
Oversight of the Committee on Ways and Means, today announced that the
Subcommittee will hold a hearing on the tax treatment of structured
settlements. The hearing will take place on Thursday, March 18, 1999,
in room B-318 Rayburn House Office Building, beginning at 1:00 p.m.
Oral testimony at this hearing will be from invited witnesses only.
Witnesses will include an official from the U.S. Department of the
Treasury and representatives from the National Structured Settlements
Trade Association and the National Association of Settlement
Purchasers. However, any individual or organization not scheduled for
an oral appearance may submit a written statement for consideration by
the Committee and for inclusion in the printed record of the hearing.
BACKGROUND:
Present law provides tax-favored treatment both to the payor and
recipient of ``structured settlements'' for damages paid as a result of
personal injury. A structured settlement consists of a series of set
payments made over a determinable period of time for damages paid as a
result of personal injury.
Generally, section 130 of the Internal Revenue Code grants tax-
favored treatment to structured settlements payments. If the payments
qualify, the payor can deduct the amount of payments made to the
recipient, and the recipient can exclude the same amount from income.
To qualify for tax-favored treatment under section 130: (1) the
payments must be fixed as to amount and time, (2) the payments cannot
be accelerated, deferred, increased, or decreased by the recipient, (3)
the payor's obligation is no greater than the liable person's
obligation, and (4) the payments are excludable by the recipient as
those under section 104(a)(2) of the code.
In recent years, firms called ``factoring companies'' have
purchased from recipients the right to receive their periodic payments.
Generally, the recipient receives a lump-sum amount at a discount from
the present value of the payment stream. There is some question whether
these transactions violate section 130 by ``accelerating'' the
payments, calling into question the exclusion for the payor and whether
a portion of the payment may be includable as income to the recipient.
Critics of these transactions have also argued that factoring companies
take advantage of the recipients who may depend on the flow of income.
Those who favor such transactions contend that they do not violate
section 130 and that some recipients are well-served by the opportunity
to receive lump-sum payments.
The President, in his fiscal year 2000 budget, proposed an excise
tax of 40 percent on the difference between the amount paid by the
factoring company and the value of the acquired income stream. The
proposal included an exception for purchases entered into under court
order finding of hardship.
Representatives E. Clay Shaw, Jr., (R-FL) and Fortney ``Pete''
Stark, (D-CA) introduced H.R. 263, a bill which provides for a 50
percent excise tax on the discount with an exception for court-approved
hardship to the recipient.
In announcing the hearing, Chairman Houghton stated: ``When
Congress last addressed the tax treatment of structured settlements, it
could not have foreseen the market that currently exists in the
purchase of structured settlements. It is timely and appropriate that
the Subcommittee examine the tax treatment of these transactions. I am
looking forward to hearing both sides of this debate.''
FOCUS OF THE HEARING:
The hearing will focus on the tax treatment of structured
settlements and legislative proposals to alter the tax treatment of the
purchase of structured settlements.
DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:
Any person or organization wishing to submit a written statement
for the printed record of the hearing should submit six (6) single-
spaced copies of their statement, along with an IBM compatible 3.5-inch
diskette in WordPerfect 5.1 format, with their name, address, and
hearing date noted on a label, by the close of business, Thursday,
April 1, 1999, to A.L. Singleton, Chief of Staff, Committee on Ways and
Means, U.S. House of Representatives, 1102 Longworth House Office
Building, Washington, D.C. 20515. If those filing written statements
wish to have their statements distributed to the press and interested
public at the hearing, they may deliver 200 additional copies for this
purpose to the Subcommittee on Oversight office, room 1136 Longworth
House Office Building, by close of business the day before the hearing.
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witness, any written statement or exhibit submitted for the printed
record or any written comments in response to a request for written
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1. All statements and any accompanying exhibits for printing must
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2. Copies of whole documents submitted as exhibit material will not
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3. A witness appearing at a public hearing, or submitting a
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comments in response to a published request for comments by the
Committee, must include on his statement or submission a list of all
clients, persons, or organizations on whose behalf the witness appears.
4. A supplemental sheet must accompany each statement listing the
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the designated representative may be reached. This supplemental sheet
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The above restrictions and limitations apply only to material being
submitted for printing. Statements and exhibits or supplementary
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and the public during the course of a public hearing may be submitted
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Note: All Committee advisories and news releases are available on
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The Committee seeks to make its facilities accessible to persons
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call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four
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materials in alternative formats) may be directed to the Committee as
noted above.
Chairman Houghton. Good afternoon, ladies and gentlemen.
Thank you very much for being here.
We will begin the Ways and Means Subcommittee hearing on
the tax treatment of structured settlements. We are going to
review a matter that may be of little importance to most
taxpayers, but it is of great importance to many who have
experienced personal injuries. We are here, of course, to
review the tax treatment of structured settlements.
Structured settlements, in a word, are a series of set
payments made over a specific period of time for damages
incurred as a result of a personal injury. The Internal Revenue
Code provides tax-favored treatment to structured settlements.
There are some important limitations. For example, payments
must be fixed in amount and duration. The payments cannot be
accelerated, deferred, increased, or decreased by the
recipient.
In recent years, factoring companies have been purchasing
structured settlements and providing the recipients with lump-
sum payments. These transactions raise two important questions.
First of all, do they run afoul of the requirement that
recipients cannot accelerate payments? Second, do recipients
suffer by accepting a lump-sum payment at a discount, rather
than a guaranteed payment stream?
Both the administration and our colleagues, Mr. Shaw and
Mr. Stark, have proposed an excise tax to discourage these
transactions. So, today, we will hear from the administration
and from people on both sides of this debate.
But before hearing from the Treasury and my two associates,
I would like to yield to our ranking Democrat, Mr. Coyne.
Mr. Coyne. Thank you, Mr. Chairman.
I just want to point out that I am a cosponsor of Mr.
Stark's and Mr. Shaw's legislation. I would just like to submit
my statement for the record, and yield to Mr. Stark for his
statement.
Chairman Houghton. Absolutely.
[The opening statement follows:]
Opening Statement of Hon. William J. Coyne, a Representative in
Congress from the State of Pennsylvania
Today's hearing will focus on an issue which has generated
much attention in recent months--the proper tax treatment of
settlement agreements.
Current tax law provides for tax advantages to injured
parties choosing to receive their damage awards in the form of
structured settlements, rather than in lump sums.
The Congress decided many years ago, and correctly so, that
injured individuals should be encouraged to receive their
damage awards over time, as periodic payments. This insures
that they have the funds needed to meet their ongoing living
needs and medical costs.
More recently, questions have been raised about the
practice of ``factoring'' settlement agreements. In other
words, individuals have been selling their settlement award
payments in exchange for a lump-sum amount at a significant
discount.
One response to this situation has been legislation
introduced by Congressmen Shaw and Stark--H.R. 263. I have
joined in co-sponsoring this bill which would impose a 50
percent excise tax on factoring transactions. A similar
proposal has been offered by the Administration which we will
discuss further today.
The discussion this afternoon should be insightful. I
welcome our review of the tax policy concerns underlying
current law, and the business dynamics of the settlement
industry and factoring transactions.
As we proceed, I hope that we keep in the mind those for
whom this controversy really matters--those thousands of
injured individuals and their families.
Mr. Stark. Thank you. I hadn't meant to preempt Mr. Shaw.
Mr. Chairman, thank you.
I am here with my colleague, Mr. Shaw, because we are
concerned about an arrangement that has worked pretty well for
two decades.
I chaired the Select Revenue Measures Subcommitee when we
enacted this bill in 1982. I was skeptical then that the
finance sharks were out there just finding a way to reduce what
the courts might offer in a way of tort settlements.
But as we saw this unfold, it became apparent that there
was some great social value in a structured settlement in
protecting, particularly in protecting people who first of all
might not have had any acquaintance with handling large sums of
money or investing it, or indeed, budgeting it.
The stories of people who received large lump-sum
settlements and squandered them were equally heart rending,
some ended up back on welfare if they were in fact disabled. It
made great good sense then, and I think it makes great good
sense now.
The problem is that over the course of some years, people
with a great deal more understanding of the cost of things and
the value of things have found a way to arbitrage or buy these
payments at a discount. You are going to hear later, I'm sure,
in testimony, many tales of people whose lives have been
disrupted, if not destroyed by the fact that they in a very
unsophisticated way, squandered their benefits.
We are therefore, suggesting that what was originally a
social issue, a consumer protection issue, needs some fine-
tuning.
You may hear some testimony today that will indicate that
this ought not to be a tax issue. This is a consumer protection
issue. I would just like to suggest that it was no less a
consumer advocate than Russell Long, who I don't think ever saw
an issue of Consumer Reports in his life, but he used to say
that it ain't an issue of fairness.
We decided the winners and losers in this business. I guess
that is what we are here to do, to see whether we can even out
the score between the winners and losers. Russell Long also
said in regard to using the Tax Code to solve a problem, that
he could take the Tax Code and make water run uphill. I suspect
that he was correct.
I hope today that this Subcommittee will hear testimony
that will encourage all of you to support the legislation that
will reasonably protect these disadvantaged, and indeed, often
disabled individuals, that we have been trying to protect. I
know it's not often a tenet of my more conservative colleagues
to say that government has a duty to protect people from
themselves, but I think you are going to hear an awful lot of
evidence today to suggest that in these cases, we have been
doing the right thing.
I am pleased to be here with the author of this
legislation, Mr. Shaw. And thank you, Mr. Chairman, for having
this hearing.
Chairman Houghton. Before I turn to Mr. Shaw, do you have
any other testimony you would like to admit for the record?
Mr. Stark. Mr. Chairman, no.
Chairman Houghton. Just your statement?
Mr. Stark. Not at this point. Thank you.
Chairman Houghton. Fine.
[The opening statement follows:]
Opening Statement of Hon. Fortney Pete Stark, a Representative in
Congress from the State of California
Mr. Chairman, thank you for holding this hearing today.
I am here today with my colleague, Rep. Shaw, because we
are concerned that an arrangement that has worked very well for
almost two decades to compensate victims of serious, often
disabling, physical injuries is now being unwound. And it's
being unwound by companies out to make a fast buck at the
expense of injured victims. I was the chairman of the Ways and
Means subcommittee that considered the original bipartisan
legislation in 1982 to enact the structured settlement tax
rules. The Committee adopted a bipartisan proposal to provide
long-term financial protection to seriously injured victims and
their families, so that they would not have to turn to
taxpayer-financed assistance programs to meet their needs.
Today there is a troubling spread of structured settlement
factoring transactions which threaten that policy. Factoring
companies are enticing injured victims to sell off their
guaranteed stream of payments for quick--but sharply
discounted--cash. The long-term financial protection for the
victim and their family disappears.
The factoring companies assert that they are just providing
a financial service to people who need money. The public record
shows otherwise. Court records show that across the country the
factoring companies are buying up the financial futures of
paraplegics, quadriplegics, people with traumatic brain
injuries, permanently-disabled children who've just barely
reached the age of majority.
This completely frustrates what our Committee intended when
it adopted the original legislation to encourage structured
settlements. Chairman Archer has talked about rooting out
abuses and closing them down. This one we don't even have to
ferret out. It is right there in front of us, and it is time we
did something about it.
Rep. Shaw and I have introduced H.R. 263 as a solution to
the abuses at hand. Seventeen Ways and Means Members have
cosponsored this bill. Treasury supports it. The National
Spinal Cord Injury Association and the National Organization on
Disability have endorsed it.
I am hopeful that this hearing will prompt the favorable
consideration of HR 263 by the full committee of Ways and
Means. I thank my colleague, Rep. Shaw for his efforts to get
this bill enacted.
Chairman Houghton. Mr. Shaw.
Mr. Shaw. Thank you, Mr. Chairman. I thank you very much
for having this hearing and allowing me and Mr. Stark to
participate in support of H.R. 263, the Structured Settlement
Protection Act.
Mr. Stark and I, along with a broad bipartisan group of
colleagues, introduced this bill to address serious public
policy concerns that are raised by transactions in which so-
called factoring companies purchase recoveries under structured
settlements from injured victims.
Congress enacted structured settlement tax rules as an
incentive for injured victims to receive periodic payments as
settlements of personal injury claims. I was an original
cosponsor of that legislation, along with Mr. Stark. Congress
was concerned that injured victims would prematurely spend a
lump-sum recovery and eventually resort to the social safety
net. The integrity of the entire system is being undone by
factoring transactions. Injured victims are selling their
settlements to factoring companies, and I might say, at very
sharp discounts, for quick cash, spending it, and eventually
winding up on public assistance, leaving them in the very
predicament that structured settlements were set up to avoid.
These sales also create the risk that the special tax
treatment, accorded to the original structured settlement, no
longer applies after a sale. Thus, the uncertainty caused by
factoring transactions may hinder the use of structured
settlements themselves.
H.R. 263 addresses these concerns in the following manner.
To discourage factoring transactions, the bill imposes an
excise tax on the factoring company. Essentially, 50 percent of
the amount of the discount is being taxed. Because of the sharp
discounts at which many of these purchases are made, an excise
tax of 50 percent is necessary to act as a real deterrent to
factoring transactions.
The excise tax on a factoring company will not apply to a
sale of a structured settlement in a court-approved hardship.
The reason for this exclusion is simple. It is to provide for
flexibility for those injured victims that need it, and have a
genuine reason to sell their settlements.
Finally, the bill clarifies that a subsequent transfer of
structured settlement payments will not jeopardize the original
tax treatment of the other parties to the settlement; namely,
the settling defendant and the financial institution assuming
the liability to make periodic payments.
If the parties originally complied with the structured
settlement tax rules when entering into the structured
settlement, then their tax situation should not be changed on a
subsequent sale of the settlement and over which they have no
control.
The way to deal with the abuses involved in factoring
transactions, the aggressive sales practices, and the sharp
discounts is not through State consumer protection laws or
through lawsuits. Because the purchase of structured settlement
payments by factoring companies so directly thwarts the
congressional policy underlying the structured settlement tax
rules, and raises such serious concerns for structured
settlements and injured victims, it is appropriate to deal with
these concerns in the tax content.
I want to thank Representative Stark for his support and
assistance working together with him in enacting this bill. I
urge my colleagues to do the same. Again, Mr. Chairman, I want
to thank you for holding, I think what is a most important
hearing on this most important matter.
Thank you.
Chairman Houghton. Thank you very much, Mr. Shaw. I
appreciate it.
Mr. Collins, do you have anything? Would you like to----
Mr. Collins. Mr. Chairman, I just appreciate the fact you
have let me sit in on your hearing this afternoon. We do have a
constituent from Georgia that is here. I appreciate the
opportunity. But no statement at this point.
Chairman Houghton. Thank you very much.
Mr. Watkins, would you like to make a statement?
Mr. Watkins. I don't have one----
Chairman Houghton. No, wait 1 minute. We are not going to
do that here. We have heard too much about the oil patch from
you. [Laughter.]
Well anyway, to continue, I would like to introduce Mr.
Mikrut. I don't know you, Joe, but you used to be with the
Joint Tax Committee 6 months ago. I think this is the first
time you have testified in front of the Ways and Means
Committee.
So, we are delighted to have you here--if you would like to
give your testimony and would like to proceed.
STATEMENT OF JOSEPH M. MIKRUT, TAX LEGISLATIVE COUNSEL, U.S.
DEPARTMENT OF THE TREASURY
Mr. Mikrut. Thank you, Mr. Chairman. It is a pleasure to be
here.
Mr. Chairman, Mr. Coyne, Members of the Subcommittee, and
Members of the Full Committee, it is a pleasure to speak with
you today about the tax treatment of structured settlement
arrangements.
As you know, the administration has proposed in its fiscal
year 2000 budget to impose an excise tax on structured
settlement factoring transactions. The administration believes
that the proposed tax, which is intended to act as a deterrent
to factoring transactions, is necessary to preserve the
integrity of the structured settlement tax regime and the
underlying policy objective of protecting and providing for the
long-term financial needs of injured persons.
Our budget proposal is very similar to H.R. 263, the
Structured Settlement Protection Act of 1999, as introduced by
Messrs. Shaw and Stark, and cosponsored by other Members of the
Subcommittee and the Full Committee.
In my brief remarks, I would like to touch upon the
following act matters: One, a description of the typical
structured settlement arrangement; the favorable tax rules
applicable to such arrangement; the tax and nontax policy
concerns underlying such rules; a description of the factoring
transaction; and finally, an explanation of how the proposed
excise tax would operate in support of the legislative
proposals underlying the current law. My written statement
describes these matters in greater detail. I request that it be
submitted for the record.
Mr. Chairman, an injured party that receives an award or a
settlement for his or her injury generally has two options.
One, to receive a lump sum, up front payment. Or alternatively,
to receive a stream of deferred payments. If the person chooses
the lump-sum payment, the transaction is over, but as described
below, there may be some negative tax consequences to such a
choice.
However, if the person chooses to receive deferred
payments, he or she can enter into a qualified structured
settlement arrangement and the inside buildup on whatever
investment is within the arrangement is never subject to tax.
Qualified structured settlements typically have the
following characteristics: The defendant, who is required
either by a suit or by an agreement to pay damages to a
physically injured or ill person, enters into a structured
settlement agreement with the injured person and a structured
settlement company, under which terms, the structured
settlement company is required to pay the injured person
specified amounts over a period of time. Pursuant to this
agreement, the defendant pays a lump sum to the structured
settlement company, which assumes the defendant's liability to
the injured person. The structured settlement company then
purchases an annuity contract, or some other qualified asset,
to fund the liability and uses the payments received under that
contract to pay the amounts due to the injured person.
Pursuant to legislation enacted in 1982, the tax results of
the structured settlement arrangement are as follows: The
defendant gets an up front deduction for his payment to the
structured settlement company. The structured settlement
company does not recognize income on receipt of that payment to
the extent it requires an annuity or other qualified
investment.
The payments to the structured settlement company are not
subject to tax to the extent they are netted out as payment to
the injured person. The injured person is not subject to tax on
any amounts received. Taken together, these rules effectively
provide that the earnings on funds set aside for the injured
person are never subject to tax, in essence, giving tax-free
buildup.
Conversely, if the injured party had received an up front
lump-sum payment outside a structured settlement, such receipt
is not subject to tax, but if the person were to invest that
lump sum, any earnings thereupon would be subject to tax. Thus,
structured settlement arrangements are tax-preferred
investments relative to lump-sum payments.
As I said before, the rules that allow a tax-free buildup
of structured settlements were first enacted in 1982.
Legislative history indicates that the legislation was intended
for two purposes. One, to clarify that the tax-free treatment
of deferred payments to injured parties was subject to section
104.
Prior to 1983, the Treasury Department and the Internal
Revenue Service had taken an administrative position similarly
exempting the injured person from any tax on the earnings on
certain funds set aside. Congress decided that it was much more
preferable to have such law enacted statutorily.
Second, legislative history provides similar tax benefits
to the structured settlement companies. This benefit, which
allows no tax upon receipt of the amount from the defendant, is
necessary to effectively allow the tax-free buildup on
structured settlement amounts. Congress conditioned these
favorable rules on a requirement that the periodic payments
could not be accelerated, deferred, increased or decreased by
the injured person.
It appears that certain nontax policy considerations
underlie these favorable rules for structured settlements.
There was a recognition that recipients of structured
settlements are much less likely than recipients of lump-sum
awards to consume their awards too quickly and then thereby
require public assistance. It appears that Congress' tax and
nontax concerns underlying structured settlements may be
frustrated by factoring transactions.
In a factoring transaction, an injured party accepts a
discounted lump-sum payment from a factoring company in
exchange for their future payment streams under the structured
settlement. These discounts may be large, and factoring
transactions appear to have become prevalent.
Factoring transactions effectively contravene the statutory
requirement conditioning favorable tax treatment on the injured
person's inability to accelerate such payments and undermine
the policy objectives for these favorable rules, that of
protecting the long-term financial needs of injured persons.
By replacing structured settlement payments with a lump sum
in the hands of the injured person, the factoring transaction
facilitates the potential dissipation of these amounts by the
injured person. Thus, the current state of affairs affords
favorable tax treatment without ensuring that the legislatively
intended conditions for such treatment are satisfied, thereby
potentially costing Federal revenues without ensuring that the
goal of long-term income protection for injured parties is
achieved.
Both the President in his fiscal year 2000 budget and
Representative Shaw and Stark in H.R. 263, have proposed the
imposition of a substantial excise tax on discounts relative to
factoring of structured settlement payments. The excise tax
would not be imposed when the purchase is pursuant to a court
or administrative order finding that certain extraordinary and
unanticipated needs of the original intended recipient render
such a transaction desirable.
The imposition of a substantial excise tax should make it
far less likely that factoring transactions will occur, because
the transactions would become less profitable. To the extent
that the market for such purchases is reduced or eliminated,
far fewer injured persons would be approached or convinced to
assign their future income rights, and the integrity of the
structured settlement tax regime of present law would be
preserved. This will help ensure that the tax benefits
conferred by present law accomplish their legislative purpose.
In conclusion, Mr. Chairman, Mr. Coyne, and Members of the
Subcommittee, the administration looks forward to working with
you and other Members of Congress in addressing this problem.
We thank you for your interest in this issue, and for an
invitation to participate in today's hearing. I am happy to
answer any questions you may have.
[The prepared statement follows:]
Statement of Joseph M. Mikrut, Tax Legislative Counsel, U.S. Department
of the Treasury
Mr. Chairman, Mr. Coyne, and Members of this Subcommittee,
it is a pleasure to speak with you today about the current-law
tax treatment of structured settlement arrangements and
legislative proposals to impose an excise tax on the purchase
of structured settlement payment streams.
As you know, the Administration has proposed in its fiscal
year 2000 budget to impose an excise tax on structured
settlement factoring transactions. The Administration believes
that the proposed tax, which is intended to act as a deterrent
to factoring transactions, is necessary to preserve the
integrity of the structured settlement tax regime and the
underlying policy objective of protecting and providing for the
long-term financial needs of injured persons. Our budget
proposal is very similar to H.R. 263, the ``Structured
Settlement Protection Act of 1999,'' as introduced by Messrs.
Shaw and Stark and other Members of the Subcommittee and full
Committee.
Following is an overview of the tax treatment of structured
settlements under current law, a discussion of the rationale
for these favorable rules, an analysis of the potential impact
of a factoring transaction, and an explanation of how the
proposed excise tax would operate in support of the legislative
purpose underlying current law.
Tax Treatment of Structured Settlements
Since 1983, section 130 and other provisions of the
Internal Revenue Code have contained a series of special tax
rules intended to facilitate the use of structured settlements
to resolve physical injury damage claims.
Structured settlements that qualify for this favorable tax
treatment typically have the following characteristics: A
tortfeasor who is required (whether by suit or agreement) to
pay damages to a physically injured person enters into a
structured settlement agreement with the injured person and a
structured settlement company (``SSC''), under which terms the
SSC is to pay the injured person specified amounts for a number
of years or for the life of the injured person. Pursuant to the
agreement, the tortfeasor pays a lump sum to a structured
settlement company (``SSC''), which assumes the tortfeasor's
liability to the injured person. The SSC purchases an annuity
contract to fund the liability, and uses the annuity payments
received under the annuity contract to pay the amounts due to
the injured person.
The tax results of the structured settlement arrangement
are as follows: The tortfeasor is permitted immediately to
deduct the lump sum paid to the SSC, but the SSC does not
include in income the amount received from the tortfeasor to
the extent that such funds are used to purchase the annuity
contract. The earnings on the annuity contract are taxed to the
SSC according to the favorable rules generally applicable only
to individual annuity holders. These rules generally defer
taxation of income under the annuity contract until such time
that the SSC actually receives annuity payments, at which time
the SSC is eligible for a corresponding offsetting deduction
for the amounts paid to the injured person. Furthermore, the
injured person is not taxed on any amounts received from the
SSC, even though significant portions of such payments are
funded through the SSC's investment earnings. Taken together,
these rules effectively provide that the earnings on funds set
aside for the injured person are never subject to tax.
Prior to 1983, the Treasury Department and Internal Revenue
Service had taken an administrative position similarly
exempting the injured person from tax on the earnings on
certain funds set aside on his or her behalf. See, e.g., Rev.
Rul. 79-313, 1979-2 C.B. 75. The legislative history to the
rules enacted in 1983 explains that the statutory changes were
intended, at least in part, to provide statutory certainty that
the injured person was not subject to tax on the earnings from
qualified structured settlements. In addition, the legislation
removed potential tax impediments with respect to SSCs. See H.
Rpt. No. 97-832, 97th Cong., 2d Sess. 4 (1982); S. Rpt. No. 97-
646, 97th Cong., 2d Sess. 4 (1982). 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 taxpayer is not in constructive receipt
of or does not have the current economic benefit of the sum
required to produce the periodic payments.''
Although the non-tax policy considerations underlying the
favorable statutory clarifications are not discussed in these
reports, Senator Max Baucus (D-Mont.) described these
considerations in introducing the legislation that led to the
favorable tax rules. Senator Baucus explained that the
recipients of structured settlements are less likely than
recipients of lump sum awards to consume their awards too
quickly and require public assistance:
In the past these awards have typically been paid by defendants
to successful plaintiffs in the form of a single payment
settlement. This approach has proven unsatisfactory, however,
in many cases because it assumes that injured parties will
wisely manage large sums of money so as to provide for their
lifetime needs. In fact, many of these successful litigants,
particularly minors, have dissipated their awards in a few
years and are then without means of support.
Periodic payments settlements, on the other hand, provide
plaintiffs with a steady income over a long period of time and
insulate them from pressures to squander their awards....
[Congressional Record (daily ed.) 12/10/81, at S15005.]
Since 1983, Congress has further expressed its support of
structured settlement arrangements. In the Taxpayer Relief Act of 1997,
Congress extended the section 130 exclusion to cover qualified
assignments of liabilities arising under workmen's compensation acts.
In deciding to extend such favorable tax treatment, ``the Committee was
persuaded that additional economic security would be provided to
workmen's compensation claimants who receive periodic payments if the
payments are made through a structured settlement arrangement, where
the payor generally is subject to State insurance company regulation
that is aimed at maintaining solvency of the company, in lieu of being
made directly by self-insuring employers that may not be subject to
comparable solvency-related regulation.'' See H. Rpt. No. 105-148,
105th Cong.,1st Sess. 410-11 (1997).
The Factoring Issue
Many injured persons are willing to accept heavily
discounted lump sum payments from certain ``factoring
companies'' in exchange for their future payment streams from
structured settlements. These factoring transactions directly
undermine the policy objective underlying the structured
settlement tax regime, that of protecting the long-term
financial needs of injured persons. The factoring transactions
also effectively contravene the statutory requirement
conditioning favorable tax treatment to the various parties to
the arrangement on the injured person's inability to accelerate
such payments.
The same policy considerations expressed in introducing the
structured settlement tax legislation in 1981 remain relevant
today. Dissipation of an award by an injured person who is
unable to earn money because of his or her injury or illness
may result in the need for welfare payments or other public
assistance. By replacing structured settlements with a lump sum
in the hands of the injured person, the factoring transaction
facilitates potential dissipation.
Factoring transactions are prevalent today. According to
recent press reports, one large factoring company has completed
more than 15,000 structured settlement transactions with an
approximate total value of $370 million. The company broadcast
more than 90,000 television commercials in a period of less
than two years. See Margaret Mannix, ``Settling for Less,'' US
News & World Report, p. 63 (January 25, 1999); Vanessa
O'Connell, ``Thriving Industry Buys Insurance Settlements from
Injured Plaintiffs,'' The Wall Street Journal, p. A8 (February
25, 1998).
We understand that almost all structured settlement
arrangements contain anti-assignment clauses that are intended
to satisfy the section 130 statutory requirements. The fact
that only companies able and willing to contravene these anti-
assignment clauses can engage in factoring transactions allows
such companies to pay heavily discounted amounts for payment
rights. While one large factoring company reports an average
discount rate of 16%, there have been reports of rates that in
some cases have exceeded 75%. See US News & World Report, id.
at 66; see also Gail Diane Cox, ``Selling Out Structured
Settlements: Abuses in Secondary Market Leads to Reform
Legislation,'' The National Law Journal, p. B1 (August 18,
1997).
In sum, the Administration believes that the factoring
transaction undermines the purpose of the special favorable tax
rules applicable to structured settlements. In fact, the
combination of the existing statutory requirements and the
willingness of certain companies to ignore those requirements
(but to exact heavy discounts in so doing) leaves injured
persons potentially more vulnerable than before the enactment
of the 1983 changes. The current state of affairs affords
favorable tax treatment without ensuring that the
legislatively-intended conditions for such treatment are
satisfied--thereby costing federal revenues without ensuring
that the goal of long-term income protection for injured
persons is achieved.
The Proposed Factoring Transaction Excise Tax
Both the President, in his fiscal year 2000 budget, and
Representatives Shaw and Stark, in H.R. 263, have proposed the
imposition of a substantial excise tax on the difference
between the amount paid by the factoring company and the
undiscounted value of the acquired payment stream. The excise
tax would not be imposed where the purchase is pursuant to a
court (or administrative) order finding that certain
extraordinary and unanticipated needs of the original intended
recipient render such a transaction desirable. H.R. 263 also
would provide that factoring transactions would not
retroactively affect the tax treatment of the original parties
to the structured settlement transaction.
The imposition of a substantial excise tax should make it
far less likely that factoring transactions will occur, because
the transactions would become less profitable. To the extent
that the market for such purchases is reduced or eliminated,
far fewer injured persons would be approached or convinced to
assign their future income rights, and the integrity of the
structured settlement tax regime would be preserved. This will
help ensure that the tax benefits conferred by section 130
accomplish their legislative purpose.
The Administration recognizes that the policy concern
underlying the proposed tax--the long-term financial protection
of injured persons--could also be addressed outside the
Internal Revenue Code. However, such policy concern already
underlies the favorable tax rules applicable to structured
settlements. The proposed excise tax is intended to ensure the
continued effectiveness of the existing tax rules in protecting
the long-term financial security of injured persons. In
addition, as of the close of calendar year 1998, we are aware
of only three states--Illinois, Connecticut and Kentucky--that
have passed laws requiring court approval of and fuller
disclosure in connection with factoring transactions, and it is
unclear whether and when other states might pass similar
consumer protection laws.
In conclusion, Mr. Chairman and Mr. Coyne, and Members of
this Subcommittee, the Administration looks forward to working
with you and other Members of Congress in addressing this
problem. We thank you for your interest in this issue, and for
inviting us to participate in today's hearing.
Chairman Houghton. OK. Thank you very much, Mr. Mikrut. I
am going to start with Mr. Coyne.
Mr. Coyne, would you like to ask any questions?
Mr. Coyne. No.
Chairman Houghton. Let me see. Mr. Collins, have you got
questions?
Mr. Collins. Not at this time.
Chairman Houghton. OK.
Ms. Dunn.
Mr. Watkins.
Mr. Watkins. I don't at this time, Mr. Chairman. Mr.
Chairman, there are several questions that do come about when
we start looking at taxing of settlements and different things
and how they prorate them out. I may want to follow back up
with some of those questions in a more serious discussion on
that.
Mr. Mikrut. I will be happy to answer any questions you
have, Mr. Watkins.
Mr. Watkins. Thank you.
Chairman Houghton. I have three questions. First of all, it
involves the Treasury. Has the Treasury Department taken any
action with the structured settlement companies, one way or
another, to explain what the tax consequences are, when a
recipient has sold his or her settlement to a factoring
company?
Mr. Mikrut. No, Mr. Chairman, we have not. Under present
law, it is unclear what happens to both the recipient and the
settlement company when these amounts are factored. I believe
some have taken the position that to the extent that the amount
is assigned, that section 130 does not apply and would not
apply from the inception. Therefore, the settlement company
would be subject to tax, and the recipient would be subject to
tax on the earnings thereon.
Others read the Code differently and would seem to indicate
that section 130 still applies for several reasons. One, from
the literal reading of the Code. Two, that the settlement
company itself does not know, many times, whether the amount
has been factored or not.
I would say at present, it is unclear what happens with
respect to these sales. H.R. 263 would clarify that treatment
and essentially say that so long as the original requirements
of section 130 were complied with at the outset of the
transaction, that that treatment would maintain throughout.
Chairman Houghton. OK. Now look, just let me talk about the
time. We have got a vote coming up now. I don't know how many
can come back, but I will just finish with a couple of
questions. Then, we will cut it and we'll go and vote. We will
come back; it will only be about a 5-minute break.
Just two other questions. If Congress clarifies the tax
treatment of the other parties to the original structured
settlement, does that really resolve the controversy that is
before us?
Mr. Mikrut. No. I think what would resolve the controversy,
Mr. Chairman, if you were to craft an excise tax which would
stop the factoring transactions to the extent that the Congress
deemed that appropriate. It is unclear what the appropriate
rate is. The administration proposed a 40-percent rate. H.R.
263 has a higher 50-percent rate.
I think the elasticity between various injured parties and
firms would depend on their own particular facts and
circumstances. But I think that the important parts are that an
excise tax is necessary to back up current section 130, and
also the clarification how section 130 operates after a
factoring transaction.
Chairman Houghton. Yes. Then the last question. Really, are
these transactions consistent with the tax policy that
underlies most structured settlement tax rules?
Mr. Mikrut. No. I don't believe they are, Mr. Chairman.
Section 130 is premised on the fact that the recipient cannot
accelerate the payments. This is generally done between the
structured settlement company and the injured party through an
antiassignment clause. The factoring transactions abrogate that
clause and in essence, as I mentioned before, call into
question the validity of section 130 treatment.
To the extent that Congress was concerned about these
payments being paid over time, the factoring transaction
completely undoes that.
Chairman Houghton. OK. Well, those are all the questions I
have. Unless anybody has a question, we are going to break here
for about 5 minutes. Thanks very much.
Ms. Dunn. Mr. Chairman.
Chairman Houghton. Have you got a question?
Ms. Dunn. I do. It just occurred to me. Is there anything
in current legislation that provides for waiver situations,
like a change of lifestyle, for example, if somebody marries
and wants to convert the settlement to a lump sum to buy a home
or something? Is there any waiver ability right now?
Mr. Mikrut. Ms. Dunn, there is not under present law, but
there would be under H.R. 263.
Ms. Dunn. Thanks, Mr. Chairman.
Chairman Houghton. OK. Good. Well, thanks very much.
Mr. Collins. Mr. Chairman.
Chairman Houghton. Yes. Go ahead.
Mr. Collins. One quick question to Mr. Mikrut. In order to
clear up the tax treatment, we could do that with a provision
of clarity without the excise tax, could we not?
Mr. Mikrut. Yes, you could. You could clarify the treatment
of the recipient, as well as the treatment of the structured
settlement company. The excise tax, however, is intended to
inhibit the factoring transactions themselves.
Mr. Collins. That is the truth? It is intended to stop the
transaction itself?
Mr. Mikrut. Yes. Not the setup of the original
establishment of the structured settlement, but the later
factoring of those amounts.
Mr. Collins. But it is a way that would probably eliminate
the structured settlements totally?
Mr. Mikrut. No. I believe it would backstop the structured
settlements because it would allow the amounts to be paid over
time as originally intended, as opposed to being accelerated.
Mr. Collins. That is the structured settlement. But it
would penalize and probably cease the purchase of those
structured settlements because of the punitive tax that would
be levied against the settlement, against the purchase?
Mr. Mikrut. No. Because, again, as long as the taxpayer and
the structured settlement company stayed within the bounds of
the original section 130, there would be the tax-free buildup
as Congress intended. It would only be when another party came
in and bought up those deferred payment rights that the excise
tax would kick in.
Mr. Collins. That is exactly right. That excise tax would
have a tendency to stop that purchase of that structured
settlement. The structured settlement, the settlement company
itself would not be affected because that cash flow remains the
same?
Mr. Mikrut. That's right.
Mr. Collins. Their cash flow remains the same to the person
or the company or the entity that purchased the settlement?
Mr. Mikrut. That's right.
Mr. Collins. The excise tax itself would be a punitive
issue, a measure to stop the purchase of those settlements?
Mr. Mikrut. That is correct.
Mr. Collins. Thank you.
Chairman Houghton. OK.
[Recess.]
Chairman Houghton. Again, I apologize for the interruption
of the vote. We had a vote on the rule; we have a little
breathing space now.
The next group of panel members starts with John Chapoton,
a partner from Vinson & Elkins, on behalf of the National
Association of Settlement Purchasers, along with Tim Trankina,
chief executive officer of Peachtree Settlement Funding in
Georgia.
We also have Thomas Little, president of Little, Meyers,
Garretson & Associates in Cincinnati, and past president of the
National Structured Settlements Trade Association; Donna
Kucenski from Seneca, Illinois, on behalf of the National
Association of Settlement Purchasers; and Thomas Countee, who
is the executive director of the National Spinal Cord Injury
Association in Silver Spring, Maryland.
We will start with Mr. Chapoton.
STATEMENT OF HON. JOHN E. CHAPOTON, PARTNER, VINSON & ELKINS,
LLP; ON BEHALF OF NATIONAL ASSOCIATION OF SETTLEMENT
PURCHASERS; ACCOMPANIED BY TIMOTHY J. TRANKINA, CHIEF EXECUTIVE
OFFICER, PEACHTREE SETTLEMENT FUNDING, ATLANTA, GEORGIA
Mr. Chapoton. Thank you, Mr. Chairman. I appreciate the
opportunity to be here today. As you mentioned, I am appearing
on behalf of the National Association of Settlement Purchasers.
Accompanying me today is Tim Trankina, who is chief
executive officer of Peachtree Settlement Funding, a structured
settlement purchasing company in Atlanta. I am a tax lawyer. I
am here to address the tax issues that are confronting this
Subcommittee.
This is an industry dispute. It is not a tax issue. In my
view, it is not an issue that ought to be resolved by the tax
writing Committees. As you have heard, it is alleged that there
are abuses in the purchases of structured settlements.
If there are abuses, they should be addressed. NASP
supports any reasonable change that will give the consumer
adequate information to make a correct choice, both at the time
he or she enters into the structured settlement and at the time
he or she is later considering a sale. If there is a problem,
it is a consumer protection problem and not a tax issue.
What I would like to do today is clear up some
misunderstanding concerning the meaning and history of section
130 and the amendments to section 104 that were originally
adopted in 1982.
First, let me address the point that you have already heard
today, that the purpose of the 1982 legislation was to provide
an incentive in the tax law to encourage structured
settlements. That is not entirely true. The legislation was
adopted to codify IRS ruling policy that had existed in the
late seventies and into the early eighties. The IRS adopted a
position in both private rulings and published rulings that
would not place a tax hurdle in the path of structured
settlements. Congress liked it, and Congress adopted it.
At that time, Treasury expressed some concern about it
because there was some tax slippage. As I believe Mr. Mikrut
pointed out, any structured settlement does involve an interest
element.
If a structured settlement is used, under the Code
provisions adopted in 1982, that interest is converted into a
tax-free award for a personal injury to the recipient, while at
the same time the payor gets a full deduction for the full
amount paid, including the interest payment. There is some tax
slippage. Treasury expressed some concern, but Treasury did not
stand in the way of the provision in 1982.
Unquestionably in 1982, everyone involved then was talking
about catastrophic injuries. Everybody thought it was clearly
desirable if the tax law permitted tax-free, long-term payout
in such cases. Sometimes the 1982 legislation is described as
protecting people who cannot protect themselves.
Congressional support in 1982 for tax rules that would
permit long-term payouts in catastrophic injury cases is a far
cry from the interpretation some are now putting on the 1982
congressional action.
Today we hear that Congress had adopted a rule that said if
you accept this tax benefit designed for catastrophic cases,
designed to keep you from being a ward of the State, you are on
notice that you are forever locked in, and can never use this
stream of payments as an asset for any financial purpose.
It is even more of a reach to suggest that Congress
intended this to be the rule in the thousands of settlements
involving lesser injuries that are also granted the option to
take long-term payouts tax free under this tax benefit. In my
view, that wasn't the congressional intent in 1982. I doubt it
is the congressional policy today.
In brief, the congressional decision in 1982 was to grant a
benefit, but not to attach a condition to that benefit and not
to impose what is now being described as a lock-in, one-way
swinging trap door that you cannot get out of. That is, if
there is a sale to require that the structured settlement
company pay a tax when the sale is made. Those conditions I
submit, were not the intent.
The 1982 congressional action was simply a codification of
then-existing IRS ruling practice. I discuss this in some
detail in my written statement. The words of section 130 that
people point to as creating this tax problem were in fact
language drawn from the IRS ruling policy. That language was
put in the statute. It had no other purpose than to avoid
constructive receipt, and certainly not the lock-in policy that
is now being attributed to it today.
More proof that this was not the policy in 1982 and should
not be the policy today is found in a wide variety of fact
situations in which long-term payouts are selected by
claimants.
There is no one-size-fits-all. The facts vary far too much.
Some involve private catastrophic permanent disability that
render the claimant unemployable, where sales should not be
permitted. At the other end of the spectrum, they involve the
creation of a financial asset, the use of which should not be
denied the owner when his or her circumstances change.
Distinguishing between these two extremes is not easy. It
should certainly not be legislated by a single Federal tax
rule. It is not a tax problem. It calls for careful,
thoughtful, consumer protection regulation. I think the need
for flexibility becomes particularly obvious when it is
realized that once these benefits were firmly ensconced in the
Code in 1982, the use of structured settlements has grown
dramatically. Some 50,000 structured settlements are arranged
each year.
There are estimates that there are $10 billion in premiums
a year, from almost nothing in the late seventies. A large part
of this growth has nothing to do with catastrophic injuries. I
am advised that over 85 percent of structured settlement
claimants are not disabled and are gainfully employed. More
than 50 percent of the structured settlements involve total
premiums of less than $50,000, and fewer than 13 percent of
structured settlements involve settlements of greater than
$250,000.
Whatever social policies are involved here, they do not
justify locking every informed and properly advised claimant
into a box and preventing him or her from selling a portion or
all of his future payments. Circumstances change. I am told the
settlement purchasers are on average first contacted by
claimants some 5 to 7 years into their structured settlement. A
secondary market has quite appropriately evolved to fill that
need.
Thank you, Mr. Chairman. I will be happy to answer any
questions.
[The prepared statements and attachments follow:]
Statement of Hon. John E. Chapoton, Partner, Vinson & Elkins, LLP; on
Behalf of National Association of Settlement Purchasers
Mr. Chairman and Members of the Subcommittee:
My name is John E. Chapoton and I appear before you today
on behalf of the National Association of Settlement Purchasers
(NASP). I am a partner with the law firm of Vinson & Elkins
here in Washington. Accompanying me today is Tim Trankina, CEO
of Peachtree Settlement Funding, a structured settlement
purchasing company located in Atlanta, Georgia.
I was the Assistant Secretary of Treasury for Tax Policy
from 1981 to 1984. I served in that capacity at the time the
tax provisions under discussion today were enacted. I testified
before the Ways and Means Subcommittee on Select Revenue
Measures about these provisions, and was actively involved in
the development of the legislation.
I want to discuss the tax issues presented by the 1982
legislation and by the proposal before you today. From my
reading of the record from 1982, and my memory of that process,
I believe there are some misconceptions concerning the original
tax issues that need to be clarified. I believe they bear on
the task before you.
Background
A structured settlement is a financial arrangement that resolves a
personal injury or wrongful death claim with an agreement to make
payments over time instead of in one lump sum. This vehicle is often
very useful in settling litigation or potential litigation. Structured
settlements are used for everything from slip and fall cases to
serious, lifelong injuries. They are not, and never have been, limited
to catastrophic injuries, however. The perception that structured
settlements typically involve lifelong disabilities is simply wrong.
Generally, under a structured settlement the beneficiary or
claimant is paid over a period of years in a series of installments
with inflexible payment terms. Most typically, the settlement takes the
form of monthly payments, periodic lump sums, or a combination of both.
It is estimated that in excess of 50,000 structured settlements are
arranged each year, generating premiums to annuity companies that may
be approaching $10 billion annually. These arrangements are often
utilized because of the highly favorable tax treatment granted to both
claimants and insurers, and because the arrangement lowers the cost to
insurers of compensating personal injury victims.
According to one of the largest brokers of structured settlements,
more than fifty percent (50%) of structured settlements involve
premiums of less than $50,000. Fewer than thirteen percent (13%)
involve settlements of greater than $250,000. Whatever the original
conception of structured settlements and the purpose of the tax rules
facilitating them, these figures clearly belie any assertion that they
are today used principally for catastrophic injuries.
Under the terms of a structured settlement that qualifies for
preferable tax treatment, the claimant is prohibited from possessing
the right to accelerate, delay, increase or decrease future payments
from the structured settlement company. If a claimant's life
circumstances change creating a need for additional funds from the
settlement, the only way the claimant may gain access to additional
funds is to sell a portion, or all, of his or her settlement. This need
has given rise to a secondary market where companies will purchase a
portion of the individual's settlement for a lump sum payment. That
lump sum reflects the discounted present value of the payments being
purchased, using discount rates that presently average sixteen to
eighteen percent (16%-18%). These discount rates reflect the cost of
capital, the inherent risk involved, and a profit for the companies.
The National Association of Settlement Purchasers (NASP) is a non-
profit trade association composed of companies that purchase structured
settlement and other deferred payment obligations. Formed in July 1996,
NASP and its member companies support rational regulation to protect
the rights of consumers seeking to sell structured settlement payment
rights. NASP has adopted a code of ethics, which includes consumer
protection and suitability standards, and has created a fraud alert
system. NASP is dedicated to providing claimants and their
representatives with an efficient, legal and ethical means by which to
obtain liquidity from inflexible structured settlement payments. NASP
is actively working in a number of states to pass comprehensive
legislation that protects the interests of personal injury victims both
at the time of settlement, and subsequently should the individual
choose to liquidate a portion of his or her structured settlement
payments.
Growth in the Use of Structured Settlements
Historically, personal injury lawsuits were settled with an
up-front, lump-sum payment to the claimant in exchange for a
release of liability delivered to the defendant. The amount
received by the plaintiff was exempt from taxation under Code
section 104, which was originally enacted in 1919. Beginning in
the 1970s IRS began issuing private rulings which permitted
claimants to receive payments in settlement of personal injury
claims over time on the same tax-free basis as lump sum
settlements. This lead to an effort in the early 1980s to
streamline and codify this IRS ruling position. The result was
enactment of the Periodic Payment Settlement Act of 1982 (the
``1982 Act'').
The 1982 Act did two things. First, it codified through
amendments to section 104 the IRS ruling position that the full
amount of settlements received over time retained their tax-
free character when received by claimants. Second, and most
importantly today, it enacted a new section 130 which set up
favorable tax procedures that allowed defendants and their
insurers to assign their liability to structured settlement
companies in exchange for the purchase by the structured
settlement company of an annuity to fund the liability.
Technical rules specified how these assignments of liability
had to take place in order to receive the favorable tax
benefits.
Typical Structured Settlement Transaction
By definition, structured settlements are agreements
entered into to settle actual or potential lawsuits. They may
not be used after a jury has rendered a verdict. As a result,
they are sometimes (approximately 25 percent of settlements)
entered into without the claimant having the benefit of
counsel. Often, a broker becomes involved in setting up these
arrangements. Those brokers typically receive a four percent
(4%) commission, which is the industry standard. A diagram
illustrating the flow of funds in a structured settlement is
attached.
Structured settlements are useful because they facilitate
settlement of lawsuits. They allow defendants and their
insurance companies to offer small settlements that look big
because they are paid out over time. Most of us are familiar
with the various sweepstakes awards that offer $10 million
dollar prizes. It is only when you read the fine print that you
discover that they are really offering $10 million over 20
years and that the real value, in present dollar terms, is far,
far less. Structured settlements are often sold to claimants in
the same way.
Unfortunately, many claimants who enter into structured
settlement agreements do not receive this information before
they settle their claim by agreeing to the long-term payout.
Often the settlement is a take it or leave it offer--settle now
or take your chances with litigation, which in crowded court
dockets may not take place for years. Faced with this Hobson's
choice, many take the settlement. As a result, claimants often
discover later that (i) the settlement is really not what they
expected, or (ii) after a period of time the settlement no
longer fits their needs. The average length of a structured
settlement is 20 years. It is impossible for an individual to
predict with accuracy what his or her needs will be over the
next 20 years.
Inflexibility can be the most significant flaw of
structured settlements. When financial needs change, a fixed
payment schedule may no longer satisfy those needs. Structured
settlement purchasers have stepped in to fill that legitimate
consumer need. Settlement purchase companies provide a useful
and vital service for individuals to deal with unforeseeable
financial situations.
Although the majority of claimants work or have other
sources of support, they often need the flexibility to pledge
or assign their rights to meet unanticipated needs. Many
claimants use the proceeds from payment sales to pay medical
and educational expenses, make bill payments or arrange debt
consolidation, cope with job loss or take advantage of an
unexpected opportunity such as starting or expanding a
business, purchase or make improvements to a home, or start or
expand a family. Occasionally, sales of a portion of structured
settlements are used to pay estate taxes due on the death of
the claimant.
Structured Settlement Purchases
The structured settlement purchase market has developed in
response to the needs of claimants who find that a fixed
schedule of payments no longer meets their needs. They make the
choice of altering the arrangement to better address their
present circumstances. The attached diagram shows how a typical
purchase is structured.
Settlement purchasers buy the right to receive a specified
amount of structured settlement payments in exchange for a lump
sum of cash. These purchases do not change the responsibilities
of the structured settlement companies: the companies continue
to make the same payments over the term of the settlement. They
merely send their check to a different address. The amount,
timing or duration of the payments do not change at all.
According to statistics maintained by the NASP, 88 percent of
settlement purchases are partial purchases. In such
transactions, only a portion of the settlement is sold and the
claimant retains the balance of the periodic payments.
Statistics from one of the largest NASP company members
indicate that the average purchased payment amount is $20,406,
representing a portion of up to seven years worth of payments.
NASP statistics also reveal that the average seller of
structured settlement payments is 33 years old, employed, and
has an annual household income of nearly $25,000. Over 85
percent of structured settlement claimants are not disabled and
are gainfully employed. Thirty-four percent of claimants use
the money to buy a home, 31 percent to pay off existing debts
or pay educational expenses, and 16 percent to open or expand
an existing business. A NASP survey showed that 92 percent of
claimants are ``satisfied'' or ``very satisfied'' with the
refinancing they were able to accomplish with the help of the
settlement purchasing industry.
Consumer Protection Concerns
NASP companies comply with a code of ethics that includes
consumer protection and suitability standards. NASP members do
not conduct transactions with minors, incompetents or their
guardians except by court order. They do not conduct
transactions with individuals dependent on future periodic
payments for medical necessity or with those who are unemployed
or unemployable who rely on their payments as the sole source
of income. They do not buy payments from individuals with
catastrophic or head injuries. All member companies encourage
or require individuals to consult with their own legal counsel
prior to entering into a funding transaction. Prospective
sellers are given amply time and opportunity to secure
alternative sources of capital or back out of a transaction.
NASP is committed to ensuring that the consumer receives
adequate protection. NASP has worked in various states to
advance legislation that requires state courts or court-like
proceedings to approve settlement purchases. Such statutes
would be greatly strengthened if language could be added to
identify which beneficiaries are affected, which courts could
approve lump-sum payments, and the standards the court would
apply. NASP has prepared model legislation addressing these
concerns and is working with several state legislatures to
encourage enactment of this legislation.
President's Fiscal Year 2000 Budget Proposal and H.R. 263, ``The
Structured Settlement Protection Act''
President Clinton's fiscal year 2000 budget contains a
proposal that would impose an excise tax on any person
acquiring a payment stream under a structured settlement
arrangement. The amount of the excise tax would be 40 percent
of the difference between (1) the amount paid by the acquirer
to the injured person and (2) the undiscounted value of the
acquired income stream. The excise tax would not be imposed if
the acquisition were pursuant to a court order finding that the
extraordinary and unanticipated needs of the original recipient
of the payment stream render the acquisition desirable.
H.R. 263 (106th Cong., 1st Sess., introduced by Rep. Clay
Shaw (R-FL) and others) provides for a 50 percent tax on the
amount equal to the excess of (1) the aggregate undiscounted
amount of structured settlement payments being acquired, over
(2) the total amount actually paid by the acquirer to the
seller.
Presumably these proposals are motivated by the valid
concern that individuals who own structured settlements not
deplete their assets. NASP members also are concerned about
protecting the individual claimants. NASP views an informed
consumer as the most appropriate way to prevent any abuses that
could otherwise occur. Such legitimate concerns should not,
however, permanently lock claimants into inflexible financial
arrangements that might be completely inconsistent with a
financial situation. Full disclosure of all the terms of a
contemplated sale transaction, including discount rates,
present values, fees and commissions, as well as representation
by counsel, would go far to protecting individual claimants.
Ironically, these same claimants do not now have the benefit of
this full disclosure when they enter into structured
settlements.
There is no question that one of the reasons motivating
this Committee to adopt the Periodic Payment Settlement Act of
1982 was that structured settlements are useful in protecting
people who cannot protect themselves. Although catastrophic
injuries were clearly on everyone's mind when the 1982 Act was
adopted, the legislation did not limit structured settlements
to the catastrophically injured. In what is perhaps a classic
example of the law of unintended consequences, the tax and
economic benefits of structured settlements are so valuable
that they are now used primarily for non-catastrophic cases.
There has been a virtual explosion in their use since 1982.
Estimates of annuity premiums received by life insurers from
third party (non-affiliated) sources in the United States
during the twenty year period shows an increase from $.005
billion in 1976 to $4.0 billion in 1996. When transfers to
affiliates are included, this number increases to $10 billion.
It defies reality to think that more than a small percentage of
these represent people who should be locked into these
settlements forever.
The policy considerations that support permitting
structured settlements of personal injury claims do not justify
preventing each and every claimant from selling all or a
portion of his or her future payments. The notion that Congress
should preclude claimants from revisiting a decision they may
have made years before under entirely different circumstances--
after being made aware of all the expenses and other facts, and
being properly advised as to the consequences--cannot be
defended. Circumstances change, and Congress should make it
easy rather than difficult for these individuals to change
their financial arrangements accordingly. The secondary market
has quite appropriately evolved to fulfill this need.
The assumption that claimants are incapable of making
reasoned financial decisions if provided full information is
unsupportable. We offer as evidence the hundreds and thousands
of satisfied customers of NASP members, many of whom have
written to our companies attesting to their satisfaction.
Virtually all of these individuals are competent to handle
their own financial affairs and do so in all other contexts.
NASP members, working together with claimants and their
representatives, including counsel in many cases, provide
various payment options to suit the needs of interested
sellers, understanding the balance between demands for
immediate cash and how much should be ``held in reserve'' for
the future. Their decision is not always the correct one, but
that cannot be prevented without taking away the individual's
freedom to choose.
Discount Rates
It is often alleged that the discount rates used by
structured settlement purchasing companies are too high, and
thus financially disadvantaged claimants who sell their rights
to a portion of their future payments. That is simply false. At
present, the discount rate applied in the overwhelming majority
of cases ranges from 16 to 18 percent, no higher than the
interest rate charged on credit card balances. In fact, these
rates have fallen steadily over the last two years. This
reflects the fact that, as the secondary market has grown, more
and more competition among settlement purchasing companies has
developed. Often, claimants will shop among the companies to
maximize the amount of money they receive, thus lowering the
discount rate. In addition, one of the factors keeping rates
high is the legal impediments raised by opponents of structured
settlement purchases. If Congress can further streamline and
make clear that sales are permitted under appropriate
circumstances, it is a certainty that discount rates will drop
substantially. Thus, consumers would be the ultimate
beneficiaries from clarification of the tax and other rules
that apply when settlements are purchased.
NASP believes that if Congress has concerns about discount
rates it should address those concerns in a manner that does
not have the effect of raising the cost of the transaction even
higher. Imposition of an excise tax would only increase the
cost to claimants who chose to engage in a sales transaction.
For example, a claimant who desires to sell five years' worth
of a settlement (approximately the current average length of
payments sold according to NASP statistics) would be forced to
sell in excess of eight years' worth in order to receive the
same dollar amount if an excise tax became law.
The surest way to increase the amounts provided to the
intended beneficiaries is to require adequate consumer
protection in all phases of a structured settlement, including
the original settlement and the subsequent transfer of payment
rights. This would assure that beneficiaries are informed of
the values and settlement options at the time of the original
settlement so that they would be less likely to enter into
settlements that do not meet their needs. Additionally,
adequate protection in the form of a ``consumer bill of
rights'' as adopted under the code of ethics by NASP members
would help to weed out any unscrupulous refinance companies.
Just as in the case of lotteries, consumer protection should
include required cooperation between the companies making the
settlement payments and any companies involved in transfer of
payment rights.
Tax Effects of the Sale of Structured Settlement Payments
Finally let me turn to the Federal income tax issues
presented by settlement purchases. Tax issues have been raised
by proponents of the legislation before you today. In a
nutshell, some assert or at least suggest that there are
possible adverse tax consequences if structured settlement
payments are sold.
Let me state, in no uncertain terms, that there is no tax
issue. The sale of structured settlement payments by a claimant
should have no adverse tax consequences to any party.
Section 130, which was enacted as part of the 1982 Act,
codified IRS ruling practice dating back to the late 1970s. The
IRS rulings permitted the use of structured settlements as a
vehicle through which a claimant could receive payments over a
period of years rather than in a lump sum without adverse tax
consequences to either party, so long as the claimant was not
considered to be in constructive receipt of those payments. The
language appearing in the IRS rulings was copied into the
statute, and the legislative history of section 130 reflects
that purpose and intent.
The language in the statute prohibits the payments from
being ``accelerated, deferred, increased or decreased'' by the
recipient (claimant). Some have argued that this language bars
the sale of structured settlement payments because a sale could
be viewed as an acceleration. They argue that this language was
intended to lock the claimants into their settlements and
prohibit them from selling their payments, presumably because
these are individuals who are incapable of making decisions on
their own.
That is not what the language of section 130 does or was
intended to do. First and foremost, there was no tax policy
reason in 1982 (and there is none today) to encourage
structured settlements of claims. As the hearing in 1982 makes
clear, the tax policy concerns went the other way--the effect
of a structured settlement is to exclude interest income from
the taxable income of claimants while granting a full deduction
for that same amount to the structured settlement company. In
spite of this tax slippage, it was decided (originally by IRS
and later by Congress) to adopt tax rules that do not stand in
the way of structured settlements.
The principal tax rule that might have impeded structured
settlements was the doctrine of constructive receipt. If the
claimant was deemed to have constructively received the
promised future payments, he or she would owe tax on those sums
immediately with no readily available cash to meet that tax
obligation. Thus the IRS rulings, and later section 130 of the
Code, used language designed to make clear that the terms of
any structured settlement avoided constructive receipt when it
was created. If constructive receipt was avoided at the outset,
it will not reappear.
This language--the claimant could not have the right to
``accelerate, defer, increase, or decrease'' the payments--is
the language of the constructive receipt doctrine. It has no
meaning for or impact on a subsequent, independent transaction
entered into by the claimant to borrow against or sell future
payments. The notion that a sale by a claimant, many years
after the fact, could cause the structured settlement company
to lose its original benefit under section 130 (or could
somehow cause constructive receipt to be revisited) is
nonsensical. It cannot be a serious assertion under the tax law
as it existed in 1982, or as it exists today.
It might be noted, almost parenthetically, that a sale of a
stream of settlement payments would solve, not exacerbate, the
tax policy issue that concerned Treasury in 1982. Thus the tax
system (and Treasury and IRS) should have absolutely no
interest in inhibiting sales of settlement payments.
If there is a policy concern about sales of structured
settlement payments, therefore, it is solely a consumer
protection concern. It is not a tax policy issue.
Consistent with this conclusion, it is interesting to note
that the IRS has never raised this as an issue. There is no
regulation, ruling, notice, or formal or informal pronouncement
which indicates the IRS views the sale of settlement payments
as raising tax issues under sections 104 or 130. There is no
evidence that the IRS has ever raised this issue in any audit.
Only one court case has dealt with this issue. The Third
Circuit, in a bankruptcy decision, squarely addressed and
rejected the argument that a subsequent assignment would cause
a settlement company to retroactively lose the income exclusion
provided by Section 130. The court went so far as to dismiss
the argument as ``novel.''
Conclusion
Mr. Chairman, the settlement purchasing companies strongly
support and actively seek consumer protection legislation to
regulate structured settlements and secondary market
transactions. Indeed, member companies have been actively
working through NASP at the state level to pass such
legislation to protect the interests of personal injury victims
at the time of settlement and subsequently should they choose
to sell a portion of their settlement. It is interesting to
note that the Staff of the Joint Committee on Taxation in
discussing the arguments for and against the Administration's
proposal states ``[a]rguably consumer protection and similar
regulation is more properly the role of the States than of the
Federal government.'' NASP would welcome adoption of standards
to assure the adequate disclosure of present value, fees, and
commissions, both at the time that structured settlements are
established and at the time of secondary purchase.
I would be pleased to answer your questions.
[GRAPHIC] [TIFF OMITTED] T8892.001
Statement of Timothy J. Trankina, Chief Executive Officer, Peachtree
Settlement Funding, Atlanta, Georgia; on Behalf of National Association
of Settlement Purchasers
Mr. Chairman and Members of the Committee:
My name is Timothy J. Trankina and I am the founder and
Chief Executive Officer of Peachtree Settlement Funding (PSF).
PSF is a niche finance company specializing in providing
liquidity to individuals holding high quality illiquid assets,
including structured settlements. I appear before you today
along with John E. Chapoton, a partner with the law firm of
Vinson & Elkins located here in Washington, and the former
Assistant Secretary of Treasury for Tax Policy from 1981 to
1984.
Structured settlement is a term of art used to describe the
settlement of a tort claim by way of a series of future
installment payments. These payments are made at fixed dates in
the future and are often monthly payments or lump sums although
virtually any type of payment arrangement can be structured.
The use of structured settlements has grown in popularity over
the last 15 years as insurers have aggressively marketed them
as a cost effective settlement tool. The settling accident
victim is often given a choice between a lump sum (for example
$100,000) or a series of future payments (e.g. $1,000 per month
for 240 months). Since the present value of the future payments
is usually not disclosed to the victim, they will often accept
the installment payments under the mistaken belief that they
are worth more than the lump sum (ie. they believe, wrongly,
that $1,000 per month for 240 months is worth $240,000 when in
fact it is worth considerably less).
While structured settlements are often very useful as
settlement tools, they suffer from one very serious drawback--
inflexibility. Thus, several years into a structured settlement
payout, a victim's life circumstances will have changed such
that they need or desire a lump sum. Settlement Purchasers such
as Peachtree fill this void by re-financing a portion of the
future payment in order to give the accident victim the lump
sum they desire now. Contrary to the message being ``spun'' by
the proponents of the excise tax, on average, we charge
discount rates of 18-20% per annum. These rates are consistent
with credit cards and other ``b'' and ``c'' lenders rates.
As you may or may not know, the National Association of
Settlment Purchasers (NASP) is a trade group made up of
companies and individual small businesspeople who are involved
in the secondary market for structured settlements. NASP
members provide liquidity for individuals who are receiving
structured settlement payments over a long period of time. This
liquidity is provided either by way of a loan, secured by a
pledge of the individual's right to receive the structured
settlement payments, or by way of an outright assignment of the
right to receive the structured settlement payments. While most
firms (and all NASP members) already provide financial
disclosures and rights of recission in their contracts,
settlement purchasers support broad consumer protection
legislation to require full and complete disclosure from
everyone.
In order to appreciate the complexity of the structured
settlement area, I have attached a brief Structured Settlement
Overview. NASP and its members have no quarrel with and have in
fact supported true consumer protection legislation. However,
HR 263 is really a ban of the sale of structured settlements in
the guise of a consumer protection bill. The particular
shortcomings of the bill can be summarized as follows:
1. Settlements that did not require court approval when
they were set up should not require court approval to re-
finance.HR 263 imposes needless and burdensome conditions of
the rights of an individual to use their money as they see fit.
The typical structured settlement claimant is seeking less than
$20,000 when they re-finance their settlement with a NASP
member. Requiring court approval can easily cost the consumer
10% or more of that sum in attorney's fees and court costs.
Moreover, in the three states that require court approval (CT,
KY and IL) the insurance industry routinely files 40 and 50
page briefs and objections to the transfers. How could an
individual possibly afford to combat the insurance industry in
court ??? Succinctly stated, transfer of settlements that were
not approved by a court in the first place should not require
court approval to re-finance.
2. Sales Shouldn't be Limited to the Desperate and The
Needy. This bill would tell the courts that only a claimant
facing ``imminent financial hardship'' could sell. In other
words, the richest guy in town can't negotiate a sale--even
with court permission; but the fellow who's desperate--who
faces ``imminent financial hardship''--can. That's
discriminatory and arbitrary (and perhaps backward). The court
should be asking, ``what is in the best interest of the
claimant?''
3. Bank Lending Should Be Excluded. The bill was supposed
to be about unregulated ``factoring'' transactions, but by its
terms, it also covers loans and bank lending. We already have
plenty of regulations dealing with lending by banks and finance
companies. This will make it difficult (if not impossible) for
banks to make secured loans to people who are getting payments
like this over time. And it will make it difficult for personal
injury law firms to secure affordable credit.
4. Claimants Deserve These Protections Whenever Asked to
Choose Between Cash and Payment Over Time. Whenever a personal
injury claimant is asked to choose between up-front cash and
payment over time, the claimant should be: (1) advised to
consult with a lawyer or other professional advisor; (2) told
what they are getting and what they are giving up; and (3) told
what the interest rate or discounted value is. The disclosures
should be made and claimants advised to consult counsel when
they are considering a sale and when getting into a settlement
in the first place. That's only fair. In its current form, this
bill will be seen as a one-sided effort to protect insurance
companies at claimants' expense, leaving claimants without any
meaningful disclosure requirements or safeguards at the
``front-end''--and no meaningful opportunity to cash out when
and if their circumstances later change.
There is an enormous amount of misinformation,
disinformation and demagoguery regarding structured settlement
purchasers and the financial terms of the transactions we
engage in. Attached as exhibit ``B'' is a three page document
which separates fact from fiction. I have also attached a
document entitled ``What's this Fight Really All About'' and
one regarding the ``tax issue'' as exhibits ``C'' and ``D''
respectively. It is also important to note that the individuals
with whom we do business are not catastrophically injured. They
are normal working people who have a need or desire for a lump
sum of money now rather than in the future. The following
statistics bear this out:
More than 85% of structured settlement recipients
are not disabled and are gainfully employed.
92% of claimants are ``satisfied'' or ``very
satisfied'' with the re-financing of their settlement which
they accomplished with the help of Settlement Purchasers.
The average person who re-finances a structured
settlement is 33 years old, employed with a household income of
nearly $25,000.
More than 50% of structured settlements have a
present value of $30,000 or less. (Source: Best's Review--
November 1998)
In conclusion, Settlement purchasers such as Peachtree
provide a valuable financial alternative to thousands of people
annually. We encourage and will support meaningful regulation
that protects consumers. However, as presently drafted, HR 263
will effectively ban our business. Additionally, it will deny
Americans access to a valuable financial alternative. As
presently drafted, HR 263 will sacrifice the interests of
ordinary Americans on the alter of insurance company special
interests.
Structured Settlement Overview
Structured settlement is a term of art used to describe the
settlement of a tort claim by way of a series of future
installment payments. These payments are made at fixed dates in
the future and are often monthly payments or lump sums although
virtually any type of payment arrangement can be structured.
The use of structured settlements has grown in popularity over
the last 15 years as insurers have aggressively marketed them
as a cost effective settlement tool. The settling accident
victim is often given a choice between a lump sum (for example
$100,000) or a series of future payments (e.g. $1,000 per month
for 240 months).
The National Association of Settlement Purchasers is a
trade group made up of companies and individual small
businesspeople who are involved in the secondary market for
structured settlements. NASP members provide liquidity for
individuals who are receiving structured settlement payments
over a long period of time. This liquidity is provided either
by way of a loan, secured by a pledge of the individual's right
to receive the structured settlement payments, or by way of an
outright assignment of the right to receive the structured
settlement payments. While most firms (and all NASP members)
already provide financial disclosures and rights of recission
in their contracts, settlement purchasers support broad
consumer protection legislation to require full and complete
disclosure from everyone.
The National Structured Settlement Trade Association has
circulated legislation in the form of a so called model act.
This legislation was drafted by the NSSTA, who has vowed to put
the settlement purchasers out of business. For your
information, the NSSTA is made up of independent brokers and
insurance companies who make billions of dollars each year in
connection with structured settlements. Estimates of the
premiums received each year by insurance companies in
connection with the issuance of annuities used to fund
structured settlements are between 3 and 5 billion dollars
annually. The NSSTA brokers that ``consult'' with the parties
during the settlement negotiations (usually with the defendant,
defense counsel and/or property and casualty insurance carrier
for the defendant) and attempt to persuade one or both of the
parties to settle the case by way of a structured settlement.
They earn commissions and fees from the insurance companies by
brokering the purchase of an annuity to fund the payments due
and payable under the structured settlement agreement.
I. A Typical Structured Settlement.
While structured settlements can take several forms. Below
is a brief description of what I would consider to be a typical
structured settlement transaction. I've also attached a diagram
as Exhibit A that may be helpful.
1. An individual (the ``Plaintiff'') is involved in, for
example, an automobile accident with another individual or
company (the ``Defendant'').
2. The Plaintiff may file a lawsuit against the Defendant
or simply file a claim with his own automobile insurance
company or against the casualty insurance carrier for the
Defendant. (It is important to note that all structured
settlements do not necessarily arise from a lawsuit. Often,
claims against property and casualty insurance carriers that
have not resulted in a lawsuit are resolved by way of a
structured settlement. Nevertheless, for purposes of our
example, let's assume that the Plaintiff has retained a lawyer
and filed a lawsuit against the Defendant.)
3. The Defendant's property and casualty carrier will
retain an attorney to provide a defense for the Defendant.
4. As is the case with almost all litigation, the parties
agree to settle; in this case let's say they agree to settle by
way of a structured settlement.
5. Under a structured settlement agreement, the Defendant
will contractually agree to pay the Plaintiff (i) an up front
cash payment (which almost always goes to pay the Plaintiff's
attorneys fees, court costs, medical expenses, etc.) and (ii)
future periodic payments. The future periodic payments may be
monthly payments, annual payments, every five years, or any
combination of these and more. The available payment options
are limited only by the creativity and negotiating skills of
the parties. The parties execute a settlement agreement,
whereby the Defendant and/or the Defendant's property and
casualty insurance company agree to make the future periodic
payments to the Plaintiff in return for a release by the
Plaintiff of all claims and causes of action against the
Defendant and the Defendant's insurer.
6. Often, the Defendant and/or the Defendant's insurer will
execute a Qualified Assignment, whereby the Defendant and/or
the Defendant's insurer will assign to a third party (the
``Assignment Company'') the obligation to make the payments due
under the settlement agreement. The Assignment Company is
typically, but not always, an affiliate or subsidiary of a
large insurance company.
7. Typically, the Qualified Assignment arrangement is
contemplated and described in the Settlement Agreement and the
Plaintiff contractually agrees to permit the Defendant and/or
the Defendant's insurer to assign their obligation to make the
future periodic payments due under the Settlement Agreement to
the Assignment Company. Often, the Plaintiff actually signs the
Qualified Assignment and the Defendant and/or the Defendant's
insurer is released from any obligation to make the periodic
payments called for by the Settlement Agreement.
8. The Assignment Company will then purchase an annuity
from a life insurance company (``Life Insurance Company'') to
fund its obligations to make the payments due under the
Settlement Agreement and/or Qualified Assignment. Often, the
Assignment Company purchases the annuity from an affiliated
life insurance company. For example, Safeco Assigned Benefits
Service Company, an Assignment Company, will often purchase an
annuity from Safeco Life Insurance Company to fund its
obligations to make structured settlement payments.
9. The Assignment Company is the ``owner'' of the annuity,
Life Insurance Company is the ``issuer,'' and the Plaintiff is
identified as the ``payee,'' ``annuitant'' and/or ``primary
beneficiary.'' The Settlement Agreement often, but not always,
will provide that the Assignment Company may, at its option,
purchase an annuity from Life Insurance Company to fund the
Assignment Company's obligation to make the periodic payments.
10. Life Insurance Company will then make the annuity
payments directly to the Plaintiff, as payee, annuitant and/or
beneficiary under the annuity, at the direction of the
Assignment Company, as owner of the annuity.
11. NASP members come into the equation by providing the
Plaintiff (i.e. the (annuitant/payee/beneficiary under the
Annuity) liquidity, in the form of assignments or loans secured
by the Plaintiff's right to receive all or a portion of the
payments due under the Settlement Agreement and annuity. For
example, a NASP member may accept an assignment of the
Plaintiff's right to receive certain payments due in connection
with the structured settlement arrangement or may loan the
Plaintiff money, in return for a pledge of the Plaintiff's
right to receive the payments due under the settlement
agreement and/or annuity.
This is not the exclusive method by which structured
settlements arise, but certainly the most common. For example,
there is no requirement that a structured settlement involve an
Assignment Company or an annuity. As discussed in more detail
below, the Assignment Companies, Life Insurance Companies and
structured settlement brokers enjoy tremendous economic
benefits from structuring these transactions in the above
manner, which helps explain why this structure is so valuable.
Nevertheless, defendants in litigation and their property and
casualty insurance companies may simply agree with plaintiffs
and claimants to settle a case which calls for a payout of the
settlement amount over time. That would be considered a
structured settlement, but would not involve a Qualified
Assignment company and would not fall under Section 130 of the
Internal Revenue Code (see below). The defendant or property
and casualty carrier may bypass the Assignment Company and
simply purchase an annuity directly to fund its obligation
under the settlement agreement or simply make the future
periodic payments directly to the plaintiff/claimant out of its
own funds. Structured settlements that predated 1986 (and the
enactment of certain tax provisions) typically did not involve
Qualified Assignments.
II. The Tax Code.
The structured settlement business generated by the members
of the NSSTA exists, almost entirely, because of the presence
of two provisions of the Internal Revenue Code. Sections 104
and 130. Section 104 provides that monies received by
individuals on account of personal injury, sickness or death is
excludable from the gross income of the taxpayer receiving said
monies. This exclusion applies whether the monies are received
in a lump sum or over a period of time. Hence, monies received
under a structured settlement are not taxable to the Plaintiff.
This section of the Code dates back to 1939 and is well-
established. The exclusion from gross income applies to all
monies received as a result of personal injury, sickness or
death as long as there was some physical injury.
The other relevant provision of the Internal Revenue Code
is Section 130, which conveys certain tax benefits on the
insurance companies that enter into structured settlements.
This provision was not enacted until 1986 and resulted from
intense lobbying by insurance companies and structured
settlement companies. It provides that an entity that accepts,
by way of a ``qualified assignment,'' the obligation to make
structured settlement payments to an injured claimant shall not
be taxed on the amount paid to said party by the defendant to
assume such obligation, provided that the Assignment Company
(i) assumes the liability from a person who was a party to the
suit or settlement agreement; (ii) the periodic payments are
fixed and determinable as to amount and time of payment; (iii)
the periodic payments cannot be accelerated, deferred,
increased, or decreased by the recipient of the payments; (iv)
the assignee's obligation is no greater than the obligation of
the person who assigned the liability; (v) the periodic
payments are excludable from the gross income of the recipient
under Section 104; and (vi) the amount received by the assignee
for assuming the periodic payment obligation is used to
purchase a ``qualified funding asset.'' A quailed funding asset
is defined as an annuity contract issued by a life insurance
company or an obligation of the United States (such as treasury
bills). It allows NSSTA broker members to ``sell'' structured
settlements more effectively and amounts to a huge tax benefit
for the insurance companies, which own the Qualified Assignment
companies.
As a result of Section 130, much of the 5-8 billion dollars
received by Assignment Companies each year to assume the
obligation of defendants and property and casualty carriers to
make the periodic payments due under structured settlements is
not taxable to the entities that receive these payments. While
it is true that the Assignment Companies use most or all of
this money to purchase ``qualified funding assets,'' it is
important to note that almost all of these qualified funding
assets are purchased from affiliated life insurance companies
(parent or sister companies). Thus, the life insurance
companies get to sell their annuity products at very
competitive rates. For those life insurance companies that own
property and casualty companies and also issue annuities to
fund structured settlements, the they have a potentially very
large and lucrative captive customer.
III. Who Benefits From Structured Settlements?
The transaction provides a great many benefits to the
players that are not always recognized or appreciated by those
unfamiliar with the transaction.
a. It is widely reported that insurance companies (i.e. the
property and casualty carriers) are able to settle personal
injury claims for 15-20% less than it would typically cost them
to settle such claims by way of a cash payment. Benefit to the
insurance industry.
b. The plaintiff's lawyer almost always receives their fee
up front, out of the cash portion of the settlement; otherwise
you can be sure that plaintiff's lawyers would be reluctant to
put their clients into structured settlements. Benefit to
plaintiff's lawyers.
c. Structured settlement brokers who structure the
settlement and place the annuity with the insurance company
earn a fee in connection with the transaction. Benefit to
structured settlement brokers [i.e. NSSTA members]. (Note: the
vast majority of these structured settlement brokers represent
the defendant/property and casualty insurance carrier. Thus,
their incentive is to settle the case as cheaply as possible
for the defendant/insurance carrier, to insure additional
business with the casualty carrier.)
d. The Assignment Company receives cash compensation from
the defendant/property and casualty carrier for agreeing to
assume the obligations to make the future structured settlement
payments and said compensation is not taxable. Benefits the
Assignment Company.
e. Life Insurance Company gets to sell their annuity
policies at very competitive rates. In turn, they put that
money to work on investments earning large returns for
themselves which far exceed the rate at which the annuities
were placed. Benefits Life Insurance Company. (Currently, rates
for annuities to fund structured settlement payments are around
5.5 to 6%. It is not difficult to see the large profits the
Life Insurance Companies enjoy if they are taking in 4 Billion
Dollars per year in annuity premiums that yield [to the
Plaintiff) 6% per year and then invest the money and earn a
return of 10 % or higher.)
IV. Problems With Structured Settlements.
The problems with structured settlement transaction are as
follows:
a. They are inflexible. In order to prevent the claimant
from being in ``constructive receipt'' of the annuity payments,
Section 130 of the Internal Revenue Code provides that payments
cannot be increased, decreased, accelerated or deferred. Thus,
once the Plaintiff agrees to the structured settlement, they
are stuck with it. If the Plaintiff has a change in his life
circumstances (i.e. death, divorce, serious illness, etc.),
which was not (and could not have been) anticipated at the time
of the structured settlement, the Plaintiff is unable to access
or liquidate his structured settlement payments to address
those issues. If the Plaintiff has a financial emergency (i.e.
unexpected medical procedure not covered by insurance,
bankruptcy, foreclosure, etc.) they would be unable to access
their funds to address the emergency. If the Plaintiff wanted
to access their structured settlement payments to continue or
finish their education; buy, improve, or remodel a home; or
start a business; pay off debts; avoid foreclosure or
bankruptcy, etc. they are precluded from doing so.
b. Structured settlements require the parties to anticipate
far into the future. It is impossible for a Plaintiff and his
counsel to look into the future and anticipate, with any degree
of certainty, what the person's financial situation and needs
will be.
c. No states have regulations requiring disclosure of the
terms of the structured settlements, such as the present value
of the future payments due under the structured settlement, the
discount rate used to calculate the present value, the total
amount of payments to be paid (so a comparison can be made of
the present value vs. the total future payments), etc.
Plaintiffs do not always fully understand the ramifications of
a structured settlement and the Defendants and insurance
brokers an insurance companies who forge structured settlements
on these Plaintiff's and their counsel are not in a big hurry
to explain the transaction in its entirety, particularly with
respect to the present value of the future payments.
d. Often, structured settlements are negotiated with
individuals who are not represented by counsel. That is a
particularly true when a person files a claim with their own
insurance company. In fact, there are several pending class
actions against insurance companies for discouraging their
insured's from retaining counsel to represent them in
connection with personal injury claims. In fact, in one state
one insurance company was cited for practicing law without a
license by providing legal advice to claimants regarding their
claims. In cases where the Plaintiff is not represented by
counsel, the problems caused by the absence of any meaningful
regulations requiring disclosure, representation by counsel,
etc. when structured settlements are originally proposed are
exacerbated.
V. Business Practices of Insurance Companies and Structured Settlement
Brokers.
For your information, the structured settlement brokers and
insurance companies who make hundreds of millions of dollars
per year on structured settlements and who are proposing the
legislation to eradicate our business have some skeletons in
their own closet.
a. As indicated above, structured settlements have numerous
benefits for the property and casualty insurance carrier and
defendants who settle litigation with structured settlements
(cheaper to settle and a reduction in attorneys fees); the
brokers who structure the settlement (they earn a fee for
selling the annuity to fund the structured settlement
payments); the plaintiff's lawyer (who settles the case without
having to go to trial and who receives his/her fee up front, in
cash); and the life insurance company/assignment company (who
accepts the obligation to make the payments and gets to sell an
annuity [they receive cash tax free, sell an annuity at
relatively low fixed rate [i.e. currently about 6%], and are
able to earn a return on the money they receive for issuing the
annuity]).
b. There are few, if any consumer protection regulations
imposed on the front end of a structured settlement
transaction, such as required disclosures, court approval,
mandatory review by an attorney or financial advisor, etc.
c. Insurance companies and structured settlement brokers
representing defendants in structured settlement negotiations
use questionable practices in trying to persuade defendants to
accept structured settlements. For instance:
(i) Travelers Insurance is currently a defendant in a class
action case in Connecticut involving claims of fraud, deceptive
trade practices, civil conspiracy, breach of fiduciary duty,
etc. The plaintiff's class are recipients of structured
settlements. The Complaint in that case quotes liberally from
Travelers' structured settlement manual as follows:
--``Essentially, when a claimant has a reduced life
expectancy and a substandard age rating has been obtained, the
more life contingent benefits provided in the structure offer,
the higher the savings on the claim.''
--``The primary objective in expanding use of structured
settlements is to maximize their value as a tool to reduce both
claim loss and expense costs.''
These quotes from Travelers own manual illustrates the
motives of the insurance companies in promoting structured
settlements. Moreover, the allegations in the Connecticut class
action lawsuit were that Travelers received illegal kickbacks
and rebates from structured settlement brokers in exchange for
directing business to said brokers. Thus, the structured
settlement brokers would rebate part of the commission they
earned for arranging a structured settlement through or for
Travelers in return for Travelers' agreement to direct business
to the brokers who agreed to make such rebates. (It is my
understanding that rebating is prohibited by statute in
virtually every state in the country.)
(ii) Insurance companies, defendants, and structured
settlement brokers endeavor to ``back-load'' structured
settlement contracts and, as evidenced above, increase the life
contingent component in the structured settlement agreements.
For example, it is not uncommon for structured settlement
agreements to call for periodic payments every five (5) years
or so to, with the payments increasing substantially toward the
end of the agreement. We've seen deals that call for a payment
of $ 10,000 in Year 5, $ 15,000 in year 10, $ 25,000 in year
15, $ 50,000 in year 20, $ 100,000 in year 25, and $ 100,000 in
year 30. The deal may be ``sold'' by the defendant, insurance
company and/or structured settlement broker as a $ 300,000
settlement (referring to the total amount of payments), yet the
true value of these future payments, assuming an 8% discount
rate, is around $ 57,000.
--Another example involves an actual structured settlement
involving one of our clients in Oregon from 1991. Our
customer's parent settled this case when our customer was 16
years old. The settlement documents specifically refer to a
settlement of $ 581,173.82, broken down as follows:
Cash payment of $ 110,443, of which $ 50,136 went
to the plaintiff's attorney, $ 41,443 went to reimburse his
health insurance company for money paid to medical providers
related to the accident, and $ 18,863 was paid to the
plaintiff's father to reimburse him for his out-of-pocket
medical expenses (probably the deductible) and to replace the
plaintiff's car.
The remaining $470,730.82 was structured over a
period of 19 years. The plaintiff was to receive $15,000 in
January 1996, when he was 22 years old; $30,000 in January
2003, when he was 29 years old; and $425,730.82 in January
2010, when he was 36 years old. This deal was marketed and sold
to the plaintiff and his father as a $581,173.82 settlement. In
reality, the settlement resulted in reimbursement of the
plaintiff's health insurance provider, a replacement car for
the plaintiff, and future payments over a period of 19 years
that had a present value, assuming an 8% discount rate, of $
120,770.
--Other examples involve monthly payments of $ 125 per
month, payments every five years of $ 5,000 per year, four
annual payments of $ 12,000 each, etc. Claims adjusters and
attorneys representing property and casualty carriers will
often tell the claimant/plaintiff (particularly when they are
not represented by counsel) that the only way the case can be
settled is by way of a structured settlement. We are involved
in a deal right now, where the plaintiff's attorney has been
told point blank by Liberty Mutual that they will not settle
his client's case except by way of a structured settlement.
They have offered three (3) payments that total approximately $
16,300, to be paid in the years 2004, 2006, and 2009. The
present value of those payments, assuming an 8% discount rate
is $ 9,203.
The point of these examples is not that parties should not
have the right to settle a claim or case on any terms that they
deem appropriate. The point is that the insurance companies and
structured settlement brokers often argue, in their ongoing
effort to put us out of business, that structured settlements
were created to serve important public policies such as to
settle cases involving catastrophically injured individuals who
have long term and continuing medical needs and physical
disabilities with little or no ability to provide for
themselves or their families. They contend or imply that
structured settlements are used exclusively or mostly where the
claimant/plaintiff is disabled and unable to work such that he
or she is dependent on the monies he receives under the
structured settlement agreement for future medical expenses and
to support himself and his family. That simply is not true.
Certainly, there are structured settlements that involve
catastrophic injuries. However, for the vast majority of
structured settlements the overriding reasons underlying the
decision to settle the case by way of a structured settlement
are that they are a tool that promotes the settlement of claims
and disputes because (I) the defendant and/or casualty carrier
can settle the claim for less money than if it was settled by
way of a structured settlement; (ii) the structured settlement
broker earns a fee, (iii) the life insurance company is able to
sell an annuity; and (iv) the plaintiff and the plaintiff's
counsel are able to avoid a lengthy and expensive trial and
resolve their dispute. There is nothing wrong with these
reasons underlying structured settlements, but it is
disingenuous for our opponents to suggest that these are not
important reasons underlying the use of structured settlements.
Furthermore, any suggestion by the opposition that all (or even
a majority) of structured settlements involve individuals who
have sustained catastrophic injuries which require long-term
care is simply inaccurate, deceptive, and misleading. Remember,
these insurance companies that have suddenly developed this
pro-consumer interest in preserving and protecting the long
term well-being of these injured claimants are, in many cases,
the same people who tried like heck to defeat the claimants in
court. Since when were insurance companies the bastion of
consumer protection?
d. Another argument that the insurance companies and
structured settlement brokers advance in support of their
efforts to shut down our business are as follows:
structured settlement recipients are
unsophisticated in financial matters and by structuring the
settlement so as to spread the payments over time, the
recipients will not receive a large lump sum which they are
likely to dissipate prematurely, leaving them and their family
destitute, unable to work, and a ward of the state.
Response: This argument presumes that all structured
settlement recipients are unsophisticated in financial matters
and will prematurely dissipate a cash settlement. Not true.
Occasionally, the settlement agreement provides that the
plaintiff's attorney shall receive their fee over time as part
of the structured settlement. (That does not happen too often,
because attorneys appreciate the time value of money.) There
simply is no correlation between being unsophisticated in
financial matters and being the recipient of a structured
settlement, unless one were to assume that someone who was
unsophisticated in financial matters would be more likely to
accept a structured settlement in the first place instead of a
cash settlement. If that were true, then it would seem to me
that these transactions cry out for some basic consumer
protection and disclosure regulations on the front end. If
structured settlement recipients are so unsophisticated in
financial matters and so seriously injured, as our opposition
claims, what is so wrong with requiring the insurance companies
and structured settlement brokers who sell these products,
which call for payments to people 20, 30, 40, even 50 years
down the road, to provide some basic information about these
structured settlements. (Insurance companies can and do go
broke.) One could argue that an injured claimant deserves and
needs more information about structured settlements on the
front end, when they are considering releasing their claim in
return for the unsecured promise of future payments that may
come due far out in the future, than they need on the back end,
when deciding to assign five or six years of payments in order
to address an immediate need or when they desire to pledge
their right to receive said payments as collateral for a small
personal loan. Yet, the insurance industry opposes all
suggestions for basic disclosures to be provided claimants when
faced with the decision of accepting a structured settlement.
The vast majority of structured settlements involve
accidents where the claimant/plaintiff did not sustain
catastrophic or permanent injuries and/or where the plaintiff
has recovered from their injuries. (NASP members typically do
not enter into transactions with individuals who are both
unemployed and unemployable.) In addition, structured
settlements are often used to settle wrongful death cases
(where the recipient of the payments is not the person who was
physically injured). I've even seen cases where a structured
settlement was used to resolve a same sex sexual harassment
case.
Furthermore, simply because the person sustained serious or
permanent injuries does not necessarily mean: (I) that they
cannot lead a productive life; (ii) that they cannot provide
for themselves and/or their family; (iii) that they are
unsophisticated in financial matters; (iv) that they received a
large structured settlement that was designed to provide for
them for the rest of their life; or (v) that they would not
benefit from having the opportunity to assign or pledge all or
a portion of their right to receive structured settlement
payments to address a personal need, situation or emergency.
Some examples:
We closed a transaction with a young man in
Arizona who had sustained a spinal injury that left him a
paraplegic. Because of the nature of the accident (i.e. no
liability by the defendant and/or the defendant who was liable
had no money and/or the plaintiff was partially at fault) this
person's structured settlement was rather small (the original
settlement called for $ 15,000 per year for 10 years). However,
this young man was self-sufficient and able to work. He was
completing his education and preparing to take the CPA exam. He
wanted some money to purchase a new handicapped van, complete
his education, and prepare for a new job. He had four (4)
annual payments remaining and assigned them to us for a lump
sum payment of around $ 41,000.
Another gentlemen who was our customer had
sustained serious injuries and was physically disabled. He
desired to put a down payment on a house and do some work on it
to make it handicapped accessible. He also wanted to purchase a
handicapped van. Although this gentleman had not fully
recovered from his injuries, such that he could hold down a
full time job, he was working toward that goal. His immediate
objective was to gain some independence by purchasing his own
home and transportation. (Previously, he had been living with
his parents.) He was receiving over $ 7,500 per month from his
structured settlement, which was increasing 3% per year. He
wanted to assign $ 1500 per month for 8 years so that he could
raise funds to start these projects. He was represented by
counsel throughout the process and was very much in favor of
proceeding with the transaction. Without the option to complete
a transaction with Settlement Capital, this fellow would have
had no other alternative.
There are numerous examples. We completed a
transaction with a gentlemen who wanted to purchase a mobile
home park. (He had recovered from his injuries and was working,
but wanted to go into business for himself.) We completed a
transaction with a lady who was working for AT&T and making $
52,000 per year, but wanted to raise some money to send her
daughter to Tulsa University. We loaned her $ 16,000, secured
by her structured settlement payments. Another client was about
to get married and she and her fiancee had saved approximately
$ 15,000 for her wedding. A few weeks prior to the wedding,
there was an unexpected death in her family. She had to use the
money for her wedding to pay for the funeral. Her parents had
settled a case for her when she was a child and she was
scheduled to receive a $ 30,000 payment in approximately two
(2) years. She was able to assign that payment to us and use
the proceeds for her wedding. She was neither disabled nor
unsophisticated. Everyone in our industry has been able to
complete transactions with individuals to help them purchase a
house, improve their home, start a business, continue their
education, avoid foreclosure or bankruptcy, consolidate debts,
pay off tax liens and child-support obligations, etc. The list
is endless.
Query: If the insurance companies and structured settlement
brokers are so concerned about the welfare of the structured
settlement recipient, why do they back-load their structured
settlement agreements and push life contingency payments. If
they are concerned about the claimant dissipating large
settlements, why do they back-load their deals with huge lump
sum payments far in the future (i.e. $ 500,000 due in 2012, $
1,000,000 due in 2020, etc.). Why do the news letters of the
structured settlement brokers and NSSTA members emphasize
selling the ``gross value'' and ``aggregate total value of the
payments'' in settlement negotiations? In an article in a
recent NSSTA newsletter, addressing overcoming objections to
structures, the emphasis was on the use of ``gross dollars'' to
compare a structure to a cash offer. Why won't they support
legislation that requires that a person consult with counsel
prior to entering into a structured settlement? The answer is
that they want to destroy our business and continue to operate
their business in a manner that maximizes their ability to
place structured settlements and earn billions of dollars,
while denying the consumer the right to make an informed choice
or have control of their financial future.
In a public hearing before the Texas State Senate
Judiciary Committee in Texas in April of last year, a
structured settlement broker and member of the NSSTA testified
that there was not enough disclosure and information provided
to the plaintiff in structured settlement negotiations. He
testified that too often the property and casualty insurance
carrier who has insured the defendant insists on placing the
annuity to fund the structured settlement with an affiliated
life company, even though another life company is offering a
better rate and even though doing so might not be as beneficial
to the claimant. He cited an example involving one case in
which he was involved where the cost of the ``in-house''
annuity was $ 350,000 and a competing offer was around $
260,000. (The point was if the property and casualty carrier
was willing to purchase an annuity from its own affiliate for $
350,000, they should have been willing to pay the same to
another life insurance company, meaning the claimant/plaintiff
could have received more structured settlement payments for the
same cost from another independent life company.) He commented
that some structured settlement brokers are only licensed by
certain life companies, meaning any structured settlements
involving said brokers would necessarily be placed with the
life companies with which the broker was licensed, regardless
of the benefits to the claimant/plaintiff. Other property and
casualty companies have an approved list of companies with whom
they will do business, further limiting the choices of the
consumer. He also commented on problems with rate and age
adjustments in connection with structured settlements. Finally,
and perhaps most importantly, he complained about the practice
of ``rebating'' which he stated was not uncommon in the
structured settlement industry. He said that this practice
never benefits the consumer. He concluded by saying that any
legislation that requires disclosure and more information to be
provided to the injured claimant and his attorney would be a
positive development. Remember all of these comments were made
by a structured settlement broker and member of the NSSTA in a
public hearing and under oath. His statements closely followed
the allegations asserted against Travelers in the Connecticut
class action cases.
In short, the insurance industry, NSSTA, and structured
settlement brokers preach consumer protection and public policy
in their efforts to discredit and destroy our industry, while
ignoring their own problems and resisting any efforts to
address and/or regulate their industry. Contrary to their
stated positions, their true interest is to expand their market
and continue to earn billions of dollars without being subject
to disclosure requirements and other consumer protection
provisions and regulation and without the presence of the
secondary market to educate the public or otherwise challenge
them. (Remember, none of their proposed legislation imposes any
regulation on them and, most notably, does not apply to a
commutation of the future benefits due under the structured
settlement to the Plaintiff by the Assignment Company and/or
Life Insurance Company. In other words, we would be subject to
extremely onerous disclosure and court order provisions to
complete our transactions with our customers, while they would
not be subject to such requirements, meaning they would have a
substantial competitive advantage in completing such
transactions. Sounds like a legislative monopoly to me.)
VI. Why the NSSTA, Structured Settlement Brokers, and the Insurance
Industry Wish To Destroy Us.
There is no simple answer to this question. They will tell
you that secondary market transactions threaten the tax
benefits which structured settlement recipients and the parties
obligated to make structured settlement payments enjoy under
the Internal Revenue Code. That is, I believe, a red herring.
There is no reported case, rule, regulation, IRS ruling or
other authority that supports their contention that these
transactions threaten their tax status. In fact, the only case
to address the matter was a Third Circuit case, which rejected
this proposition.
They will, of course, argue consumer protection and claim
that the secondary market is ripping off consumers and charging
exorbitant and unconscionable discount rates. That is also
untrue. While discount rates are high, relative to mortgage
rates and the prime rate, they are in line with credit card
rates and other relatively risky lending. Discount rates range
from 12% to as high as 25%, but the vast majority of deals are
completed in the range of 16% to 22%. To be absolutely fair and
frank, there certainly are some transactions where the discount
rate exceeds 25%, rising to 30 or even 35%, but those involve
very short and small transactions. (For example, someone may be
scheduled to receive 2 annual $ 5,000 payments over the next
two years and seek to raise some cash now. Our industry members
do have a cost of capital [maybe 7,8, 9, or 10%], therefore to
make the transaction economical, the annuitant might receive $
6,700 at a discount rate of 31.41%. While that rate might seem
a bit high, compared to the prime rate of interest, the fact is
that our customers do not have access to traditional sources of
capital. Moreover, the actual dollar difference between a rate
of say 21.5%, which you might be able to get on a credit card
and the 31.41% rate, would be $ 800. When you are dealing with
transactions this small and this short-term, the actual dollars
is what is important. Due to the risk inherent in our
transactions and the cost of bringing in a transaction, we
simply cannot do deals this size at these types of rates.)
Our opposition often argues that our customers receive 10
or 20 cents on the dollar. In this particular case, while the
rate is relatively high, the annuitant receives 68 cents on the
dollar. In a longer term transaction, say a $ 25,000 payment
due in five years, the transaction could be completed at a rate
of 15.5% and the annuitant would receive less than 50 cents on
the dollar. The point is that you must be careful when
comparing transactions, interest rates, and dollar amounts. You
must not compare apples to oranges.
It is important to note, however, that when these
transactions are completed by way of a loan, as some NASP
members do, they are bound by usury limits. In Texas, the usury
limit is an 18% effective rate, which means that our
transactions are completed at a contract rate of interest of
around 16.5%. Furthermore, lenders are required to provide
disclosures of effective interest rates, etc. as required under
applicable state law and the Federal Truth-in-Lending laws, may
not charge fees or points, and must allow pre-payment of the
loan without penalty.
All NASP members would support regulation of our industry
which would require disclosures, that the seller/borrower be
represented by counsel, and other consumer protection
provisions. I believe NASP would also support a reasonable
court/administrative agency review process, as long as the
procedure was not too expensive and time consuming for the
borrower/seller and as long as the standards of review were
reasonable. In short, we support true ``consumer protection''
regulation, but not laws that give the insurance industry
control over our customers and our business and which, in
effect, regulate us out of business.
I believe the true motivation behind the insurance
industries' opposition to our business is that by virtue of the
fact that we exist, we necessarily educate the public and
plaintiff's attorneys as to the true value of structured
settlements, which is something our opponents cannot accept. We
also have raised the profile of their industry and highlighted
the profits they are earning and the tax boondoggle that they
enjoy in Congress. A representative of the NSSTA once said to
me that they have been told by their leadership that they must
destroy us or we will destroy them. While I disagree with that
statement, the fact that that is how they feel should give you
some insight as to why they are fighting us.
We happen to believe our arguments are compelling and our
position is reasonable and makes sense. However, we recognize
that our opponents have done a good job of painting us as
immoral companies who prey on widows, orphans, and the weak and
uninformed. That simply is not true. Our objective is to
survive and thrive in a reasonably regulated industry.
What are Structured Settlements Really About ???
On August 12, 1998, a hearing was held in the Circuit Court
for Montgomery County, Maryland in the matter of Stone Street
Capital v. Deborah L. Jackson, Civil No. 176131. In this
hearing, Counsel for State Farm Insurance company discussed the
reasons for pursuing structured settlements in personal injury
case. Following is an excerpt from the transcript on this
hearing:
THE COURT: Why is it, by the way, that traditionally these
[structured settlement annuity contracts] are non-assignable?
COUNSEL FOR STATE FARM: There are a lot of reasons. One is
to protect the victim usually of personal injury. The whole
reason for setting up these--
THE COURT: Protect them from what?
COUNSEL FOR STATE FARM: The whole reason for setting up
these structured payments is so that they do not get a lump
sum; they do not get $300,000 up front. These people--
THE COURT: No it is not. The reason for setting up these
structured payments are so that the insurance companies can
settle out cheaper.
COUNSEL FOR STATE FARM: That is one reason
THE COURT: All right, come on--
COUNSEL FOR STATE FARM: I am not going to deny that.
THE COURT: They are not looking out for a plaintiff in a
personal injury case. Please.
COUNSEL FOR STATE FARM: That is one reason that Your Honor
has said. It is more cost effective for the insurance company--
THE COURT: That is the reason. That is the reason.
COUNSEL FOR STATE FARM: Okay.
How Insurers Abuse Structured Settlements
The attached are examples of structured settlements. These
example show how, when they are being set up, the insurance
industry abuses them and how the true economics of a structured
settlement are buried, hidden and obscured to make them seem
more appealing to the plaintiff lawyer and his client.\1\
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\1\ Over 20% of all structured settlements involve clients with no
attorney representation!
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Exhibit: Explanation/Comments:
1. Examples of actual insurance company settlement
documents showing the amount they paid for the annuity and the
future value of the settlement. This is why structured
settlements ``seem'' like a great deal for the claimant when
they are really a great deal for the insurer.
2. Attorney accidentally took his fee on the future value
of the settlement.
3. Christy's proposal states that the value of the
settlement is $222,000. In fact discounted at 10% it is really
worth only $140,000 an overstatement of more than 58%!
4. The proposal for Rose states that the value of $630.89
per month for 240 months is $151,413. Discounted to present
value at 10% per annum it is only worth $63,000--an
overstatement of the value of more than 140% !!
5. The Mr. & Mrs. Gibbons settlement proposal says that
they are guaranteed $830,000. However, the real economic value
of the guaranteed portion of the settlement is half that
amount!!!
6. This settlement agreement wrongly sets forth the
settlement values suggesting that the client is settling for
over $413,000 when in fact the settlement is a mere $129,000.
7. The settlement foisted on this 19 year old accident
victim tells her the settlement is worth $1,594,918 when in
fact, it is only worth $341,166 in present value--this
settlement proposal overstates the true value of the settlement
by an astounding 367.4 %!!!
8. The settlement proposal for Kimberly sets out the actual
cost of the annuities being purchased. With this information we
can see that the yield she is receiving on the annuities
purchased is a miserly 3.452% for the monthly annuity and
4.253% for the one paying the lump sum whereas, in 1993, United
States Treasury Bonds were yielding over 7%.
9. Here again, due to lack of information, the attorney
over-charged his client by taking a fee on the entire future
value of the settlement.
10. This comparison is so utterly misleading and incorrect
as to need almost no commentary. First, yields on U.S. Treasury
securities at the time (7/'93) were over 7%. Thus, the annual
payment would have been closer to $46,800. Second, the tax code
specifically allows one to fund a structured settlement with
U.S. Govt. securities--thus there would be no taxes due! Third,
A U.S. Govt. bond is risk free whereas, a commercial annuity
has default risk (see First Executive Life, Mutual Benefit
Life, Confederation Life, etc.).
11. As a result of the death of her father, a structured
settlement was used to provide for the care of Bobbyjo Plank
(12 years old at the time). It provides her monthly payments of
$2,250. However, they don't start until 43 years latter !!! The
true value of this settlement discounted at a mere 5% is less
than $64,000. How, pray tell, was this structured settlement
designed to care for her???
More examples available upon request.
PEOPLE WITH STRUCTURED SETTLEMENTS NEED PROTECTION, ALL RIGHT FROM THE
INSURANCE COMPANIES!
You may have heard talk about how people who have been
awarded structured settlements as compensation for some injury
need protection from settlement purchasers. They say these
helpless people--who have been crippled or maimed and who rely
on their settlement payments for sustenance--are being preyed
upon by unscrupulous businessmen who want to dupe them into
selling these lifelines for only a tiny fraction of what
they're worth. Through H.R.4314, which was introduced at the
end of July, they are demanding that a 50 percent excise tax be
imposed on such transactions to drive settlement purchasing
companies out of business and prevent recipients from
``foolishly'' dissipating their awards.
Nonsense. The facts tell a much different story. Not only
is the vast majority of people who have sold their structured
payments for a lump sum not disabled, but as we'll see, they're
happy with the choices they have made. Speaking of choices,
other facts suggest that the insurance companies who are behind
these structured settlements in the first place have not always
been up-front with recipients, and have kept some pretty
important information to themselves. Maybe that's why they're
working so hard to keep exclusive control over this industry.
Let's look at the facts:
Nearly a third (32 percent) of recipients were not
allowed to choose for themselves whether or not they wanted a
structured settlement instead of a lump some. Some of these
were minors at the time their cases were settled, and in some
cases the insurance carrier made a ``take it or leave it''
offer.
Almost half the time (48 percent), the actual
mathematical value (called present value) of the settlement was
not explained to the claimant.
Almost as often (43 percent of the cases),
claimants were not advised that their future scheduled payments
were absolutely inflexible.
Astoundingly, 12 percent of structured settlement
recipients were not represented by counsel when they agreed to
the settlement.
So it appears that the insurance companies have a lot of
explaining to do. But what about their claims that they're now
just trying to help protect defenseless recipients.
Again, let's look at the facts:
More than 85 percent of structured settlement
recipients are gainfully employed and suffer no long term
disability. (So much for preying on the defenseless!)
34 percent of those who exchange their settlements
for lump sums use the proceeds to buy or renovate a home, 31
percent pay off debts or pay for educational/vocational
education, 9 percent use the proceeds for a medical procedure
or existing medical bills, 16 percent use the funds to open or
expand a business. (So much for frivolously dissipating their
awards!)
92 percent are ``satisfied'' or ``very satisfied''
with the refinancing they were able to accomplish with the help
of the settlement purchasing industry. (So much for supposedly
shady tactics!)
The average discount rate charged by settlement
purchasers is 18-22 percent--about the rate credit cards
charge. (So much for outrageous interest rates!)
Bottom Line, the facts simply aren't what the insurance
companies would have you believe. If you really want to help
injured people who have been awarded structured settlements,
take your time and demand a carefully crafted consumer
protection bill that mandates full and understandable
disclosure of financial details at every stage in the process--
beginning when settlements are first agreed to, and continuing
through any future transfer--and also recognizes the right of
recipients to change their minds as their needs and
circumstances change and to choose to sell their annuity
payments for a lump sum if that's what they want.
WHY WON'T THE BIG INSURANCE COMPANIES TELL THE TRUTH ABOUT STRUCTURED
SETTLEMENTS?
There's been talk recently about how Congress ought to
impose an extreme new 50 percent excise tax on settlement
purchasing companies in order to protect people who have been
awarded structured settlements. The big insurance companies who
support this scheme, known as H.R. 263, have created a string
of myths in their rush to ram this unfair tax through. The
problem is, their myths don't hold up in the light of day.
Let's look at those myths and the facts they leave out:
Myth: Structured settlements are essential for the long-
term financial health of seriously injured people.
Truth: More than 85 percent of people receiving structured
settlements have full-time jobs or are capable of working. They
don't suffer from long-term disabilities.
The average size of a structured settlement is only
$75,000--not nearly enough to pay for the long-term care of
someone who's been critically injured.
Myth: People who sell some or all of their structured
settlements just squander the money, like the woman who
allegedly wanted to cash in her settlement to help her new
boyfriend buy a new motorcycle.
Truth: Far from squandering the money, of the people who
exchange their monthly payments for lump sums:
34 percent use the money to buy or renovate a
home.
31 percent pay off existing debts and child
support obligations. In fact, settlement purchasers require
that tax liens, child support and alimony are paid as part of
their contracts.
14 percent pay medical expenses.
11 percent open or expand a business.
Myth: Structured settlements were designed to prevent
people from quickly dissipating their awards. Truth: The real
reason the big insurance companies push structured settlements
is their incredible profitability. Consider this, from The
Travelers Structured Settlements Manual:
The primary objective in expanding the use of structured
settlements is to maximize their value as a tool to reduce both
claim loss and expense costs.''
``Essentially, when a claimant has a reduced life expectancy
and a substandard rating has been obtained, the more life
contingent benefits provided in the structured offer, the
higher the savings on the claim.''
In other words, the sooner a person with a structured
settlement dies, the less the insurance company has to pay.
That's why they're pushing structured settlements--not some
altruistic desire to protect people from themselves. Why won't
the big insurance companies tell the truth? They can't afford
to. Don't let them use Congress to put an entire industry out
of business.
[Additional attachments are being retained in the Committee
files.]
Chairman Houghton. Thanks very much, Mr. Chapoton.
Mr. Little.
STATEMENT OF THOMAS W. LITTLE, PRESIDENT, LITTLE, MEYERS,
GARRETSON & ASSOCIATES, CINCINNATI, OHIO; ON BEHALF OF NATIONAL
STRUCTURED SETTLEMENTS TRADE ASSOCIATION
Mr. Little. Mr. Chairman, Members of the Subcommittee, good
afternoon. My name is Thomas Little. I am a structured
settlement broker from Cincinnati, Ohio. I am testifying today
as past president of the National Structured Settlement Trade
Association, NSSTA. NSSTA is an association composed of more
than 500 members which negotiate and fund structured
settlements involving persons with serious, long-term physical
injuries.
Structured settlements were developed because of the
pitfalls associated with the traditional lump-sum form of
recovery in serious personal injury cases, where all too often,
a lump sum meant to last for decades or a lifetime swiftly
eroded away, and victims were left unable to meet their ongoing
medical and living expenses.
Over the past two decades, structured settlements have
proven to be a very effective means of providing long-term
financial protection to persons with serious long-term, often
profoundly disabling injuries. A voluntary agreement is reached
between the parties generally through counsel under which the
injured victim receives damages in the form of an insured
stream of payments, often for the rest of the victim's life.
This payment stream is tailored to the day-to-day living
expenses and the future medical and financial needs of the
victim and the victim's family, and comes from a financially
secure institution. The victim has a choice whether to take a
structured settlement, and generally only about one-third of
the victims who are offered a structure take it.
As a structured settlement broker, I sit at the settlement
table with the injured victim and a defense, and work with the
parties to try to reach a fair resolution that meets the
victim's needs. In my 19 years in the field, I have seen first
hand how a structured settlement enables seriously injured
victims and their families to put their lives back together and
move forward. Structured settlements have the strong support of
the plaintiffs bar, the defense bar, judges, and mediators.
Congress has adopted special tax rules to encourage and
govern the use of structured settlements in order to provide
long-term financial security for injured victims and their
families. Under these rules, structured settlement payments are
supposed to be nonassignable. However, all of this careful
planning and long-term financial security for the victim and
the family can be unraveled in an instant by a factoring
company offering to buy future structured settlement payments
for quick cash at a steep discount. Having factored away their
assured source of future financial support, these injured
victims are likely to face uncertain financial futures. They
may find themselves in the very predicament that the structured
settlement was used to avoid, and may now have to resort to
taxpayer-financed assistance programs to meet basic needs.
We in the structured settlement industry are here today
because we are trying to do the right thing. We are on the
frontlines. We see what is happening out there. We see the
human cost when factoring companies unravel the structured
settlements of injured victims. Court records from across the
country tell the story. There is a quadriplegic in Oklahoma,
another in California, the paraplegic in Texas, the victim in
Connecticut with traumatic brain injuries dating from
childhood, and the injured worker who was receiving worker's
compensation benefits in Mississippi, all selling their future
payments to the factoring companies.
Having worked with this Subcommittee and the Congress over
the last two decades to encourage the use of structured
settlements, we felt a responsibility to step forward and alert
Congress and the Treasury about what is going on about how the
congressional policy is being undermined. H.R. 263 represents a
balanced approach to these problems created by structured
settlement factoring. H.R. 263 imposes a stringent penalty tax
on a factoring company that purchases structured settlement
payments from an injured victim. The penalty would be subject
to an exception for genuine court-approved hardship to protect
instances of true hardship of the victim or the family. This is
a penalty to discourage a transaction that thwarts
congressional policy. It is not a new tax or a tax increase.
H.R. 263 has broad bipartisan support among Members of the
Ways and Means Committee and the Senate Finance Committee. It
is endorsed by the National Spinal Cord Injury Association and
the National Organization on Disability. It is supported by the
Treasury. It should be enacted as soon as possible.
Thank you, Mr. Chairman, for the opportunity to testify.
[The prepared statement follows:]
Statement of Thomas W. Little, President, Little, Meyers, Garretson &
Associates, Cincinnati, Ohio; on Behalf of National Structured
Settlements Trade Association
Mr. Chairman, my name is Thomas W. Little. I am President
of Little, Meyers, Garretson & Associates, a structured
settlement broker firm headquartered in Cincinnati, Ohio. I am
testifying today as Past President of the National Structured
Settlements Trade Association.
I. Background and Policy of the Structured Settlement Tax Rules
The National Structured Settlements Trade Association (NSSTA) is an
organization composed of more than 500 members which negotiate and fund
structured settlements of tort and worker's compensation claims
involving persons with serious, long-term physical injuries. Structured
settlements provide the injured victim with the financial security of
an assured payout over time. Founded in 1986, NSSTA's mission is to
advance the use of structured settlements as a means of resolving
physical injury claims.
A. Background
Structured settlements in wide use today to resolve
physical injury claims
Structured settlements are used to compensate seriously-injured,
often profoundly disabled, victims of torts and workplace accidents. A
lump sum recovery used to be the standard in personal injury cases. The
injured victim then faced the daunting challenge of managing a large
lump sum to cover substantial ongoing medical and living expenses for
decades, even for a life-time. All too often, this lump sum swiftly
eroded away. When the money was gone, the victim was left still
disabled and still unable to work. In such cases, responsibility to
care for this disabled person fell to the State Medicaid system and
public assistance system.
Structured settlements provide a better approach. A voluntary
agreement is reached between the parties generally through their
counsel under which the injured victim receives damages in the form of
a stream of periodic payments tailored to the future medical expenses
and basic living needs of the victim and his or her family from a well-
capitalized, financially-secure institution. This process may be
overseen by a court, particularly in minor's cases. Often this payment
stream is for the rest of the victim's life to make sure that future
medical expenses and the family's basic living needs will be met, and
that the victim will not outlive his or her compensation.
These are voluntary arrangements. The injured victim has a choice
whether or not to take a structured settlement, and generally about a
third of the injured victims who are offered a structured settlement
take it. The other two-thirds take the cash lump sum.
A recent study underscores the fact that structured settlements
typically are used in the case of major physical injuries ``when the
loss payments are very large.'' (``Closed Claim Survey for Commercial
General Liability: Survey Results, 1997,'' p. 22, prepared by ISO DATA,
Inc., a nonprofit arm of the Insurance Services Office, Inc., which
conducted the survey under the auspices of the National Association of
Insurance Commissioners (NAIC), the national group of the State
insurance regulators).
The ISO study found that of the 215 claims involving structured
settlements in the survey sample, 67% arose from ``major injuries''
(``permanent significant,'' ``permanent major,'' ``permanent grave,''
death and ``temporary major''), with an average total payment of
$408,000. The remaining 33% of claims involving structured settlements
had an average total payment of $210,000. ``Total payment'' for this
purpose means in effect the total present value of the settlement, and
consists of (i) the lump sum of cash paid at settlement, plus (ii) the
present value of the future structured payments. The ISO study found
that about half of the present value of the case was paid in an upfront
lump sum to meet the victim's cash needs (e.g., retrofitting the house
for wheelchair access), and the remaining half represented the present
value of the structured future payments. (ISO Study, at p. 22).
Overall, the ISO study found that the average total present value
(including the upfront cash and the present value of the future
payments) of a case resolved by structured settlement was $343,000.
(ISO Study, at p. 21).
Structured settlements have the strong support of the plaintiff's
bar, the defense bar, judges, and mediators.
Structured settlements provide crucial financial
protection to seriously-injured tort victims
Protection against premature dissipation by injured
victims lacking the experience to manage the financial responsibilities
and risks of investing a large lump sum to cover a substantial, ongoing
stream of medical and basic living expenses for a lengthy period.
Payout tailored to the day-to-day living expenses and the
ongoing medical and financial needs of the victim and his or her
family.
Avoids shift of responsibility for care to the taxpayer-
financed social safety net.
Congress has adopted special tax rules to encourage and
govern structured settlements
Congress has adopted a series of special rules in sections 130,
104, 461(h), and 72 of the Internal Revenue Code to govern the use of
structured settlements by providing that the full amount of the
periodic payments constitutes tax-free damages to the victim and that
the liability to make the periodic payments to the victim may be
assigned to a structured settlement assignment company that will use a
financially-secure annuity to fund the damage payments.
In the Taxpayer Relief Act of 1997, in a provision co-sponsored by
a majority of the House Ways and Means Committee, Congress recently
extended the structured settlement tax rules to worker's compensation
to cover physical injuries suffered in the workplace.
B. Structured Settlement Tax Rules Were Adopted by Congress to Protect
Victims from Pressure to Dissipate Their Recoveries
In introducing the 1981 legislation that originally enacted
the structured settlement tax rules, Sen. Max Baucus (D-Mont.)
pointed to the concern over squandering of a lump sum recovery
by injured tort victims or their families:
``In the past, these awards have typically been paid by
defendants to successful plaintiffs in the form of a single
payment settlement. This approach has proven unsatisfactory,
however, in many cases because it assumes that injured parties
will wisely manage large sums of money so as to provide for
their lifetime needs. In fact, many of these successful
litigants, particularly minors, have dissipated their awards in
a few years and are then without means of support.''
[Congressional Record (daily ed.) 12/10/81, at S15005.]
By contrast, Sen. Baucus noted: ``Periodic payments
settlements, on the other hand, provide plaintiffs with a
steady income over a long period of time and insulate them from
pressures to squander their awards.'' (Id.)
In introducing legislation last year to protect structured
settlements and injured victims from the practice of factoring,
Sen. Baucus reiterated this original legislative intent:
``Thus, our focus in enacting these tax rules in sections
104(a)(2) and 130 of the Internal Revenue Code was to encourage
and govern the use of structured settlements in order to
provide long-term financial security to seriously injured
victims and their families and to insulate them from pressures
to squander their awards.''
[Congressional Record (daily ed.) 10/5/98, at S11499.]
Therefore, the federal tax rules adopted by Congress to
govern structured settlements reflect a policy of insulating
injured victims and their families from pressures to dissipate
their awards.
In addition, Congress was concerned that the injured victim
not have the ability to exercise such control over the periodic
payments that he or she would be deemed to have received a lump
sum recovery that was then invested on his or her behalf,
destroying the fully tax-free nature of the periodic payments
to the injured victim. The House Ways and Means and Senate
Finance Committee Reports adopting the structured settlement
tax rules both state: ``Thus, the periodic payments as personal
injury damages are still excludable from income only if the
recipient taxpayer is not in constructive receipt of or does
not have the current economic benefit of the sum required to
produce the periodic payments.'' (H.R. Rep. No. 97-832, 97th
Cong., 2d Sess. (1982), 4; Sen. Rep. No. 97-646, 97th Cong., 2d
Sess. (1982), 4.)
Reflecting this Congressional policy of protecting injured
victims from pressure to squander their recoveries and the need
to avoid any risk of constructive receipt of a lump sum by the
victim, the structured settlement tax rules prohibit the victim
from being able to accelerate, defer, increase, or decrease the
periodic payments. (I.R.C. Sec. 130(c)(2)(B)). In addition,
the periodic payments must constitute tax-free damages in the
hands of the recipient. (I.R.C. Sec. 130(c)(2)(D)).
In compliance with these Congressional requirements and
consistent with State insurance and exemption statutes,
including ``spendthrift'' statutes that restrict alienation of
rights to payments under annuities and under various types of
claims (e.g., worker's compensation and wrongful death claims),
structured settlement agreements customarily provide that the
periodic payments to be rendered to the injured victim may not
be accelerated, deferred, increased or decreased, anticipated,
sold, assigned, pledged, or encumbered by the victim.
As the Treasury Department has noted, ``Consistent with the
condition that the injured person not be able to accelerate,
defer, increase or decrease the periodic payments, [structured
settlement] agreements with injured persons uniformly contain
anti-assignment clauses.'' (U.S. Department of the Treasury,
General Explanations of the Administration's Revenue Proposals
(Feb. 1999), at p. 192).
Sen. John Chafee (R-R.I.), in introducing along with Sen.
Baucus recent legislation to protect structured settlements and
injured victims from the practice of factoring observed:
``Structured settlement payments are nonassignable. This is
consistent with worker's compensation payments and various
types of Federal disability payments which also are
nonassignable under applicable law. In each case, this is done
to preserve the injured person's long-term financial
security.'' (Congressional Record (daily ed.), 10/2/98, at
S11340).
II. Purchases of Future Structured Settlement Payments by Factoring
Companies Directly Undermine the Important Public Policies Served by
Structured Settlements
A. Background
Over the past two years, there has been dramatic growth in a
transaction, generally known as a ``factoring'' transaction, that
effectively takes the structure out of structured settlements.
In such a factoring transaction, the injured victim who is
receiving periodic payments of damages for physical injuries under a
structured settlement sells his or her rights to future periodic
payments to a factoring company. In exchange, the injured victim
receives from the factoring company a sharply discounted lump sum
payment.
This is a transaction that the injured victim enters into with a
third party, completely outside of the structured settlement and
generally without even the knowledge of the other parties to the
structured settlement. The factoring company is not in the structured
settlement business, and the structured settlement company is not in
the factoring business.
In an effort to avoid the anti-assignment provisions in the
structured settlement agreements, the factoring companies typically
have the injured victim simply present the structured settlement
company with a change of address to a post office box, or change of
direct deposit to a bank account, under the control of the factoring
company to accomplish the redirection of payments to the factoring
company. Thus, the structured settlement company obligated to make the
periodic payment damages under the structured settlement is not a party
to the factoring transaction and often has no notice of it at all.
At the time the structured settlement is created, the victim has
multiple layers of protection by means of State insurance licensing and
regulatory requirements and oversight, the Federal tax law requirements
for the terms of a structured settlement, legal counsel, and in many
cases court oversight. By contrast, the factoring companies and their
transactions are completely unregulated.
B. Rapid Growth in Factoring Company Purchases of Structured Settlement
Payments
Factoring companies use extensive advertising and telemarketing, as
well as direct appeals to plaintiffs' lawyers coupled with a finder's
fee, to solicit new business. For example, one major factoring company,
J.G. Wentworth, stated in a 1997 Securities and Exchange Commission
filing that during the first 9 months of 1997 alone, it ran 56,000
television commercials. Wentworth's SEC filing states that it runs a
telemarketing call center with 200 telemarketing stations operating 24
hours a day, 6 days a week.
The factoring companies direct considerable advertising at the
plaintiffs' bar, promising the injured victim's lawyer a second fee on
the same case--this time by unwinding the structured settlement. For
example, an ad by Stone Street Capital, a factoring company, placed in
a prominent trial lawyer publication, states:
``You helped your clients once by winning them a structured
settlement. Now you can help them again by showing them how to
convert all or a portion of their settlement to a lump-sum
payment.
``For each of your clients who exercise this exciting new
option, your firm will be compensated for legal fees by
facilitating the standardized processing of an annuity purchase
agreement. On average, these fees amount to about $2,000 per
conversion. [Emphasis in original].''
The factoring company business is a rapidly growing one.
J.G. Wentworth recently announced that it has undertaken
approximately 7,700 structured settlement purchase transactions
with a total value of $370 million. According to SEC filings,
during the first 9 months of 1997, J.G. Wentworth undertook
3,759 structured settlement purchase transactions. These
purchased structured settlement payments had a total
undiscounted maturity value of $163.6 million and were
purchased for $74.4 million. Blocks of purchased structured
settlement payments are now being ``securitized'' by the
factoring companies and marketed on Wall Street.
C. Public Policy Concerns Created by Factoring Company
Transactions
Factoring company purchases of structured settlement
payments create serious problems affecting all participants in
structured settlements and directly thwart the clear
Congressional policy that underlies the structured settlement
tax rules.
Factoring company purchases of structured
settlement payments trigger the very same dissipation risks
that structured settlements are designed to avoid
As Sen. Baucus observed ``All of the careful planning and
long-term financial security for the injured victim and his or
her family can be unraveled in an instant by a factoring
company offering quick cash at a steep discount.''
(Congressional Record (daily ed.) 10/5/98, at S 11500).
As lump sum tort recoveries frequently dissipate, the lump
sum from the factoring company is as quickly dissipated, and
the injured person finds himself or herself in the very
predicament the structured settlement was intended to avoid.
Having factored away their only assured source of future
financial support and then dissipating the cash received, these
injured victims are likely to face an uncertain financial
future and may face the prospect of taxpayer-financed
assistance programs to cover their future medical expenses and
basic living needs.
As Rep. Clay Shaw (R-Fla.) stated in introducing the
``Structured Settlement Protection Act'' (H.R. 263) along with
Rep. Pete Stark (D-Ca.) and a broad bipartisan group totaling
some 17 Members of the Ways and Means Committee: ``As long-time
supporters of structured settlements and the congressional
policy underlying such settlements, we have grave concerns that
these factoring transactions directly undermine the policy of
the structured settlement tax rules.'' (Congressional Record
(daily ed.) 2/10/99, at E192).
On the Senate side, as Sen. Baucus observed in introducing
the same legislation:
``I speak today as the original Senate sponsor of the
structured settlement tax rules that Congress enacted in 1982.
I rise because of my very grave concern that the recent
emergence of structured settlement factoring transactions--in
which factoring companies buy up the structured settlement
payments from injured victims in return for a deeply-discounted
lump sum--completely undermines what Congress intended when we
enacted these structured settlement tax rules.''
[Congressional Record, (daily ed.), 10/5/98, at S11499.]
Sen. Baucus then went on to say:
``As a long-time supporter of structured settlements and an
architect of the Congressional policy embodied in the
structured settlement tax rules, I cannot stand by as this
structured settlement factoring problem continues to mushroom
across the country, leaving injured victims without financial
means for the future and forcing the injured victims onto the
social safety net--precisely the result we were seeking to
avoid when we enacted the structured settlement tax rules.''
[Id., at S11500.]
Sen. Chafee, lead Republican co-sponsor of the legislation,
echoed Sen. Baucus's concerns: ``These factoring company
purchases directly contravene the intent and policy of Congress
in enacting the special structured settlement tax rules.''
(Congressional Record (daily ed.) 10/2/98, at S11340.)
NSSTA's members are on the front lines. We see the human
costs when factoring companies unravel the structured
settlements to injured victims. Court records from across the
country tell the story--there's the quadriplegic in Oklahoma,
the quadriplegic in California, the paraplegic in Texas, the
victim of Connecticut with traumatic brain injures dating from
childhood, and the injured worker receiving worker's
compensation benefits in Mississippi--all selling their future
payments to the factoring companies. The human costs in
factoring cases such as these were recently chronicled in a
U.S. News & World Report entitled ``Settling for Less--Should
accident victims sell their monthly payments?'' (January 25,
1999), pp. 62-66.
Factoring company purchases often are made at
sharp discounts
In many cases the injured victim's dissipation risks are
magnified because the lump sum payment that the injured victim
receives in the factoring transaction is so sharply discounted.
While factoring transactions apparently reflect a range of
discounts, it is not uncommon for an injured victim to receive
a lump sum payment of half or even less of the present value of
the structured settlement payments being sold.
In one recent case, a 20-year-old structured settlement
recipient who was receiving monthly payments from a tort action
when she was a child was persuaded to sell a series of her
future payments for approximately 36 percent of their
discounted present value. A few months later, she was persuaded
to sell additional future payments for approximately 15 percent
of their discounted present value.
Based on this case and many similar examples from court
records, it is clear that in factoring company transactions
structured settlement recipients often are persuaded to sell
future payments for far less than the payments are worth.
Factoring company transactions create serious
Federal income tax uncertainties for the original parties to
the structured settlement
The structured settlement tax rules require that the
periodic payments constitute tax-free damages on account of
personal physical injuries in the hands of the recipient of
those payments. (I.R.C. Sec. Sec. 130(c)(2)(D); 104(a)(2)).
Following the factoring away by the injured victim, the
periodic payments are received by the factoring company and its
investors and do not constitute tax-free damages in their
hands. One of the requirements for a qualified assignment no
longer is met. This creates serious Federal income tax
uncertainties under the structured settlement tax rules for
both the victim and the company funding the structured
settlement.
Injured victim:
The injured victim not only loses the benefit of
the future tax-free damage payments, but also runs a risk of
being taxed on the lump sum received from the factoring company
if such payment is treated as received on account of the sale
of the victim's future payment rights and not on account of the
original injury.
If the structured settlement payments were freely
assignable by the injured victim and a ready market of
financial institutions was available to acquire such payments,
the victim might be deemed in constructive receipt of the
present value of the future payments just as if the payments
could be accelerated. In that case, from the outset of the
settlement a portion of each periodic payment would be treated
as taxable earnings, rather than tax-free damages.
Company funding the structured settlement:
Under the structured settlement tax rules, the settling
defendant (or its liability insurer) assigns its periodic
payment liability to a structured settlement company in
exchange for a payment which is excluded from the structured
settlement company's income if the structured settlement tax
rules under I.R.C. Sec. 130 are satisfied and such payment is
reinvested in either an annuity or U.S. Treasury obligations
precisely matched in amount and timing to the periodic payment
obligation to the injured victim. The structured settlement
company's income from the payments under the annuity or
Treasuries is matched by an offsetting deduction for the damage
payment to the victim.
Once the factoring company buys the injured
victim's payments, those payments no longer constitute tax-free
personal physical injury damages under Code section 104 in the
hands of the recipient, and hence one of the requirements for a
qualified assignment under Code section 130(c)(2)(D) no longer
is satisfied. The critical question then becomes whether the
Code section 130 requirements for a qualified assignment apply
only at the time the structured settlement is established or
constitute continuing requirements for the structured
settlement. On that question, there is no clear-cut answer, and
considerable tax uncertainty results.
The factoring transaction raises the concern that
the structured settlement tax rules no longer may be satisfied
and the risk that the structured settlement company may be
required to recognize and pay tax on amounts previously
excluded from its income or to pay tax on the ``inside build-
up'' under the annuity, for which there is no cash distribution
to pay the tax. This is a tax risk that the structured
settlement company had sought to avoid through use of the anti-
assignment provisions in the structured settlement agreement
and is not in a position to absorb.
The structured settlement company may face an
obligation to report the payments made to the factoring company
as taxable income even though in many cases the identity of the
purchaser or even the existence of the factoring transaction
itself is unknown.
Factoring company transactions create risks of
double liability for the structured settlement companies
While factoring transactions normally involve only the
injured victim and the factoring company, the underlying
structured settlements typically involve multiple parties such
as family members, defendants, liability insurers, and state
workers' compensation authorities in workers' compensation
cases. Because structured settlement agreements prohibit
transfers of payments, if the structured settlement company
makes the payments--even unwittingly--to the factoring company,
the structured settlement company may become subject to later
claims that it paid the wrong party and could still be required
to make the payments as originally required under the
settlement. This has happened in several recent cases.
In many cases this risk of double liability is magnified by
state statutes that (i) in more than 20 states give statutory
effect to contract provisions prohibiting transfers of annuity
benefits, and (ii) in nearly all States directly restrict or
prohibit transfers of recoveries in various types of cases
(e.g., worker's compensation, wrongful death, medical
malpractice).
The uncertainties created by factoring company
transactions may discourage future use of structured
settlements
These tax risks and double liability risks raised by the
factoring transaction are risks that the structured settlement
company specifically sought to avoid through the anti-
assignment provisions in the structured settlement agreement
and is not in a financial position to absorb, years after the
original structured settlement transaction was entered into.
These uncertainties and unforeseen risks could jeopardize
the continued ability of structured settlement companies to
fund settlements in the future. The structured settlement
company's participation is necessary to enable structured
settlements to be undertaken in the first instance by
satisfying the objectives of both sides to the claim: the
injured victim needs the long-term financial protection that
the structured settlement company's funding arrangement
provides, and the settling defendant wishes to close its books
on the liability rather than bearing an ongoing payment
obligation decades into the future.
III. A Stringent Penalty Tax on Factoring Company Purchasers, Subject
to a Limited Exception for Genuine, Court-Approved Hardship, Protects
Structured Settlements, the Injured Recipients, and the Underlying
Congressional Policy
A. Gravity of Problem Requires Strong Action by Congress
In acting to address the concerns over factoring companies that
purchase structured settlement payments from injured victims the
Treasury Department noted that: ``Congress enacted favorable tax rules
intended to encourage the use of structured settlements--and
conditioned such tax treatment on the injured person's inability to
accelerate, defer, increase or decrease the periodic payments--because
recipients of structured settlements are less likely than recipients of
lump sum awards to consume their awards too quickly and require public
assistance.'' (U.S. Department of the Treasury, General Explanations of
the Administration's Revenue Proposals (Feb. 1999), p. 192).
Treasury then observed that by enticing injured victims to sell off
their future structured settlement payments in exchange for a heavily
discounted lump sum that may then be dissipated: ``These `factoring'
transactions directly undermine the Congressional objective to create
an incentive for injured persons to receive periodic payments as
settlements of personal injury claims.'' (Id., at p. 192 [emphasis
added].)
The Joint Tax Committee's analysis of the issue last year echoes
these concerns: ``Transfer of the payment stream under a structured
settlement arrangement arguably subverts the purpose of the structured
settlement provisions of the Code to promote periodic payments for
injured persons.'' (Joint Committee on Taxation, Description of Revenue
Provisions Contained in the President's Fiscal Year 2000 Budget
Proposal (JCS-1-99), (February 22, 1999), p. 329).
A natural question is why use the tax system to solve this problem?
Isn't consumer protection best left to the States? We believe there are
compelling reasons for the Ways and Means Committee to act. The problem
is nationwide and mushrooming. A State-by-State approach could take
years. Moreover, while noting that the States traditionally have been
the province of consumer protection, the Joint Committee's analysis
reasons that there is a clear role for the Federal tax law to address
the policy concerns raised by sales of structured settlement payments:
``On the other hand, the tax law already provides an incentive for
structured settlement arrangements, and if practices have evolved that
are inconsistent with its purpose, addressing them should be viewed as
proper.'' (Joint Committee Description, supra, at p. 330).
Indeed, as Rep. Shaw observed in introducing H.R. 263 which
addresses the structured settlement problem by means of a penalty tax
on the factoring company: ``Because the purchase of structured
settlement payments by factoring companies directly thwarts the
congressional policy underlying the structured settlement tax rules and
raises such serious concerns for structured settlements and injured
victims, it is appropriate to deal with these concerns in the tax
context.'' (Congressional Record (daily ed.) 2/10/99, at E192).
Similarly, as Sen. Chafee observed last year in introducing the
same legislation on the Senate side: ``It is appropriate to address
this problem through the federal tax system because these purchases
directly contravene the Congressional policy reflected in the
structured settlement tax rules and jeopardize the long-term financial
security that Congress intended to provide for the injured victim. The
problem is nationwide, and it is growing rapidly.'' (Congressional
Record (daily ed.), 10/2/98, at S11340).
House Ways and Means Chairman Archer has indicated informally that,
``If there are abuses out there, we'll look for them, we'll ferret them
out, and we will do away with them.'' (BNA Daily Tax Reporter, 12/5/99,
GG-1), and in later remarks pointed to transactions that make ``an end
run around the Code.'' Clearly, factoring company purchases of
structured settlement payments from injured victims fall into the
category of abusive transactions to which Chairman Archer refers.
A Federal tax approach also is necessary in order to address the
tax uncertainties that the factoring transaction creates for the
parties to the original structured settlement.
There is broad bipartisan support among Members of the House Ways
and Means Committee, the Senate Finance Committee, and from Treasury
for addressing the structured settlement factoring problem by means of
a stringent penalty on the factoring company to discourage the
transaction, except in cases of genuine, court-approved hardship of the
injured victim.
B. Treasury Proposal
The Treasury Department in the Administration's FY 2000 Budget has
proposed a 40-percent excise tax on factoring companies that purchase
structured settlement payments from injured victims.
Under the Treasury proposal, ``any person purchasing (or otherwise
acquiring for consideration) a structured settlement payment stream
would be subject to a 40 percent excise tax on the difference between
the amount paid by the purchaser to the injured person and the
undiscounted value of the purchased income stream, unless such purchase
is pursuant to a court order finding that the extraordinary and
unanticipated needs of the original recipient render such a transaction
desirable.'' (Treasury General Explanations (Feb. 1999), at p. 192).
The proposal would apply to transfers of structured settlement payments
made after date of enactment.
The Treasury proposal represents a strong and appropriate response
to the structured settlement factoring problem.
C. Bipartisan Congressional Proposal
1. Stringent penalty on factoring company that purchases structured
settlement payments from injured victims
Reps. Clay Shaw (R-Fl.) and Pete Stark (D-Ca.), two senior Members
of the Ways and Means Committee, have introduced H.R. 263 (the
``Structured Settlement Protection Act'') which adopts a similar
approach by imposing a 50 percent excise tax on the difference between
the amount paid by the purchaser to the injured victim and the
undiscounted value of the purchased payment stream. H.R. 263 is co-
sponsored by a broad bipartisan group totaling 17 Members of the Ways
and Means Committee. It is endorsed by the National Spinal Cord Injury
Association and the National Organization on Disability. It is
supported by Treasury.
Sens. John Chafee (R-R.I.) and Max Baucus (D-Mt.) introduced
companion legislation last year with similar broad bipartisan support
among Finance Committee Members.
As Sen. Baucus noted, the excise tax approach is a penalty, not a
tax increase or a new tax: ``I would stress that this is a penalty, not
a tax increase--the factoring company only pays the penalty if it
undertakes the transaction that Congress is seeking to discourage
because the transaction thwarts a clear Congressional policy.''
(Congressional Record (daily ed.), 10/5/98, at S11500).
2. Exception for limited cases of genuine, court-approved hardship
This stringent excise tax would be coupled with a limited exception
for genuine, court-approved financial hardship situations. The excise
tax would apply to factoring companies in all structured settlement
purchase transactions except in the case of a transaction that is
pursuant to a court order finding that ``the extraordinary, imminent,
and unanticipated needs of the structured settlement recipient or his
or her dependents render such a transaction appropriate.''
This exception is intended to apply only to a limited number of
cases in which a genuinely ``extraordinary, imminent, and
unanticipated'' hardship actually has arisen (e.g., serious medical
emergency for a family member) and which has been demonstrated to the
satisfaction of a court, as well as a showing that transferring away
such payments will not leave the injured victim and his or her family
exposed to undue financial hardship in the future when the structured
settlement payments no longer are available.
3. Need to protect the tax treatment of the original structured
settlement
In the limited instances of extraordinary and unanticipated
hardship determined by court order to warrant relief, adverse tax
consequences should not be visited upon the claimant or the other
parties to the original structured settlement. Accordingly, the
bipartisan Congressional proposal would clarify in the statute or the
legislative history that in those limited instances in which the
extraordinary, imminent, and unanticipated hardship standard is found
to be met by a court, the original tax treatment of the structured
settlement under I.R.C. Sec. Sec. 104, 130, 72, and 461(h) would be
left undisturbed.
That is, the periodic payments already received by the claimant
prior to any factoring transaction would remain tax-free damages under
Code section 104. The assignee's exclusion of income under Code section
130 arising from satisfaction of all of the section 130 qualified
assignment rules at the time the structured settlement was entered into
years earlier would not be challenged. Similarly, the settling
defendant's deduction under Code section 461(h) of the amount paid to
the assignee to assume the liability would not be challenged. Finally,
the status under Code section 72 of the annuity being used to fund the
periodic payments would remain undisturbed.
Despite the anti-assignment provisions included in the structured
settlement agreements and the applicability of a stringent excise tax
on the factoring company, there may be a limited number of non-hardship
factoring transactions that still go forward. If the structured
settlement tax rules under I.R.C. Sec. Sec. 130, 72, and 461(h) had
been satisfied at the time of the structured settlement and the
applicable structured settlement agreements included an anti-assignment
provision, the original tax treatment of the other parties to the
settlement--i.e., the settling defendant and the Code section 130
assignee--should not be jeopardized by a third party transaction that
occurs years later and likely unbeknownst to these other parties to the
original settlement.
Accordingly, the bipartisan Congressional proposal also would
clarify in the case of a non-hardship factoring transaction, that if
the structured settlement tax rules under I.R.C. Sec. Sec. 130, 72,
and 461(h) had been satisfied at the time of the structured settlement
and the applicable structured settlement agreements included an anti-
assignment provision, the section 130 exclusion of the assignee, the
section 461(h) deduction of the settling defendant, and the Code
section 72 status of the annuity being used to fund the periodic
payments would remain undisturbed.
Finally, the bipartisan Congressional proposal would clarify the
tax reporting obligations of the annuity issuer and section 130
assignee in the event of a factoring transaction. In the case of a
factoring transaction, either on a court-approved hardship basis or a
non-hardship basis, of which the annuity issuer has actual notice and
knowledge, assuming that a tax reporting obligation otherwise would be
applicable, the annuity issuer would be obligated to file an
information report with the I.R.S. noting the fact of the transfer, the
identity of the original payee, and the identity where known of the new
recipient of the factored payments. No reporting obligation would exist
where the annuity issuer (or section 130 assignee) had no knowledge of
the factoring transaction.
Conclusion
H.R. 263 fully protects structured settlements, the injured
victims, and the Congressional policy underlying structured
settlements.
H.R. 263 has broad bipartisan support among Members of the
Ways and Means Committee. It is endorsed by the National Spinal
Cord Injury Association and the National Organization on
Disability. It is supported by Treasury.
This bipartisan Congressional proposal should be included
as part of the tax legislation considered by Congress this
year.
Chairman Houghton. Thank you very much.
Now, I would like to call on Ms. Kucenski from Illinois.
STATEMENT OF DONNA KUCENSKI, SENECA, ILLINOIS; ON BEHALF OF
NATIONAL ASSOCIATION OF SETTLEMENT PURCHASERS
Ms. Kucenski. My name is Donna Kucenski. I appear here
today to express my concern that the Federal Government and
Congress are considering legislation that would eliminate my
right to choose how to conduct my financial affairs. This
proposed new excise tax would make it prohibitively expensive
for me and thousands of individuals like me to receive lump
sums in exchange for an asset that may no longer serve the
needs for which it was originally established. This proposal
will punish rather than protect consumers. Individuals who
enter into structured settlements and those who later wish to
sell them deserve full and complete disclosure in order to make
informed financial decisions.
I am 30 years old, married with a 7-year-old daughter, and
live in Seneca, Illinois. When I was 13 years old, I was mauled
by a dog that resulted in serious scarring and damage to my
thigh. The incident was traumatic for me, but not by comparison
to the fight put up with me by the insurance company and the
litigation that followed.
Further, that fight pales in comparison to the struggles I
have engaged in over the past 2 years to gain access to a
portion of my settlement to meet legitimate needs of me and my
family that arose years after the agreement was negotiated.
Those needs could not have been anticipated at the time the
settlement was proposed.
After the incident, when I was 13, my mother and
grandfather obtained an attorney, and 3-year litigation ensued.
Only after I was at court on that case, a jury was selected,
did the insurance company make a serious settlement offer to my
attorney.
After decisions, my mother and grandfather, through the
help of our attorney, agreed to a structured settlement, which
provided $475 a month beginning at the age 19, a minimum of 30
years guaranteed. In addition, I was entitled to receive four
$10,000 payments beginning at age 19, $35,000 at age 30,
$60,000 at age 35. I think it is important to know that part of
the reason for settling in this manner was sheer exhaustion and
exacerbation in the litigation process.
I suffered no disabilities as a result of the incident that
gave rise to the settlement other than a disfigured thigh that
cannot be repaired with surgery. I am college educated. I had
been employed as a successful real estate agent for the past 5
years. In 1990, I was married. My husband is employed as a
mechanical engineer. Several years after our marriage, we
decided to have our first child. I am now the mother of a 7-
year-old daughter. Planning to expand our family and wanting to
improve the living arrangements, my husband and I decided to
purchase a home in late 1997.
However, notwithstanding the fact that we both earn good
salaries and have for some time, we didn't have sufficient
downpayment to purchase the home we really wanted. A large
downpayment would make the mortgage payments much more
affordable, allowing us to live the life we desire.
We also want to avoid paying private mortgage insurance at
no extra cost of first-time home buyers. Furthermore, we want
to be able to afford monthly expenses on my husband's salary
alone, as we are hoping for our second child.
With these things in mind, we began examining our financial
options. In late 1997, I responded to an advertisement from the
company that stated it could pay me a lump sum in exchange for
some of my settlement payments. After contacting Singer Asset
Finance Co., the process was explained to me in detail. The
paperwork provided to me was extremely thorough, set forth the
exact terms of the transaction in plain English with no hidden
terms, charges, or provisions. The company was also very
careful in explaining those terms to me.
After consulting my husband and negotiating the purchase
price of a portion of my future settlement payments, I agreed
to this transaction. Singer began a thorough underwriting
process in which they carefully evaluated my ability to support
my family and myself. Singer wanted to ensure that the
transaction would be in my and my family's best interest.
After filing the requisite documents and complying with
their thorough due diligence, Singer informed Prudential
Insurance of the assignment by sending them a notarized
document signed by me instructing them to make a series of
future payments to Singer instead of me. At that point, I
received a lump sum I had been promised. We purchased our home.
As a result of that refinancing transaction, we were able
to make a substantial downpayment on the home of our choice,
thereby reducing our monthly expenses. This also provided for
significant equity nest built into the house. The folks at
Singer were professional and courteous throughout the process,
that was made even longer because of resistance and lack of
cooperation from the insurance company, Prudential.
After closing on our home and living in it some time, my
husband and I decided to make home improvements. We were also
interested in expanding our investment portfolio. Having been
satisfied with the first transaction with Singer, we contacted
them again for future payments in which I was entitled to. In
the summer of 1998, I again contacted Singer. They spelled out
the terms of the transaction. Unfortunately, I was advised that
due to a change in the law with the State of Illinois, it would
be required for me to go to court in order to transfer these
payments. This process was costly, time consuming for me and my
husband. Both us and Singer retained a counsel and waited 2
months until the hearing could be scheduled. The judge in this
matter was not familiar with the law and how to apply it. He
took testimony from us, including very invasive personal
questions. After hearing this testimony, the judge granted the
order, permitting me to sell a future portion of my payments. I
was embarrassed at having to answer very detailed, personal
questions regarding my life and finances in open court.
Now I understand that virtually every insurance carrier
contests court proceedings such as mine, which increases the
cost many thousands of dollars, and stretches out the process
to 6 months or more. Had they done this to me and my husband, I
would not have been able to afford the risk of such a potential
litigation.
After the court order was finally obtained, Singer paid me
the money they had agreed to under the terms of the contract.
Again, everything was spelled out in writing and fully
disclosed to me ahead of time. No hidden charges, no hidden
agendas. With the money we received from the second
transaction, my husband and I were able to do home
improvements, such as finishing a basement, adding a deck, and
adding a driveway. We also took $15,000 remaining and invested
it with a Templeton growth fund.
Mr. Chairman, I am here to challenge in the strongest terms
possible, the notion that Congress should and can dictate to me
and anyone else what we do with our assets. My husband and I
are educated and astute individuals. We decided to sell a
portion of our payments in order to accomplish the things in
life we wanted. Simply stated, there is no reason in the world
that people shouldn't be able to refinance their settlements if
they choose to do so.
Before I conclude, I would like to share another experience
with you and the Committee. In 1998 I was scheduled to appear
before the Illinois Legislature to testify against the proposed
law that could make it virtually impossible for people like me
to access our money. Before the hearing, I heard stories of
other individuals who chose to sell their structured settlement
payments. They included Mrs. Halit. She was involved in a
serious accident resulting in a broken femur----
Chairman Houghton. Is it possible, since the red light is
on, to submit those stories of Mrs. Halit, Mrs. Bochette, and
Mr. and Mrs. Davenport for the record?
Ms. Kucenski. Surely.
Chairman Houghton. Would that be all right?
Ms. Kucenski. That's fine.
Chairman Houghton. Maybe you would want to conclude your
comments.
Ms. Kucenski. OK. Mr. Chairman, my story and those like
mine are just some of the thousands of individuals who have
been helped by structured settlement purchasing companies. The
settlement purchasers I have dealt with have been forthright,
honest, and open about the transactions. The right to do with
one's money as one chooses should not be quickly or arbitrarily
stripped from Americans such as myself. Furthermore,
conditioning the right to use one's money on obtaining a court
order that is cumbersome, expensive, and very time consuming is
not, in my opinion, sensible. The right to economic self-
determination is fundamental to all Americans. I urge you to
consider this seriously before you act. I appreciate the
opportunity to present my views to the Committee, and trust
that they will be incorporated in the Committee's decision
respecting this matter.
[The prepared statement follows:]
Statement of Donna Kucenski, Seneca, Illinois; on Behalf of National
Association of Settlement Purchasers
My name is Donna Kucenski. I appear here today to express
my concern that the Federal government and this Congress are
considering legislation that would eliminate my right to choose
how to conduct my financial affairs. This proposed new excise
tax would make it prohibitively expensive for me and thousands
of individuals like me to receive lump sums in exchange for an
asset that may no longer serve the needs for which it was
originally established. This proposal will punish rather than
protect consumers like myself. Individuals who enter into
structured settlements and those who later wish to sell them
deserve full and complete disclosure in order to make informed
financial decisions.
I am 30 years old, married with a 7-year-old daughter and
live at P.O. Box 761, Seneca, Illinois. When I was 13 years
old, I was mauled by a dog that resulted in serious scarring
and damage to my thigh. The incident was traumatic for me but
not by comparison to the fight put up be the insurance company
in the litigation that followed. Further, that fight pales in
comparison to the struggles I have engaged in over the last two
years to gain access to a portion of my settlement to meet
legitimate needs of me and my family that arose years after the
settlement agreement was negotiated. Those needs could not have
been anticipated at the time the settlement was first proposed.
After the incident when I was 13, my mother and grandfather
retained an attorney and a 3-year litigation ensued. When I was
16, I was in court on that case. After a jury had been
selected, the insurance company finally decided to make a
serious settlement offer to my attorney. After settlement
discussions, my mother and grandfather with the help of our
attorney, agreed to a structured settlement which provided for
payments of $475 a month beginning when I reached the age of
19. Those payments were for life with 30 years guaranteed. In
addition, I was entitled to receive four $10,000 annual
payments beginning when I was 19, a $35,000 payment when I
reached the age of 30 and a $60,000 payment when I reached the
age of 35. I think it is important to know that part of the
reason for settling in this manner was shear exhaustion and
exasperation at the litigation process.
I suffered no disability as a result of the incident that
gave rise to this settlement other than a disfigured thigh that
cannot be repaired with surgery.
I am college educated and have been employed as a
successful real estate sales agent for the past 5 years. In
1990, I was married. My husband is employed as a mechanical
engineer. Several years after our marriage, we decided to have
our first child. I am now the mother of a 7-year-old daughter.
Planning to expand our family and wanting to improve our living
arrangements, my husband and I decided to purchase a home in
late 1997. However, notwithstanding the fact that we both earn
good salaries and have for some time, we didn't have a
sufficient down payment to purchase the home we really wanted.
We had decided that a large down payment would make the
mortgage payments much more affordable for us and would allow
us to live the life we desire. We also wanted to avoid paying
private mortgage insurance and the extra costs usually incurred
by first time homebuyers. Furthermore, we wanted to be able to
afford our monthly expenses on my husband's salary alone as we
are hoping to have a second child.
With these things in mind, we began examining our financial
options. In late 1997, I responded to an advertisement from a
company that stated it could pay me a lump sum in exchange for
some of my settlement payments. After contacting this company,
Singer Asset Finance Company, the process was explained to me
in detail. The paperwork provided to me was extremely thorough
and set forth the exact terms of the transaction in plain
English with no hidden terms, charges, or provisions. The
company was also very careful to explain those terms to me.
After consulting with my husband and negotiating a purchase
price for a portion of my future settlement payments, I agreed
to the transaction with Singer Asset Finance. Singer then began
a thorough underwriting process in which they carefully
evaluated my ability to support my family and myself. Singer
wanted to assure that the transaction would be in my and my
family's best interest. After filing all the requisite
documents and completing their thorough due diligence, Singer
informed Prudential Insurance of the assignment by sending them
a notarized document signed by me instructing them to make a
series of future payments to Singer instead of me. At that
point, I received the lump sum I had been promised and my
husband and I proceeded to purchase our home. As a result of
that refinancing transaction, we were able to make a
substantial down payment on the home of our choice, and thereby
reduce our monthly expenses. This also provided for a
significant equity nest egg built into the house. The folks at
Singer were professional and courteous throughout the process
that was made even longer because of resistance and lack of
cooperation from the insurance company, Prudential.
After closing on our home and living in it for some time,
my husband and I decided to do some home improvements. We were
also interested in expanding our investment portfolio. Having
been satisfied with the first transaction with Singer Asset
Finance, we contacted them again in order to sell some more of
the future payments to which I am entitled. In the summer of
1998, I again contacted Singer.
Once again, Singer spelled out all of the terms of the
transaction in clear, easy to understand terms. Unfortunately,
I was advised that due to a change in the law in the state of
Illinois, I would be required to go to court in order to
transfer these payments. This process was costly and time
consuming for my husband and me. Both we and Singer retained
counsel and waited over two months until a hearing could be
scheduled. The judge in that matter was not familiar with the
Illinois Law or with how to apply it. He took testimony from my
husband and me, including very invasive personal questions.
After hearing this testimony, the judge granted the Order
permitting me to sell a future portion of my payments. I was
embarrassed at having to answer very detailed, personal
questions regarding my life and my finances in open court. Now,
I understand that virtually every insurance carrier contests
court proceedings such as mine, which increases the costs many
thousands of dollars and stretches out the process to six
months or more. Had they done this to me and my husband I
wouldn't have been able to afford the risk of such a protracted
litigation.
Sometime after the hearing, an Order was finally obtained
from the Court and Singer paid me the money they had agreed to
under the terms of the contract. Again, everything was spelled
out in writing and fully disclosed to me ahead of time. No
hidden charges. No hidden agendas. With the money we received
from that second transaction, my husband and I were able to
make some home improvements and invest a substantial sum of
money in the market. After finishing the basement, adding a
deck to our home and repaving the driveway, we had more than
$15,000 remaining with which to invest. This money is now
invested in a Templeton Growth Fund.
Mr. Chairman, I am here to challenge, in the strongest
terms possible, the notion that Congress can and should dictate
to me or anyone else what we can do with an asset. My husband
and I are educated and astute individuals. We decided to sell a
portion of our payments in order to accomplish the things in
life that we wanted. Simply stated, there is no reason in the
world that people shouldn't be able to refinance their
settlements if they choose to do so.
Before I conclude, I would like to share another experience
with you and the committee. In 1998, I was scheduled to appear
before the Illinois Legislature to testify against a proposed
law that could have made it virtually impossible for people
like me to access our money. Before that hearing I heard the
stories of other individuals like myself who had chosen to sell
some of their structured settlement payments. They include:
Irene Halit: Ms. Irene Halit was involved in a severe
accident resulting in a broken femur and the amputation of her
left leg below the knee. Ms. Halit had the option of receiving
a lump sum settlement or a structured settlement. After
consulting with her family and her attorney she decided to
accept the structured settlement which provided for lump sum
payments as follows: $10,000 due January 1, 1989; $20,000 due
January 1, 1994; $30,000 due January 1, 1999; $50,000 due
January 1, 2004; and $100,000 due January 1, 2009. Ms. Halit
was 18 years old at the time of the settlement. 15 years later,
Ms. Halit's needs changed. She was getting a divorce, wanted to
return to school and was in need of a new prosthetic limb.
Faced with these needs, in 1997, Ms. Halit sold the payment she
was to receive in 1999 for a discounted lump sum. With this
money she was able to complete school, satisfy some debts,
purchase a new prosthesis and conclude her divorce proceedings.
Mr. and Mrs. Edward Bochette: Mr. Bochette's wife was
involved in an accident in 1992. Mr. and Mrs. Bochette did not
want a structured settlement. However, the insurance company
indicated that if they did not accept the structure it would
not settle the lawsuit. Mr. and Mrs. Bochette feel they were
coerced into accepting the structured settlement. To quote Mr.
Bochette the structured settlement was ``rammed down our
throats'' by the insurance carrier. Mr. Bochette became the
recipient of the annuity payments through a divorce settlement.
Thereafter, Mr. Bochette decided to sell a portion of his
future payments in order to purchase a new car and satisfy some
outstanding debts.
Mr. and Mrs. Anthony Davenport: Due to a 1987 accident, Mr.
Davenport has a permanent scar across chest, rods in his legs,
a scar across his hip, and a scar from his forehead all the way
to the back of his head. Mr. Davenport begrudgingly accepted a
structured settlement after battling with the insurance company
and their lawyers for over five years. Six months prior to the
settlement, Mr. Davenport and his wife gave birth to twin boys.
This placed a significant and unexpected financial burden on
the Davenports prompting them to accept the structured
settlement. Their attorney also advised the structured
settlement was, in his opinion, a better deal. The settlement
was for ten annual payments of $2,295 commencing February 13,
1994 through February 13, 2003. An additional lump sum payment
of $40,000 was due February 13, 2005. The insurance company
represented the settlement was worth $62,950, whereas the
present value of the settlement was a mere $26,000. In 1997,
the Davenport's found themselves in a financial bind as a
result of temporary unemployment. They sold their remaining
settlement payments to satisfy debts and clear up a mortgage
default that was threatening their home. The flexibility and
freedom provided by the lump sum allowed Mr. Davenport to
return to school so he could qualify for a better job in the
future.
Mr. Chairman, my story and stories such as those of Irene
Halit, the Bochettes, and the Davenports are just some of the
thousands of individuals who have been helped by structured
settlement purchasing companies. The settlement purchasers I
have dealt with have been forthright, honest and open about the
transactions. The right to do with one's money as one chooses
should not be quickly or arbitrarily stripped from Americans
such as myself. Furthermore, conditioning the right to use
one's money on obtaining a court order that is cumbersome,
expensive and very time consuming is not, in my opinion,
sensible. The right to economic self-determination is
fundamental to all Americans and I urge you to consider this
seriously before you act. I appreciate the opportunity to
present my views to the committee and trust that they will be
incorporated in the committee's decision respecting this
matter.
Thank you very much.
Chairman Houghton. Thank you very much.
Now I would like to call on Thomas Countee.
STATEMENT OF THOMAS H. COUNTEE, JR., EXECUTIVE DIRECTOR,
NATIONAL SPINAL CORD INJURY ASSOCIATION, SILVER SPRING,
MARYLAND
Mr. Countee. Thank you, Mr. Chairman. My name is Thomas H.
Countee, Jr., executive director of the National Spinal Cord
Injury Association, a national nonprofit organization
headquartered in Silver Spring, Maryland. The association's
president is Jack Dahlberg, who is a quadriplegic.
On a personal note, I was born, raised, and educated right
here in Washington, DC. In 1958, 41 years ago, I sustained a
diving accident on the Chesapeake Bay, rendering me a
quadriplegic. I am an attorney. I served for 15 months as
legislative counsel in the Ford White House. It is a pleasure
and honor to return to the Hill today to testify, this time as
a private citizen.
Today, I represent over 5,000 members of the National
Spinal Cord Injury Association, and thousands of other spinal
cord-injured persons, many of whom benefit from structured
settlements, including several hundred in the Metropolitan
Washington area. The National Spinal Cord Injury Association
has no business or tax effect stake in the outcome of this
proposed legislation, H.R. 263. However, the association is
deeply interested in the health, safety, and welfare of persons
with catastrophic, traumatic, and/or debilitating injuries,
many of whom are association members and receive structured
settlements.
The National Spinal Cord Injury Association is extremely
concerned about factoring companies which increasingly prey
upon the weakest, most gullible, and most vulnerable in our
society. We believe that at present, the emerging gray market
of factoring companies is largely unregulated, unresponsive to
the needs and best interests of recipients of structured
settlements, and unconscionable in their slick, high pressure
marketing practices and unethical legal maneuvers and
strategems, such as the use of a confessed judgment against the
victim in a distant court to garnish the victim's payments.
I have testified on this matter before State legislatures
considering similar legislation, Mr. Chairman. I have read Mr.
Chapoton's submitted testimony and listened to his testimony
this morning. I am struck by its familiarity. Mr. Chapoton
asserts that ``NASP members do not conduct transactions with
individuals dependent on further periodic payments for medical
necessity or with those who are unemployed or unemployable who
rely on their payments as the sole source of income'' and
``they do not buy payments from individuals with catastrophic
or head injuries.''
Mr. Chairman, with all due respect to my fellow member of
the bar, these assertions are simply inaccurate, misleading, or
false. Just look at the pictures in the U.S. News and World
Report article of January 25, 1999. Look at Christopher Hicks,
a quadriplegic. Look at Raymond White, who was unemployed when
he sold the first portion of his settlement and who now relies
partially on public assistance to get by, according to the
article. Look at Davinia Willis in her wheelchair.
Until the National Spinal Cord Injury Association realized
what kind of business factoring companies were really in, our
SCI Life magazine, published quarterly, accepted their
advertising. We don't do that any longer. They were targeting
our members and not only because many of them had structured
settlements.
One last point, Mr. Chairman, I have come here today to let
you see the type of catastrophic injury affected by this bill,
and to put a human face on this legislation, not as a
beneficiary of a structured settlement, but as the leader of,
and advocate for, severely disabled persons who have.
In 1982, the intent of Congress, the social purpose, if you
will, was to encourage those who receive monetary settlements
growing out of catastrophic injuries to accept period payments
to safeguard the very uncertain futures that they faced.
Factoring companies' intent, on the other hand, is simply to
cheat severely injured persons out of their money. H.R. 263
does nothing to help those who have already been taken
advantage of. We need this legislation to guide those who may
be taken advantage of in the future. You can and should stop
this outrage. Sound public policy and simple decency would
indicate that as legislators, you have no choice but to do the
right thing.
For all the above reasons, the National Spinal Cord Injury
Association respectfully recommends and strongly urges your
support of H.R. 263, which would provide needed protection from
the predatory practices of these factoring companies.
Thank you very much for the time and attention, Mr.
Chairman, you are devoting to this critical issue, and the
opportunity to appear before you. I would be happy to answer
any questions you might have about the association and our
interest in this matter.
[The prepared statement follows:]
Statement of Thomas H. Countee, Jr., Executive Director, National
Spinal Cord Injury Association, Silver Spring, Maryland
Good afternoon, Mr. Chairman and other Representatives.
My name is Thomas H. Countee, Jr., Executive Director of
The National Spinal Cord Injury Association, a non-profit
organization, headquartered in Silver Spring, Maryland. The
Association's President is Jack Dahlberg, who is a
quadriplegic.
On a personal note, I was born, raised and educated right
here in Washington, D.C. Forty-one years ago in 1958, I
sustained a diving accident on the Chesapeake Bay, rendering me
a quadriplegic. I served 15 months as Legislative Counsel in
the Ford White House. It is a pleasure and honor to return to
The Hill to testify, this time as a private citizen.
Today, I represent over 5,000 members of the National
Spinal Cord Injury Association and thousands of other spinal
cord injured persons, many of whom benefit from structured
settlements, including several hundred in the Metro Washington
area. The National Spinal Cord Injury Association has no
business or tax effect stake in the outcome of this proposed
legislation, H.R. 263. However, the Association is deeply
interested in the health, safety and welfare of persons with
catastrophic, traumatic and/or debilitating injuries, many of
whom are Association members and receive structured
settlements.
The National Spinal Cord Injury Association is extremely
concerned about factoring companies which increasingly prey
upon the weakest, most gullible and most vulnerable in our
society. We believe that at present, the emerging ``gray
market'' of factoring companies is largely unregulated,
unresponsive to the needs and best interests of recipients of
structured settlements and unconscionable in their slick, high
pressure marketing practices and unethical legal maneuvers and
strategems such as the use of a confessed judgment against the
victim in a distant court to garnish the victim's payments.
One last point, Mr. Chairman, I have come here to let you
see the type of catastrophic injury affected by this bill and
to put a human face on this legislation, not as the beneficiary
of a structured settlement, but as a leader of, and advocate
for, severely disabled persons who have. In 1982, the intent of
Congress, the social purpose, if you will, was to encourages
those who receive monetary settlements growing out of
catastrophic injuries, to accept periodic payments to safeguard
the uncertain futures they face. Factoring companies' intent,
on the other hand, is simply to cheat severely injured persons
out of their money. You can, and should, stop this outrage.
Sound public policy and simple decency would indicate that as
legislators, you have no choice but to do the right thing.
For all these reasons, The National Spinal Cord Injury
Association respectfully recommends and strongly urges your
support of H.R. 263 which would provide needed protection from
the predatory practices of these factoring companies.
Thank you for the time and attention you are devoting to
this critical issue and the opportunity to appear before you. I
will be happy to answer any questions you may have about the
Association or our interest in this matter.
Chairman Houghton. Thank you, Mr. Countee. Thank you,
everybody, for your testimony.
What I would like to do is forgo my questions and turn it
right over to Mr. Coyne. Then, we will go right down to the end
and come back here with a question.
Go ahead, Mr. Coyne.
Mr. Coyne. Thank you, Mr. Chairman.
Mr. Chapoton, you seem to be testifying more in opposition
to the proposed legislation based on the fact that it is a
consumer protection issue rather than a taxation issue.
Mr. Chapoton. That is correct, sir.
Mr. Coyne. But I would guess that you could imagine that
there would be instances where people would have to succumb to
some kind of situation where they needed money immediately?
Mr. Chapoton. I certainly could imagine that. As I said in
my written statement and in my oral presentation today, there
should be protection. The result we should try to achieve is a
fully informed, fully advised consumer.
Mr. Coyne. Your major objection is just from a consumer
protection standpoint?
Mr. Chapoton. My major objection is that there are too many
fact situations--it is too complicated an issue to deal with in
one fell swoop in the tax law. It's really not a tax issue.
Mr. Coyne. Thank you.
Mr. Chapoton. Yes, sir.
Mr. Coyne. Ms. Kucenski, you indicated that you and your
husband are ``educated and astute'' and you were able to come
to a conclusion that that was the best financial arrangement
for you. I guess you could understand where some people who are
not as educated or astute in financial matters and may need the
protection of something like that?
Ms. Kucenski. Yes, I can understand. But there are more
factors involved in that too, that may not have the financing
or good job or whatever. The age is a factor, well-being,
mental stability, things like that.
Mr. Coyne. Thank you.
Chairman Houghton. OK.
Mr. Weller.
Mr. Weller. Thank you, Mr. Chairman. It is always nice to
have a constituent on the panel today. Donna Kucenski is from
Seneca, Illinois.
It's nice the day after St. Patty's Day that someone from
the home of the Seneca Irish is with us. I want to welcome you
to the Ways and Means Committee. Donna, I appreciate your
testimony. Mr. Countee made some pretty strong statements
regarding this issue and the intent of those who purchase
structured settlements.
You have indicated in your testimony that you felt you were
never pressured, you had all the information before you. You
have given examples of others that you know personally who have
used this as a way to have a little extra money to buy a car or
make a downpayment on a home, go back to school. You feel that
it's an option people should have as a choice for their
finances.
I was wondering, was there anything unexpected after you
reached this agreement with the company that purchased your
structured settlement? Were there any surprises?
Ms. Kucenski. There were no surprises from Singer Assets in
general. The surprise the second time was knowing that I had to
go before court. That was a surprise. I was told the first time
that you know, if you ever want anything else and you need
anything, you know where to make a phone call, and that is what
my husband and I decided to do. It surprised us going before a
judge.
Mr. Weller. And was there ever a time during your business
transaction with the company where they did not honor their
side of the bargain?
Ms. Kucenski. No. Never a time.
Mr. Weller. And you have indicated in your testimony that
there were two sales, I guess, of two portions of your
structured settlement. Do you still have some of your
structured settlement that is still yours?
Ms. Kucenski. Yes, I do.
Mr. Weller. That is still outstanding. You have sold two
pieces of it?
Ms. Kucenski. Right.
Mr. Weller. As part of this. From your experience and in
talking with others, since you indicated in your testimony you
know some other individuals that have done this, you know, Mr.
Countee indicated that some people may be exploited by some bad
apples maybe in the industry. What type of protections do you
feel there is a need for? Clearly you oppose Mr. Shaw's
legislation, from your testimony and from our personal
conversation you have shared that with me. Do you feel there is
a need, if this type of practice continues, for any additional
protection to protect those who may be more vulnerable because
of their mental condition or physical condition?
Ms. Kucenski. I think as an individual who has the
settlements and who has the opportunity to move forth with
Singer Assets and everything, the documentation that they give
you is pretty self-explanatory. If for any reason that me, as
the settlement holder, feels that I have been taken for a ride
or whatever, we have an attorney that you can hire. There are
counsels. I have my own broker that does all my financial
arrangements. I consult him. There are many other people that
we can hire as a person if we feel that we are being ``taken
for a ride.'' That is up to the individual's decision.
Mr. Weller. OK. Mr. Countee, just in response to Donna
Kucenski's statement there, if this practice were to continue,
you know, not considering Mr. Shaw's legislation, but if this
practice were to continue where people would have the
opportunity to purchase settlements and also have the
opportunity to sell them, would you see perhaps some particular
additional protections that should be put into the law to
protect those that you noted may be vulnerable in your
testimony?
Mr. Countee. You mean without the provisions of H.R. 263?
Mr. Weller. That's correct. Are there any other--if the
Shaw legislation is not adopted, are there protections that you
would suggest that we consider, that the Congress consider as
an alternative? Have you thought about any other protections
for those who may be vulnerable?
Mr. Countee. Probably some that would fall under the rubric
of consumer protection laws. I think that the conduct of the
factoring companies that I have outlined, such as confessed
judgment against a victim in a distant court, for instance,
should be looked at. I think the marketing practices should be
looked at.
I think that the provisions of State legislatures, such as
bringing any factoring companies' award before the approval of
State court should certainly be a provision that is required. I
see nothing wrong with bringing these factoring companies'
contracts before the light of day, and require court approval
of them before they go into effect. I think that this has the
advantage at the very least of having them reviewed by someone
with the knowledge and background of what the recipient is
getting into.
Those are some provisions that I think, and there probably
are others that would protect the recipient.
Mr. Weller. Thank you, Mr. Countee. Donna, I am glad to
have you here. Thank you, Mr. Chairman. I see my time is
expired.
Chairman Houghton. Thanks, Mr. Weller.
The gentleman from Colorado, Mr. McInnis.
Mr. McInnis. Thank you, Mr. Chairman. I appreciate the
testimony from the witnesses today. I guess I take a different
approach on this. I don't see this as a consumer issue. It
appears to me that at some point in all segments of society,
that consumers have to accept a little responsibility. I think
having heard Ms. Kucenski's testimony, she is certainly capable
of handling her own matters.
What I do see, however, and I disagree with the one witness
who did not see it as a tax issue, I see it right and center to
be a tax issue. The reason is that the present law, because of
the injuries that were sustained, according to the legislative
history of this, they provided a special exception. They
provided a tax subsidy for these type of payments. But to
prevent the abuse of this tax subsidy, they put in certain
requirements. One of those being that the payments could not be
accelerated. It appears to me from my reading, that clearly
there is an acceleration here. Clearly there is a change in tax
status, and a noninjured party is now obtaining the benefit of
the tax subsidy which was never intended for the noninjured
party.
I see this as clearly a tax issue. That is how I intend to
approach it.
But out of curiosity, I would ask Donna, so I don't keep
butchering your last name, if you don't mind me just saying
Donna, what was the discount rate that you ended up paying? Do
you mind responding to me for that, for the first and second
settlement?
Ms. Kucenski. Yes. I don't have that information with me. I
don't even want to speculate. I don't have that information.
Mr. McInnis. Is it Mr. Chapoton, the gentleman there?
Mr. Chapoton. No. I could not respond to that. Mr. Trankina
could speak on the discount issue if you wish.
Mr. McInnis. Now that I have got you on the microphone, you
said--no, maybe I didn't hear you correctly. But you said you
didn't see this as a tax issue?
Mr. Chapoton. No. You heard me correctly.
Mr. McInnis. Would you agree----
Mr. Chapoton. Let me----
Mr. McInnis. No. Let me finish.
Mr. Chapoton. If I might go through it very briefly.
Mr. McInnis. I reclaim my time. Let me ask you very
briefly. Would you agree, yes or no, would you agree that this
is a tax subsidy, that it is an exception in the Tax Code, that
it is treated as a tax subsidy?
Mr. Chapoton. That is an interesting question. It was the
IRS ruling policy before the law was enacted. It was the IRS
ruling policy before 1982. You got the same result before 1982
as you got after 1982.
Mr. McInnis. But it's still a tax subsidy.
Mr. Chapoton. It is a tax benefit, yes. I agree with that.
It is a tax benefit. The interest element of the structured
settlement is not taxed.
Mr. McInnis. And under these structured settlements, the
tax benefit goes from the original intended party, which would
be in most cases the injured party, now I understand you can
have lottery winners and people like that, but the witnesses we
have heard today are injured parties. It was intended that
benefit went to the injured party. Wouldn't you agree now that
the benefit through a discount rate, and it affects the
discount rate, that benefit now transfers to the recipient
receiving those structured checks under an assignment every
month?
Mr. Chapoton. Well, I think that question comes up, is
exactly the same when the structured settlement is entered
into, how you split that tax benefit between the structured
settlement company and the claimant as it is on the purchase of
a structured settlement company some years later. In other
words, the two parties you are negotiating are going to split
that tax benefit.
Mr. McInnis. That's right. I mean it impacts the price.
Mr. Chapoton. Correct.
Mr. McInnis. I understand the impact on the price, but we
have a third party involved here who is not involved in the
negotiation. The government, who initiated a tax benefit for
the injured party. Now, the second party, the purchaser of the
payments come in. They are now the recipient of a tax benefit
that was never intended to go to that party. Wouldn't you agree
with that?
Mr. Chapoton. No. I wouldn't. They are in no different
position as far as negotiating for a piece of the whole
arrangement than the structured settlement company is. The tax
benefit is going to be split between all the parties that
negotiate. I agree with that. But I don't know that I see your
point that they are different than the structured settlement
company.
Mr. McInnis. Now correct me if I am wrong, but you said you
are a tax attorney?
Mr. Chapoton. I am.
Mr. McInnis. How would you define then the intent as well
as the literal definition of the terms under the qualified
assignment cannot be accelerated. How would you define
``accelerated''?
Mr. Chapoton. The term ``accelerated'' was also used in the
rulings issued by the IRS. It was dealing with the constructive
receipt doctrine that the claimant could not accelerate. That
does not mean that a claimant cannot enter into a separate,
independent, later transaction based on different facts and
sell that interest. Acceleration is different than assignment.
Mr. McInnis. Even though the payments are accelerated to
her, it's just another form? There is still an acceleration of
payments to her, but it is through another form. But you don't
think that fits under the definition of acceleration?
Mr. Chapoton. No, it is not. I definitely do not think it
is. The payments are not accelerated. They continue as
originally----
Mr. McInnis. Well, in form, they continue to another
mailbox, but there is a transfer payment to the recipient that
accelerates the payments to the recipient.
Mr. Chapoton. The recipient gets the funds earlier than
they would get them after the sale. Let me go back, if I
might----
Mr. McInnis. I am out of time. I appreciate it. I would
call it acceleration.
Thank you, Mr. Chairman.
Chairman Houghton. Thanks very much.
The gentleman from Georgia, Mr. Collins.
Mr. Collins. Thank you, Mr. Chairman.
Mr. Chapoton. Mr. Chairman, could I respond to one
question?
Chairman Houghton. Surely, you bet. Go right ahead.
Mr. Chapoton. There was a suggestion that I misanswered Mr.
McInnis' question. I assume that you understood, Mr. McInnis,
that the payments received by the purchaser are fully taxable.
You understood? You were not disagreeing with that, were you?
Did I mislead you on that? A purchaser of a settlement is fully
taxable on profit it makes on that settlement.
Mr. McInnis. On the profit. But the payments that come in
on the profit, yes. But on the payments that come in, still are
in a tax-exempt status.
Mr. Chapoton. No. They are not tax-exempt to the purchaser,
no. There is a tax benefit involved in the original claimant's
position, but the purchaser is fully taxable on whatever it
makes in the transaction.
Mr. McInnis. That helps. Thank you.
Mr. Chapoton. I'm sorry if I confused you.
Chairman Houghton. OK.
Mr. Collins.
Mr. Collins. Thank you, Mr. Chairman. I wanted to welcome
Tim Trankina from the Peachtree Settlement Funding Co. of
Norcross, Georgia. He is a good Georgian here today before this
fine Subcommittee.
My question is to Mr. Chapoton. What sort of information is
provided to a claimant at the time the structured settlement is
offered? Tim may want to answer this, I don't know.
Mr. Trankina. If I may, Mr. Collins, respond. We typically
receive inquiries from individuals at which point we discuss
with them their particular financial needs. We attempt to
determine the amount of money they are seeking to raise for
purposes of improving a home, and so forth. We then go over the
program with the individual and the requirements for the
program. Then we provide them information on the amount of
money we could pay them in exchange for a specific number of
payments.
We disclose a lot of information to our clients that is
consistent with the disclosure information that has been
suggested here. We are very much in favor of consumer
protection, and support adding any kind of consumer protection
or disclosures that might help people make informed decisions.
Mr. Collins. It has been referred to in catastrophic cases
that maybe there should be some provision that would prevent
these type of purchases of catastrophic cases. But under the
ADA, Americans With Disabilities Act, that would not be
permitted, would it not?
Mr. Trankina. Well, we are in a difficult situation in that
circumstance. Eighty-five percent of the structured settlement
claimants that we deal with in our business and on a national
basis are not disabled and are gainfully employed, and did not
sustain a catastrophic injury.
However, our application process asks very specific and
detailed questions to determine whether in fact they do have
such a disability. Our policy is to reduce from their available
payments amounts that are earmarked for specific medical needs
and to take into account whether they have a disability.
The ABA dilemma is that if an individual wants to proceed,
and they have a disability, our underwriting requirements and
commitments to our financial institution partners prohibit us
from purchasing more than about 50 percent of such persons
payments, even if they were not earmarked for specific medical
needs, merely because of the concern for the long-term
disability. That is, we don't want to purchase settlement
payments that the individual may need on a going-forward basis.
Mr. Collins. But you fully disclose all aspects of the
agreement of proposed structure purchase before you purchase
it?
Mr. Trankina. Correct. I am not the general counsel of the
company, but we follow, I believe, reg Z or similar Federal
lending provision disclosures that would indicate the amount of
money that is being given, the number of payments over time
that are going to be given or transferred to us, and the
interest rate associated with the transfer.
We also provide as an industry, a 3-day right of recision,
not merely after the date the contract is signed, which is
fairly common in States, but after we have actually closed the
transaction so that an individual could return the check to us
after closing for up to 3 days thereafter.
Mr. Collins. Mr. Little, it looks like the full intent of
your support for this legislation is actually to end these
purchases of structured settlements.
Mr. Little. I'm sorry, Mr. Collins. Could you repeat the
question?
Mr. Collins. I said it appears that your support of this
type of legislation is aimed at totally eliminating these types
of purchases, purchases of structured settlements?
Mr. Little. With the exception, sir, of a hardship case, I
would say yes.
Mr. Collins. And that is based on what?
Mr. Little. That is based on the flagrant, I would say,
attempt to thwart a congressional intent.
Mr. Collins. What is the congressional intent?
Mr. Little. The congressional intent, sir, I would say was
best stated by Congressman Ramstad 4 years ago when I had
breakfast with him. He said that he understood the amendments
in 1982 to allow for the structured settlements to permit a
profoundly injured person to live her life with dignity free of
government.
Mr. Collins. But you are wanting government to step in and
prevent the opportunity from an individual having access to
this type of settlement.
Mr. Little. No, sir. I am wanting the intent of Congress,
as embodied in section 104(a)(2) of the Code, and section 130
of the Code to be upheld.
Mr. Collins. And that is to prevent the dissipation risks
to the individual who was injured who is under the structured
settlement?
Mr. Little. Yes, sir.
Mr. Collins. Let me ask you this. You also say that a lump
sum does the same thing. Would you be in favor of putting the
40 percent on a lump-sum settlement too?
Mr. Little. No, sir, I would not, because I think there's
200 years of common law there.
Mr. Collins. But you also go onto say that that also leads
to the dissipation of funds.
Mr. Little. I think that what we have to understand is that
a personal injury victim has a choice at the time of
settlement, a fully informed choice, often times at the advice
of counsel, generally at the advice of counsel, and many times
requiring court approval.
Mr. Collins. But the 40 percent would not totally stop the
possible purchase of these type of settlements?
Mr. Little. No, sir. I think again, that our bill has the
hardship clause. On the showing of genuine hardship, I think
that the purchase could go forward.
Mr. Collins. That would be your determination of hardship?
Mr. Little. No, sir. That would be a court's determination
of hardship.
Mr. Collins. But then it also could lead to someone who is
not total hardship, but also wanted to sell their structured
settlement to be penalized?
Mr. Little. I don't know if I would agree with you, sir,
when you say would be penalized.
Mr. Collins. You could pay the 40-percent penalty and still
have the purchase of your settlement?
Mr. Little. That is correct. Yes, sir.
Mr. Collins. You could actually be penalizing someone as
well as trying to stop, because if they were to decide to go
ahead, they would just be penalized 40 percent?
Mr. Little. I think that the intent----
Mr. Collins. And there probably would be cases where there
were people who would do that.
Mr. Little. I suppose it would be foreseeable.
Mr. Collins. This is very, I think, unneeded legislation.
Thank you, Mr. Chairman.
Chairman Houghton. Thanks, Mr. Collins.
Mr. Portman.
Mr. Portman. Thank you, Mr. Chairman. This is constituent
day. The fine gentleman that my friend from Georgia was just
grilling is a constituent of mine. I'll leave the Peachtree
guys alone.
Mr. Collins. I should have known that by your statement.
[Laughter.]
Mr. Collins. You are welcome to grill, if you want to, my
good friend from Georgia.
Mr. Portman. Thank you, Mr. Chairman, for having this
hearing. It is a very important topic.
Mr. Little, I appreciate your coming into town and
providing my office, and I think this Subcommittee, with a lot
of good information, from your association's position, and also
based on your personal experience in being involved in a number
of these structured settlements.
One that I remember distinctly was in northern Kentucky,
the Carollton bus tragedy. I have not talked to you about this
personally, but I know that you were involved in creating some
structured settlements for the kids who were injured. There
were some severe injuries resulting from that. What has
happened with that particular case? You did structured
settlements. Have the factoring companies become involved in
that, and gone to those families? Do you have any experience
there to tell us about?
Mr. Little. That particular case, sir, is probably one of
the best examples of the law as it currently stands in place.
There was everything in that particular catastrophic accident,
from wrongful death to emotional trauma. Several kids died in
that schoolbus crash. Several kids were profoundly burned. All
of those children were the children of enlisted Army personnel
based at Fort Knox. It was a church outing and resulted in that
fiery crash on the interstate.
All of those cases, with the exception of four, resulted in
a partial structured settlement. There was a lot of analysis
that went into that to determine the future of medical needs,
the future surgeries that those burn victims would have to
have. I am very pleased to say that a lot of those structured
moneys was dedicated to the college education funds for those
children, for the future psychological treatment of those
children. Many of those children went on to become college
graduates, the first in the history of their families. Many of
those kids, the scarring notwithstanding and the future
surgeries that they had, were able to reintegrate into society
having had the benefit of the structure to pay for the future
surgeries, and go on very well with their lives.
Unfortunately, factually those children were from one
community. It was very easy to get the court records by the
factoring companies. They have in fact become targets for the
factoring companies. They are located in one geographic area,
very easy to contact them, very easy to try to persuade them to
sell their settlements.
I am happy to tell you that the Kentucky judiciary is not
looking favorably on that, because there was a lot of analysis
and a lot of thought that went into the settlement of those
claims.
Mr. Portman. Was this a court-ordered settlement? Was the
judiciary involved?
Mr. Little. It was a court-ordered settlement as to the
children who survived. You know, they were minors at that time.
The children who died, their parents brought the cause of
action, and that did not----
Mr. Portman. The judicial system was involved in the
structured settlements as compared to a lump sum at the time?
Mr. Little. Yes, sir. Absolutely.
Mr. Portman. At the time of the accident?
Mr. Little. Yes, sir.
Mr. Portman. With the families of the children?
Mr. Little. Yes, sir.
Mr. Portman. Have the judges in that case and for that
matter around the country, to the extent that you know about
it, sealed the records of the settlements? You said that they
haven't looked favorably upon the factoring companies. How are
judges reacting around the country, to your knowledge?
Mr. Little. We see a lot of judicial activism, particularly
in cases involving incompetence concerning minors. By judicial
activism, what I mean, sir, is that the judges have commented
in open court that they are cautious of the factoring
companies' advertisements on TV. In that regard, they are
ordering that the settlements be sealed. When there is court
approval, it needs to be brought to bear on the settlement.
Mr. Portman. Are they permitted to do that?
Mr. Little. Yes, they are.
Mr. Portman. We have a situation now where at least in some
cases, the judges are actively keeping the factoring companies
from coming in by either sealing the records or in open court
discouraging it, or how?
Mr. Little. Not only saying in open court, sir, that the
record will be sealed, the terms of the settlement will be
sealed, but admonishing the attorneys on both sides to not
reveal, if you will, the terms of the settlement in that
regard.
Also, we see situations in Hamilton County. That by the
way, is particularly true with the judges in Hamilton County
back in Cincinnati. Also, the other thing that we are seeing is
that the judges, where there is a cash settlement involving a
minor or an incompetent, are telling the attorneys to go back
and to take a look at a portion of the settlement dollars that
would be paid in lump sum, be paid partially in a structured
settlement to protect the child or the incompetent from
mercenary friends and relatives.
Mr. Portman. Let me ask about the court approval clause in
H.R. 263, the Shaw bill. It says there's an exception if the
transfer is undertaken pursuant to an order of a court finding
that there is an extraordinary unanticipated or imminent need
of the structured settlement recipients, spouse or dependents
to receive a lump sum.
Mr. Little. Yes.
Mr. Portman. How would that be likely to affect the
structured settlements that are currently in place? In other
words, how often do you think that would happen?
Mr. Little. In my experience, in almost 20 years as a
structured settlement broker, in working in every jurisdiction
in this country, I have had three requests by claimants who
said ``I have a genuine hardship,'' who have come back to me as
the broker that I met at a settlement conference table, and
said ``Is there any way that you can help me, because we have
an emergency.''
I am confronted with a surgery that was not anticipated.
You know, we have lost our home in a fire, something like that.
In all of those three situations, the insurance company worked
very closely to try to find a way to help them.
Mr. Portman. I just asked the Chairman if I could keep
going beyond the red light here with his indulgence. I want to
thank everyone for coming. Buck Chapoton is one of the premier
tax lawyers in this town. I respect his opinion on tax matters.
I disagree with him somewhat on this one because I do think,
and we got into some of those specifics of it, that based on
the revenue ruling and in the 1982 change in the law, that we
made a conscious decision to provide a tax subsidy, which is
the interest on the structured settlement over time, that
otherwise would have been taxable. Having made that decision,
that was a public policy determination that there was some
public good, and what would be considered to be not only a
subsidy, but an economic inefficiency otherwise. The question
is, is that working and is it consistent with the public good.
I think in this respect, there is a lot of evidence that it's
not working well in many cases because of the public policy
being thwarted by the factoring companies.
Now the question is whether there should be a 50-percent
excise tax, or 40 percent, or whether there is something in
between, or another way to get at it. But I do think that there
is an appropriate public policy here that Congress set out to
try to at least confirm in 1982, based on the revenue ruling
that ought to be consistent.
Do you have any comment on that?
Mr. Chapoton. I would just say I clearly think the benefit
should last as long as the structured settlement stays in place
and the claimant cannot have the right to accelerate it. My
point is that there is a good policy behind that, and it works.
If situations change, and that recipient decides to sell in
an unrelated transaction to a third party, then that benefit
stops. It seems to me that is quite appropriate and quite
consistent with the 1982 legislation.
Mr. Portman. Again, and I understand what you are saying
there in terms of policy, that the question is what was the
congressional intent and what was the public policy purpose. If
it was indeed to permit people to have this protection, and
that protection is taken away by a practice that has since
occurred, you know, having set that policy in place, and having
made that decision, it is a tax issue. It becomes an issue that
is before this Subcommittee. Doesn't this Subcommittee have the
right then on a tax basis to come in and adjust?
Mr. Chapoton. Certainly, in that sense it is a tax issue.
There is a tax provision here. My point is the tax provision
did not mean to impose a lock-in effect as everyone is
interpreting it. That is as clear as a bell. The tax provision
did not mean to impose a lock-in effect on the claimant. It did
not mean to impose a tax on the structured settlement company
if there is a later sale. It meant simply not to stand in the
way of structured settlements. Absent that rule, if you didn't
have a rule such as contained in sections 130 or 104(a) or in
the rulings before those provisions became law, then the
structured settlement would have an adverse tax consequence.
The rulings and the 1982 Code amendments said you can do it,
but did not condition that as people are interpreting it, they
did not condition that benefit to require that you can never
can sell it in the future. That is just a separate issue, in my
mind.
Mr. Portman. Again, I think the more fundamental question
is what was the public policy. You just interpreted it as being
that the Congress decided it would not stand in the way of
structured settlements, looking back at the legislative
history. You were probably involved in this at the time and I
wasn't. But I think it was not that Congress wouldn't stand in
the way, but rather, that Congress would encourage. I think
that is a distinction that is important with a difference with
regard to what we do going forward. I don't know what precisely
the right approach might be to resolve this, but I think if you
look back at the public policy intent, it was not to stand in
the way. It was actually to encourage, and to the extent that's
being discouraged, it might be an appropriate remedy to amend
the tax system.
Also, one other thing, Mr. Chairman, if I might. I
apologize for the time. We have a very famous panel with us.
Mr. Countee was on TV last night. In case you didn't see him,
he was there talking about a new golf course for people with
disabilities in the State of Maryland. He was interviewed and
he did a very good job, as he did this afternoon in talking
about that issue.
Thank you, Mr. Chairman.
Mr. Countee. Thank you very much, Mr. Portman.
Chairman Houghton. Should we all meet on the golf course?
[Laughter.]
Well, I just have one question. The association has said
that under no circumstance would any company or grouping buy
settlements from people who really depend upon that income.
Here we have this U.S. News and World Report from January 25.
There is an article here, ``Settling for Less. Should Accident
Victims Sell Their Monthly Payments?'' Here are two
quadriplegics who are suing because they have been taken
advantage of. I mean is this true or not?
Mr. Trankina. Mr. Chairman, if I could respond to that. I
was disturbed as well when I read that article. I can primarily
speak for our experience at Peachtree Settlement Funding, but
also on behalf of our trade association.
At Peachtree Settlement Funding, it is our policy to
carefully examine and obtain information from claimants as to
their physical condition and their intended use of funds. We do
that through an application process, which asks these types of
questions. Do you depend on your payments for medical
necessities? Please describe other information about your
medical and physical condition. Based on that information, we
apply standards that allow us to purchase payments from
individuals that are not earmarked for specific medical needs.
Again, 85 percent of our clients do not have any type of
long-term disability and are employed. Clients having a long-
term disability reflect only a small percentage of our
applicants. But also I would like to say with respect to that
article, on my own effort for my company and in trying to
uphold the ethics we maintain, I wanted to investigate somewhat
into those circumstances reflected in the article. There are
somewhere in the area of 15,000 structured settlement
transactions that have occurred in the secondary market by
finance companies, I believe over the last few years. This
article highlighted a few situations where transactions may or
may not have been appropriate. It would appear they should not
have occurred.
We are in a consumer business. We are constantly striving
to improve that business. We have wholeheartedly embraced the
idea of consumer protection that would prevent any type of
abuse to occur. In those particular instances, I believe two of
the individuals had diverted some payments and one of the
individuals had improperly completed and did not convey
truthfully his medical condition in the application. The
individuals referenced in the article were not clients of our
company.
I was interviewed for about 45 minutes by the author of
that article. However, none of the information that I conveyed
of the practices of our business was represented. I think it
was a highlight of some situations.
More importantly, I think it highlights the need for
consumer protection. Again, we wholeheartedly embrace
disclosure and the procedures that would permit an individual
to make an informed decision.
[The following was subsequently received:]
March 31, 1999
Mr. A.L. Singleton
Chief of Staff
Committee on Ways and Means
U.S. House of Representatives
1102 Longworth House Office Building
Washington, D.C. 20515
Re: Committee on Ways and Means, Subcommittee on Oversight, Tax
Treatment of Structured Settlements, Thursday, March 18, 1999
Dear Mr. Singleton:
I greatly appreciated the opportunity to testify before the
Subcommittee on Oversight in the above-reference matter. It was truly a
privilege and honor for me as a citizen to participate in the
legislative process at the federal level.
As a follow-up to the hearing, I have set-forth below responses to
a few items/questions left open at the hearing and for which I have
personal knowledge and/or requested permission to provide a response
subsequent to the hearing.
1) Ms. April Fely--Testimony was offered by the proponents of the
excise tax related to Ms. April Fely, a client of Peachtree Settlement
Funding. Ms. Fely, who was not present at the hearing nor consulted
prior to, was portrayed by the proponents of the excise tax as having
lost her dignity by squandering her structured settlement. This
portrayal is not only inaccurate, but offensive to Ms. Fely, as well as
others in her situation who often must make difficult decisions in
order to move themselves and their families forward. Quite to the
contrary, Ms. Fely made an informed and educated decision to sell her
future settlement payments to meet her changing financial
circumstances. As she states in her attached affidavit, her family
benefitted greatly from her transaction with Peachtree Settlement
Funding which, in part, permitted her to obtain an automobile to
facilitate her childrens' commute to work and school. She is employable
and not disabled. Certainly she will lose her dignity if denied the
right of self-determination and control over her own financial affairs.
2) Litigious Customers--The proponents of the excise tax offered
testimony stating that our clients are so unhappy with our services
that over 200 lawsuits have been filed against us as an industry. This
assertion is absolutely false and reflects a gross misrepresentation to
the Committee. Peachtree Settlement Funding has participated in several
thousand transactions and has not been sued or served with a complaint
by a single customer. Other NASP members have reported only a handful
of customer initiated litigations out of 15,000 plus transactions.
Unfortunately, a small percentage (1%) of our customers attempt to
defraud us of payments we purchased. In these instances, we seek to
enforce our purchase agreement against the individual perpetrating the
fraud. The ``200'' lawsuits referenced by the proponents relate to
those instances where a settlement purchaser instigated an action to
enforce its contractual rights.
3) Searching Through Court Records--The proponents of the excise
tax offered testimony stating that settlement purchasers, like
Peachtree Settlement Funding, actively seek out and ``target'' accident
victims. This assertion is absolutely false. No member of the National
Association of Settlement Purchasers researches court filings or other
court documents to identify potential customers. The mere suggestion of
such is a red-herring and pure nonsense as over 80% of structured
settlements are reached without a single document ever being filed in
court. To the contrary, we advertise broadly without any specific
knowledge as to whether those who hear our message in fact have a
structured settlement. We rely entirely on responding to inbound
telephone inquiries initiated by the consumer.
4) Interest Rates--The proponents of the excise tax offered
testimony stating that settlement purchasers, like Peachtree Settlement
Funding, charge egregious interest rates. This assertion is false.
Peachtree Settlement Funding utilizes interest rates consistent with
credit card rates. These rates average in the high teens. The largest
issuer of sub-prime credit cards in the country (First USA Bank)
charges a standard rate of 26.1 percent. For the vast majority of our
customers, the interest rates we charge reflect the best credit terms
they have ever been offered. Moreover, our rates have declined steadily
as competition in the industry has increased.
5) Consumer Bill of Rights--During my testimony, I referenced the
National Association of Settlement Purchasers (``NASP'') Consumer Bill
of Rights. The Consumer Bill of Rights sets forth broad disclosure
requirements and recission rights for the consumer. All NASP members
are required to follow a code of ethics which includes compliance with
the Consumer Bill of Rights. I have enclosed a copy of the NASP
Consumer Bill of Rights and Code of Ethics for your consideration.
Thank you once again for the opportunity to make this submission to
the Committee. I am available to provide additional information,
testimony, or assist in any other manner to further the Committee's
examination of the proposed legislation.
Sincerely,
Timothy J. Trankina
President & C.E.O.
TJT:ma
Encl.
CONSUMER BILL OF RIGHTS
You have the right to know the exact amount you are to
receive in exchange for your transfer of payment rights;
2. You have the right to know the discount rate applied to
your transaction;
3. You have the right to consult with your counsel of
choice at any time regarding your transaction;
4. You have the right to know the exact amount of all
commissions, fees and other charges to be incurred by you in
connection with your transaction;
5. You have the right to cancel your agreement to transfer
your payment rights for any reason within three (3) business
days of the date you receive payment;
6. You have the right to know about any penalty provisions,
including claims for liquidated damages, in the event of a
breach by you of your transfer agreement;
7. You have the right to choose whether or not to transfer
your payment rights at any time.
NASP CODE OF ETHICS
Be it resolved, that the NASP shall adopt a code of ethics
for its members. All members shall:
Observe high standards of commercial honor and
just and equitable principles of trade;
Comply with all laws governing the member's
operations, and shall conduct its business so that the member
deserves and receives recognition as a good and law abiding
citizen;
Be accurate and complete in its contract
negotiations with prospective customers;
Not engage in any unfair methods of competitions;
and
Not take any unfair advantage of a prospective
customer; and shall insure that the prospective customer is
legally capable of entering into the transaction contemplated.
To Whom It May Concern:
I received payments pursuant to a structured settlement.
This settlement arose out of a medical malpractice action from
the death of my husband. My children receive a separate
settlement which they will be able to collect when they turn 18
years old. I also receive social security payments and I am
employable, if need be and I am not disabled in any way.
It is my understanding that the NSSTA has been using me as
an example of how structured settlement purchaser take
advantage of accident victims. First of all, I am offended by
the NSSTA's position that I am incompetent to handle my
financial matters. Secondly, my family greatly benefitted by
doing transactions with Peachtree Settlement Funding. We used
the money for several things: we purchased a vehicle which
greatly facilitated my children's commute to school and to
work. Also, we used a portion of the funds for recreation as we
took a long due vacation in the island.
I am puzzled as to why I am being used as an example
against structured settlement purchasers. Selling MY payments
has benefitted me and my family and I do not think ANY
insurance company has the right to tell me whether I should or
should not do it, or whether I should or should not improve my
family's life. I am perfectly capable to make these decisions
on my own.
Thank you very much,
APRIL FELY
March 31, 1999
Notary Seal
State of Hawaii
County of Hawaii
On this 31 day of March, 1999, before me personally
appeared April Fely
To me known to be the person------described in and who
executed the foregoing instrument, and acknowledge that she
executed the same as her free act and deed.
Lauri M. Mattos
Notary Public, Third Judicial Circuit, State of Hawaii
My commission expires February 6, 2000
Chairman Houghton. If I could just interrupt 1 minute. I
mean it's the age-old issue. If it's a consumer protection
issue versus an issue of law, then you have to make sure that
the consumer is protected. If the industry is not going to do
it, this is where the government moves in. I think most of us
sitting around here don't want to create new laws.
But we will create new laws if the industry isn't willing
to protect itself or it isn't able to protect itself. Maybe you
have an answer to this, and maybe somebody else would like to
make a comment.
Yes, Mr. Little.
Mr. Little. Mr. Chairman, I would respectfully point out a
case that Peachtree was involved in. I think it is important
that we look at the circumstance of the claimant in each
situation and not focus so much on language such as
catastrophic. It would be a relative term that people would
take exception to.
Let me give you the example here that I am speaking of. Her
name is April Feely. Mrs. Feely is an unemployed widow,
approximately 40 years old with eight children. Her sole source
of income are or were her $1,200 monthly structured settlement
annuity payment and Social Security payments of $1,850. The
transaction for which Peachtree has sought approval from the
Kentucky court as its fourth transaction with Ms. Feely. Taking
the transactions together, she has sold Peachtree all of her
monthly $1,200 settlement payments through February 2005, and
all but $100 of her monthly payments through February 2008.
So, I think that case alone shows a circumstance. We are
not talking about a catastrophic injury here. We are talking
about a catastrophic situation, where she was dependent with
eight children, on this annuity payment, in addition to her
Social Security payment. It goes back to the Congressman
Ramstad's comment of living one's life with dignity, free of
government.
I can assure you that if this goes forward as proposed and
Mrs. Feely is left without her annuity benefits, that she
surely will be on public assistance, and she will surely lose
some of her dignity in that regard.
Chairman Houghton. Thank you very much.
Mr. Coyne. Thank you, Mr. Chairman. I just want to follow
up. Mr. Trankina, what is the preferred method for payments to
the companies' agents or salesmen?
Mr. Trankina. I am not sure I follow.
Mr. Coyne. Is it commission? Are they paid on a commission
basis?
Mr. Trankina. Our employees?
Mr. Coyne. Yes, right.
Mr. Trankina. At Peachtree Settlement Funding, we have
employees that receive a base salary a commission based on a
sales volume, typical for a sales organization.
Mr. Coyne. The commission is based on sales volume?
Mr. Trankina. For that individual, yes.
Mr. Coyne. Along with a base salary?
Mr. Trankina. Yes.
Mr. Coyne. Thank you.
Chairman Houghton. Yes. I was just going to get back to my
issue. Do you really have a feeling that the industry is going
to be able to police itself? Because absent that, then clearly
legislation is going to take place. Maybe the rest of you would
have comments about it.
How about you, Ms. Kucenski?
Ms. Kucenski. I do not understand the question.
Mr. Trankina. If I may respond, if it please the Chair, if
I may respond.
The industry is a young industry. We have responded to a
calling of thousands of individuals, 30 percent of which never
had any representation when they entered into the structured
settlement, did not understand completely what the
transaction----
Chairman Houghton. Can I interrupt? Would you answer my
question?
Mr. Trankina. Yes, sir. As a result of being an emerging
industry, we have very diligently been organizing ourselves as
a trade association, we have developed a consumer bill of
rights and standards for membership in the organization. We
believe those standards, which have not been submitted in the
materials--I would appreciate the opportunity to do so. We
believe those standards address the issues that have been
raised.
Notwithstanding that, we do realize as an emerging
industry, that others may want to get into the industry that
may not choose to participate in our national association. For
that reason, we have, as an industry, proposed a model act of
legislation in various States that would codify these types of
consumer protections that we are all seeking.
We wholeheartedly embrace the idea of consumer protection,
as long as it's meaningful and still provides and recognizes
that circumstances change over time. Consumers had a choice
when they entered into a transaction. They were victimized at
that point, had a choice to take a lump sum or a structured
settlement, and now later, as circumstances change, our typical
timeframe is 5 to 7 years after an incident occurred, that they
be given that choice once again to evaluate whether a financial
transaction is in their best interest.
Chairman Houghton. Would you have a comment on that, Mr.
Chapoton?
Mr. Chapoton. No. I was simply going to make exactly that
point. The industry is new. I have reviewed the Code of conduct
that they have adopted and discussed with them at some length
their effort at State legislation, where this should be dealt
with.
Chairman Houghton. And so you think that the Congress
should wait, not pass legislation, and see this industry
develop into greater maturity? Is that right?
Mr. Chapoton. That is correct. I think we should make sure
that the industry does it responsibly.
Chairman Houghton. How do we get away from something like
that?
Mr. Chapoton. I think that is difficult, Mr. Chairman. I
think highlighting situations like that is helpful, not
harmful. I think the industry should deal with situations like
that. As you say, it should police itself.
Chairman Houghton. But is there anything we can do together
to try to prevent something like this from happening tomorrow?
Mr. Chapoton. I would defer to Mr. Little, but I do think
industry associations such as NASP are good ways to police
industries. I think it should be done, and I hope and believe
it is being done.
Chairman Houghton. Mr. Little.
Mr. Little. Mr. Chairman, we would have the opinion very
strongly, sir, that 263 should be enacted for the very reason
that you are asking the question, as I understand your
question, sir.
We would be curious as to why even though it may be a young
industry, that hundreds of purchase victims are suing the
purchaser. If this is a legitimate business, and if it is
serving some social good, why does all of this end up in such
protracted lawsuits as we see, and are a matter of public
record? Why are these interest rates so egregious? Why does it
result in the stories that you see in U.S. News and World
Report? Those are not isolated cases. We see it every day.
In my practice, I get to know a lot of very successful
attorneys around the country. You would be surprised, sir, and
somewhat impressed if you would hear the comments that they
make.
That people come back to them after they have worked very
diligently to procure the structured settlement, to protect the
interest of their clients, their future medical needs, and see
them come back 1 year, 2 years, or 5 years after the settlement
and say ``I'm totally broke. I sold my structured settlement. I
squandered what I got for it. Is there anything that you can do
for me?''
Chairman Houghton. There isn't. I am all through with my
questions.
Have you got any? Would you like to say something?
Mr. Collins. Yes, Mr. Chairman. I would like to ask Mr.
Chapoton.
You mentioned what is occurring as far as what the
association has drafted as their code of conduct and that State
legislatures should look at this.
Mr. Chapoton. That's correct.
Mr. Collins. Are you familiar or are there any State
legislatures that are actually looking at legislation like
that?
Mr. Chapoton. There have been proposals. I really couldn't
answer that directly. We could discuss that, but I couldn't
give you any details on it.
Mr. Collins. But it is an industry that is an advantage for
a lot of consumers who need help, who have structured
settlements, to be able to go to an industry like this for
assistance. But it is important that the State legislatures
look at consumer protection legislation within their States.
Mr. Chapoton. That is correct. Our industry association
supports that.
Mr. Collins. To me it is un-American for the Congress to
try to tax any business out of existence, whether it be this
type of industry or whether it be the tobacco industry, or
whether it be an arms manufacturing industry or whatever. It is
wrong to try to tax a business out of existence.
Thank you, Mr. Chairman, for allowing me to participate.
Chairman Houghton. OK. Thanks, Mr. Collins.
Mr. McInnis.
Mr. McInnis. Thank you, Mr. Chairman. I have some
appreciation for the gentleman at the end of the table. In the
U.S. News and World Report interview where he talked for 45
minutes to the reporter and the reporter specifically left many
of his comments out, I think everybody at this table has been a
victim of that kind of reporting as well.
But Mr. Little, maybe you can help me out. What is the
premium, the typical premium that is charged by these factoring
companies to purchase the structured settlement? Can you give
me an idea what? You said earlier extravagant interest rates. I
happen to believe that is probably true, but I am trying to get
my hands on a number here.
Mr. Little. As a matter of public record, some of the
things that the National Structured Settlement Trade
Association through counsel has pulled, which show that a
mortgage equivalent rate on an annual basis to range from 19.8
to 36.2, to 36.9, 41.7. Sir, I do not have an average for you.
These are actual cases involving actual purchases. I would be
happy to give you a copy of this.
Mr. McInnis. Reclaiming my time, Mr. Little. These are
probably the most egregious cases because they filed litigation
on them. I am trying to determine what is more run-of-the-mill.
These are going to be at one end of it. If you have any data
that would give me a run-of-the-mill rate, that would be a
little more helpful to me than probably the most egregious
cases.
Mr. Little. I'm sorry, I don't have that with me today,
sir. If we have any of that data available, we will certainly
make it available to you.
Mr. McInnis. Then I guess the other point, Mr. Little,
actually I find myself going back and forth with your
testimony. I think it has been very helpful, and also the tax
lawyer, I appreciate your counsel. But tell me at what point do
you think that the client or the injured party should have the
economic freedom to make a decision? If they make a bad
decision, I mean who is responsible for that other than the
person? Unless they have been sold through fraud or some other
means, I mean at what point do you say hey, consumer beware.
The same thing applies with charging on a credit card.
Mr. Little. In my experience in working for many property
and casualty companies and self-insureds, I don't see any
fraud. The 104(a)(2) says damages received on account of
personal injury or sickness, whether paid in a lump sum or
periodic payments. Personal to the claimant, you have a choice.
You can take it in a lump sum or you can take it in periodic
payment. The property casualty adjustor who is sitting there at
the settlement conference table is under no obligation to offer
a structured settlement. He offers it as a choice, consistent
with the tax law. So that is the moment of settlement there.
It is very, very rare that a case settles on a day that the
settlement conference is held.
Mr. McInnis. Let me reclaim my time because I must have
given you the wrong question. I am not talking about the
original structured settlement. I am talking about the decision
to factor their account or to go out and sell their structured
settlement.
Mr. Little. I think that our bill addresses that. I think
with the showing of genuine hardship, that there would be no
problem with that. I think it is reasonably foreseeable that
there would be genuine hardship. I think if you go back the
court of original jurisdiction, and you have the approval of
that court, everything has been dealt with appropriately. The
hardship has been demonstrated. The court has said yes, we
understand the hardship and we let it go forward, and no excise
tax is applied.
Mr. McInnis. Then I'll conclude it with this, Mr. Chairman.
What if at some point somebody who is astute, who is not
experiencing a hardship, sees that they can get a better return
for their money; in other words, they had an opportunity to
invest in a home in a rapidly accelerating real estate market.
At what point would you allow those people to make a voluntary
choice to sell a structured settlement to a factoring company,
or sell it to the companies that do this, without having a
hardship.
Mr. Little. I would think in your example, sir, that it is
part of the American dream to have a home. If an astute couple
had an opportunity to buy a home, that that may fall under the
genuine hardship.
I would find it a rare situation for a court of original
jurisdiction to say if you have the opportunity as an American
to own a home and you could do that, I would say that that
would create a genuine hardship.
Mr. McInnis. And help me. Would a person under this--
because I'm not completely clear on this--what if a person can
go and convince the court, I have got an opportunity to invest
in a fairly conservative investment which will give me a higher
return. Would they have to qualify--at what point could they
say, Judge, I want to make my own decision. I want to sell the
structured settlement.
Mr. Little. I think, using your assumption, sir, that they
were astute, that they had the opportunity to apply their
astuteness at the time that they settled their lawsuit or their
claim on the personal injury. That is the choice that they have
at the time of the settlement, consistent with 104(a)(2) of the
Code. As you are saying, if it's accelerated----
Mr. McInnis. We don't play semantics here. The investment
comes after the settlement. Forget the structured settlement.
It has already been settled. Five years later, an opportunity
comes up to invest. You know what I am saying.
Mr. Little. Yes, sir, I do.
Mr. McInnis. I am just trying to determine whether or not,
if there is a lesser step, like perhaps just going to the court
and the court determining that the party selling is fully aware
of what they are doing, and the rate at which they are paying.
I'll wrap it up.
Mr. Little. I think at that point that you are unraveling
the intent of Congress and a large body of tax law. I think
that that would create problems.
You know, the Tax Code, I think that that narrow paragraph
in there is the only segment of our society that you will find
is protected in that way, are the profoundly injured. I think
that if we undo that, we undo the intent of Congress, and we
unravel all of that.
I hope I am answering your question. I feel like I am
frustrating you in not answering your question, but that is my
opinion.
Mr. McInnis. Mr. Chairman, if I might, the gentlewoman
there is kind of jumping around, anxious. Does she wish to
respond, if it meets the approval of the Chairman?
Chairman Houghton. Please.
Ms. Kucenski. When my husband and I decided to purchase
this home, and it was exactly what you said, a great real
estate opportunity, and we improved it and we made more money
off of it, I took our money, my money made in Templeton Growth
Fund, I am making more money, my money, making more than
anybody could give me through what I have for settlement now. I
had no choice to pick a structured settlement. I am 30 years
old. I do not need this to physically improve myself or to live
off of.
This is money that I found that me and my husband could
invest in. That's what we did. It was basically my choice. I
resent the fact that I had to have a judge grant me permission
of my money to use it the way I saw fit. Basically it comes
down to it's my money. I have the right to do what I want. If I
blow it, I blow it. If I invest it wisely, great. But it is my
money.
Mr. McInnis. Thank you, Mr. Chairman.
Chairman Houghton. All right, thank you very much. Thank
you, I really appreciate your time here this afternoon.
[Whereupon, at 3:05 p.m., the hearing was adjourned.]
[Submissions for the record follow:]
Statement of American Bankers Association
The American Bankers Association (ABA) is pleased to have
an opportunity to submit this statement for the record
regarding the tax treatment of structured settlements.
The American Bankers Association (ABA) is pleased to have
an opportunity to submit this statement for the record
regarding the tax treatment of structured settlements.
The American Bankers Association brings together all
categories of banking institutions to best represent the
interests of the rapidly changing industry. Its membership--
which includes community, regional and money center banks and
holding companies, as well as savings associations, trust
companies and savings banks--makes ABA the largest banking
trade association in the country.
The tax treatment of structured settlements is currently
the focus of several legislative proposals. Representative Clay
Shaw (R-FL) and others have introduced legislation, H.R. 263,
The Structured Settlement Protection Act of 1999, to impose an
excise tax on ``persons who acquire structured settlement
payments in factoring transactions.'' Also, the
Administration's Fiscal Year 2000 budget contains a proposal to
impose an excise tax on ``the purchase of structured
settlements.'' These proposals could have unintended and
harmful consequences for banking institutions that make loans,
pursuant to blanket security agreements, to consumers who
receive structured settlement payments.
This could have unintended consequences on legitimate
lending arrangements. If legislators determine to proceed with
structured settlement legislation, such arrangements should be
excluded.
THE PROPOSED LEGISLATION WOULD SUBJECT LEGITIMATE LENDING ACTIVITY TO A
SUBSTANTIAL EXCISE TAX PENALTY
H.R. 263 would impose a 50 percent tax on ``any person who
acquires directly or indirectly structured settlement payment
rights in a structured settlement factoring transaction.'' The
bill defines a structured settlement factoring transaction is
defined as ``a transfer of structured settlement payment rights
made for consideration by means of sale, assignment, pledge or
other form of encumbrance or alienation for consideration.''
The bill provides that the tax should be applied to the
``factoring discount,'' which it defines as ``the excess of (i)
the aggregate undiscounted amount of structured settlement
payments being acquired in the structured settlement
transaction, over (ii) the total amount actually paid by the
acquirer to the person from whom such structured settlements
are acquired.'' As currently drafted, the proposed legislation
would impose a substantial excise tax penalty on legitimate
lending activity.
For example, if an individual who borrows $100,000 from a
bank, secured by a lien on the borrower's assets, is a
recipient of annual structured settlement payments, the bank
could be liable for an excise tax. The excise tax on such a
transaction, assuming the borrower receives $20,000 per year
for 15 years under the structured settlement arrangement, is as
follows:
------------------------------------------------------------------------
------------------------------------------------------------------------
Face amount of settlement payments................... $300,000
Loan amount.......................................... 100,000
------------------
Factoring discount................................... 200,000
Excise tax percentage................................ 50%
------------------
Excise tax due....................................... $100,000
==================
------------------------------------------------------------------------
The Administration's proposal is similar, but would impose
a 40 percent excise tax on any person purchasing (or otherwise
acquiring for consideration) a structured settlement payment
stream. Under the Administration's proposal, the bank's excise
tax liability could be $80,000.
------------------------------------------------------------------------
------------------------------------------------------------------------
Undiscounted value of purchased income stream........ $300,000
Loan amount.......................................... 100,000
------------------
Difference........................................... 200,000
Excise tax percentage................................ 40%
------------------
Excise tax due....................................... $80,000
==================
------------------------------------------------------------------------
The imposition of such substantial penalties on legitimate
business activity would certainly not be an intended
consequence of the subject legislation.
OUTSTANDING LOANS MADE PURSUANT TO BLANKET SECURITY AGREEMENTS COULD BE
SUBJECT TO TAX
A blanket security agreement generally provides that the
loan made by the lending institution is secured by all property
(tangible and intangible) the borrower presently owns or
subsequently acquires. As currently drafted, both of the
proposals could impose excise taxes on banking institutions
that use such agreements to secure loans. Indeed, a financial
institution may unknowingly become subject to the excise tax on
outstanding loans to a recipient of structured settlement
payments upon rollover or renewal of the loan, or if the
borrower acquires settlement payment rights subsequent to
receiving the secured loan. The lending institution would be
subject to tax even though it did not rely on the existence of
the settlement for the decision to make the loan nor for
repayment purposes.
Certain Members of Congress believe that by imposing the
excise tax on the amount of the discount, rather than on the
entire amount of the payment stream, the proposal is more
targeted than the prior Administration proposal. However, for
the reasons set out above, both proposals remain overly
inclusive in that innocent and unknowing banking institutions
may be unfairly snared in a punitive tax trap.
Further, enactment of the proposed legislation as currently
drafted would impose new and unduly burdensome administrative
costs on lenders, who would be required to re-write their
outstanding loans in the attempt to avoid imposition of the
excise tax. Accordingly, we strongly urge you not to impose the
factoring excise tax on banking institution lending activity.
CONCLUSION
The ABA appreciates having this opportunity to present our
views on the tax treatment of structured settlements. We look
forward to working with you on this important matter.
Statement of American Council of Life Insurance
The American Council of Life Insurance (ACLI) supports H.R.
263, the Structured Settlement Protection Act (``Act''). We
believe that this Act better regulates the factoring (i.e.
purchasing) of structured settlement payment rights, offers
greater protection to injured persons who are receiving those
payments, and clarifies the effect on the insurance companies
who issue the annuities from which the payments are made. The
ACLI represents four hundred ninety-three (493) life insurance
companies, many of which issue annuities that are utilized in
connection with satisfying obligations to provide structured
settlements payments.
Factoring Permitted with Finding of Court-Approved
Hardship. Under the Act, an excise tax is imposed upon any
person who acquires structured settlement payment rights except
in the case of a transfer which is ``undertaken pursuant to the
order of the relevant court or administrative authority finding
that the extraordinary, unanticipated, and imminent needs of
the structured settlement recipient or his or her spouse or
dependents render such a transfer appropriate.'' We believe
that the requirement that a court or administrative agency make
an affirmative finding of fact regarding the appropriateness of
factoring structured settlement payment rights is crucial in
ensuring that the intent of the underlying structured
settlement is preserved.
Our member companies' experience has shown that structured
settlements are often utilized in situations in which the
recipient is physically disabled, in need of medical care, and
may have a decreased ability to engage in gainful employment.
The periodic payments from the structured settlement may be the
main source of income available for support of the recipient
and his or her family. Congress has recognized these concerns
in the enactment of special tax rules which are beneficial to
the structured settlement recipient, provided for primarily in
sections 104 and 130 of the Internal Revenue Code. The
legislation currently proposed would be consistent with the
existing laws and would continue Congress' history of ensuring
continued protection for injured persons receiving structured
settlements.
In 1981, the original sponsor of section 130, Senator Max
Baucus, noted that periodic payment settlements would ``provide
plaintiffs with a steady income over a long period of time and
insulate them from pressures to squander their awards.''
Congressional Record (daily ed.) 12/10/81 at S15005. The same
needs exist today. The ACLI believes that the Act would serve
both to strengthen the protections for injured persons intended
by Senator Baucus in 1981 as well as to further the
Congressional intent of existing legislation affecting
structured settlements.
While the intent of a structured settlement is to ensure a
steady income to an injured person, we also understand that an
individual's circumstances can change and that there may be
legitimate circumstances under which the factoring of a payment
stream is appropriate for the injured person. The Act addresses
these circumstances by providing that factoring is permitted
without penalties where there has been a determination by a
court or administrative agency that ``extraordinary,
unanticipated, and imminent needs of the structured settlement
recipient or his or her spouse or dependents render such a
transfer appropriate.'' The injured person is protected by
having this determination made by a court or administrative
agency familiar with the factual circumstances of each
individual factoring transaction. The standard is broad enough
to cover true hardships that we know do occur from time to
time, while also being narrow enough to protect injured persons
from dissipating their payment streams in inappropriate
circumstances. This hardship standard falls within the ambit of
the original 1981 intent of the structured settlement tax
legislation.
Excise Tax. Our members prefer that factoring should be
permitted only in cases of hardship as determined by a court or
administrative agency. However, the Act does provide for a
meaningful excise tax for factoring which occurs absent a
finding of legitimate hardship. Any excise tax that is enacted
must be of a sufficient amount as to discourage non-hardship
factoring. In addition, any legislation must explicitly provide
that the excise tax is to be paid by the settlement purchaser
and that the amount of the tax is to be disclosed to the
injured person.
Tax Clarification. The Act provides that ``where the
applicable requirements of section 72, 130, and 461(h) were
satisfied at the time the structured settlement was entered
into, the subsequent occurrence of a structured settlement
factoring transaction shall not affect the application of the
provisions of such sections to the parties to the structured
settlement (including an assignee under a qualified assignment
pursuant to section 130) in any taxable year.'' The ACLI
believes that this provision is essential as it protects
insurance companies issuing the structured settlement annuity
contracts as well as the structured settlement obligors from
unintended adverse tax consequences created by the actions of
the injured persons and the transferee. At the time that the
structured settlement annuity is entered into, insurers and
obligors ensure that the qualified assignment underlying a
structured settlement annuity contract will satisfy the
requirements of the Internal Revenue Code, especially section
130. Were the tax treatment changed after issuance of the
annuity contract due to actions beyond the control of the
insurer or obligor, the insurer and obligor could incur
significant financial loss. Since whether a payment stream is
factored is based on a decision of the injured person and not
on any decisions of the insurer or obligor, it would be grossly
inequitable for a factoring to trigger a change in the tax
treatment of the insurer or obligor. The Act appropriately
takes into consideration this fact.
Conclusion. The Structured Settlement Protection Act should
be enacted as it provides necessary limitations on the
factoring of structured settlement payment rights while
permitting factoring in true hardship situations.
Statement of Gerald D. Facciani, Henderson, Nevada
I appreciate the opportunity to provide written testimony
regarding H. R. 263.
I am interested in this proposed legislation because of its
potential negative impact on people like me who have suffered
personal injuries and/or continue to be afflicted with physical
disabilities. Some of these people have benefited substantively
and substantially by being able to ``monetize'' (i.e. convert a
series of fixed or variable annuity payments to a lump sum)
part or all of a personal injury ``structured settlement'' to
help meet certain financial needs.
Specifically, H. R. 263 would impose a 50% excise tax on
certain types of financial transactions, known as ``factoring''
or ``monetizing,'' relative to a fixed or variable series of
structured settlement payments made to personal injury victims,
many of whom remain partially disabled. I am opposed to such a
provision being in the IRC for a number of reasons:
(1) H. R. 263 would prevent individuals who have suffered
personal injuries -many of whom remain partially disabled -from
monetizing a stream of fixed or variable payments made pursuant
to a structured settlement arrangement. The vast majority of
individuals who convert a series of payments to lump sums do so
for important and critical financial reasons--e.g., to
liquidate debts and avoid bankruptcy; to get a ``fresh start''
in life; to secure additional education or technical training;
to capitalize a small business; to obtain the down payment for
a home; etc. Only 3% of all structured settlement recipients
monetize their payments, however for the majority of
beneficiaries who choose to do so, access to monetization
defines dignity, responsibility and freedom of choice. For such
persons, the ability to convert part of their periodic payments
spells HOPE! Why would any elected representative desire to
circumscribe an individual's--and often a disabled individual's
right--to achieve a modicum of financial dignity?
(2) An excise tax will act as a damper on future monetizing
transactions, and therefore little, if any, revenue will be
raised as a result of imposing such a tax.
(3) The small percentage of injured or disabled persons who
will in the future engage in this transaction will encounter
additional legal barriers, which in turn will cost them more
(in the way of legal fees; higher interest rates due to
increased transaction costs for factoring companies (also known
as Settlement Purchasing Companies); etc) to access their
money. End result: less money to those people--the injured and
the disabled--who need it most.
(4) Not withstanding the availability of a hardship
provision, to a person of limited means and legal experience,
the process can be overwhelming, in addition to the expense of
accessing such hardship provision.
(5) Do we really want to add to the load of our already
overburdened judicial system?
Some proponents of H. R. 263 have a salutary reason for
desiring enactment of this legislation, namely, to protect
recipients of structured settlements against themselves and the
``predatory'' sales practices of a few sales people. Clearly,
some individuals make choices they wish they had not made--
haven't we all? Assuming strong underwriting and appropriate
consumer protection safeguards can be implemented which will
enhance a disabled/injury victim's ability to make an informed
and protected choice regarding monetization, is this not
preferable to having such persons pay an excise tax?
Other issues relative to monetization of structured
settlements deal with (1) present value discounts to calculate
lump sums and (2) legality of monetizing such payments.
Regarding (1), interest rate discounts used by factoring
companies, it is my understanding such rates normally fall into
a range of 12% to 21%, depending upon the size of the
settlement and the expenses associated with the transaction.
For smaller amounts, the relative dollar cost to a factoring
company is going to be greater than it would be for a larger
dollar amount, because the fixed costs associated with a
smaller transaction will comprise a greater percentage of the
overall transaction's cost. A large portion of these fixed
costs is attributable to the legal impediments raised by state
and insurance companies! Finally, I know from personal
experience as a disabled beneficiary under a group insurance
contract, (and a former actuary-see Professional Credentials)
that insurance company interest rates used to calculate
``buyouts'' of disability payments are equivalent to rates
charged by factoring companies buying out personal injury
claims.
Regarding (2), legal issues, Moody's rating service has
established an asset class for factoring transactions, belieing
the contention of those--principally insurance companies
providing structured settlements,--who claim the assignment of
a personal injury payment stream by a structured settlement
beneficiary to a factoring company is not a qualified
assignment. Furthermore, it is my understanding that the legal
and tax validity of monetizing structured settlements has been
totally buttressed by a tax opinion letter recently issued by
Price Waterhouse Coopers to The National Association of
Settlement Purchasers (NASP) 1
---------------------------------------------------------------------------
\1\ NASP is a 501 trade association established by
settlement purchasing companies to establish ethical and professional
standards of conduct for the industry. The term ``Settlement Purchasing
Company'' is used synonymously with ``factoring company.''
---------------------------------------------------------------------------
While my goal is not to assume an advocacy position for
settlement purchasers, the best of these companies have worked
diligently to develop and implement underwriting and consumer
protection safeguards relative to monetization of structured
settlement payments. Additionally, only about 3% of all
structured settlements have been converted to some form of lump
sum payment; and, as Moody's report illustrates, there have
been relatively few illustrated examples of high pressure sales
tactics.
The vast majority of structured settlement recipients are
comfortable receiving a series of fixed or variable payments,--
a steady stream of income meets their needs; however, for that
small percentage of recipients, who both need and want access
to some type of properly underwritten lump sum, monetization
has been a valuable option.
On behalf of all injured and/or partially disabled persons,
I urge Congress not to foreclose the option to convert part or
all of a series of periodic payments to a lump sum. For the
needy few (3%) structured settlement beneficiaries who have
accessed monetization, its availability has helped and enabled
them and their families achieve one of life's major goals--
financial dignity.
Thank you very much
Statement of J.G. Wentworth, Philadelphia, Pennsylvania
J.G. Wentworth, located in Philadelphia, Pennsylvania, is a
specialty finance company that originates, securitizes and
services rights to receive payments from structured settlements
and other deferred payment obligations. As the largest
purchaser of structured settlements in the United States, we
appreciate the opportunity to submit this statement for the
record to the Committee on Ways and Means Subcommittee on
Oversight hearing on the tax treatment of structured
settlements.
A structured settlement describes an arrangement that
compensates a plaintiff or claimant in a personal injury
lawsuit over time, rather than with a current lump sum payment.
Under the terms of the settlement agreement, the defendant and/
or the defendant's insurer agree to and are obligated to make
future payments to the claimant. The insurer also may elect to
transfer the obligation under a qualified assignment to a
structured settlement company and purchase an annuity contract
to satisfy the periodic payment obligation.
Background
J.G. Wentworth (JGW) is in the business of purchasing,
among other things, a portion of claimants' rights to receive
future scheduled payments under structured settlement
agreements. The purchase transactions undertaken by JGW provide
liquidity to claimants whose structured settlements no longer
meet their particular life circumstances. The need for JGW's
funding services arises from the inflexible nature of many
deferred payment plans and the changing financial needs of many
claimants. Some claimants want to sell their payments rights
because they have an immediate cash need and lack access to
traditional funding sources. The claimant gains the advantage
of realizing immediate liquidity on an otherwise illiquid
asset. The purchase transaction is structured as a sale of
payment rights under the underlying settlement agreement
because the claimant is not technically the owner of the
annuity contract and does not have the power to alter any terms
except the name of the beneficiary and the address for payment.
JGW generally does not utilize brokers to originate
structured settlement purchase transactions and its policies
prohibit the solicitation or ``cold calling'' of prospective
customers. Instead, JGW utilizes a nationwide television
advertising campaign to provide information to claimants who
might wish to sell the payments rights. The company's call
center responds to claimant inquiries, attempts to quantify an
individual's financial needs and endeavors to structure the
funding transaction to meet those needs. JGW policies prohibit
the origination of receivables from minors and incompetent
persons and require independent representation by counsel of
each claimant.
Since August 1995, JGW has consummated over 16,000
structured settlement transactions. By establishing the
necessary infrastructure, includuing sound underwriting
procedures and servicing capabilities, JGW has become the
largest purchaser of structured settlements in the United
States. Beginning in 1997, JGW has completed four
securitization transactions through private placement of
structured settlement-backed notes. To complete these
transactions, JGW has sold a pool of structured settlements to
a securitization trust which in turn issues debt that is sold
to investors. Payments on the securitized receivables, less a
servicing fee and certain related expenses, are made by the
special purpose vehicle to investors. The most recent series of
notes was at the time of initial issuance rated at ``AAA'' by
Duff & Phelps Credit Rating Co. and Moody's Investors Services
Inc., and was credit enhanced by MBIA.
Public Policy Concerns
It is alleged that structured settlement purchases and, by
implication, the actions of structured settlement purchasing companies
such as JGW, undermine the public policy concerns that lead Congress to
adopt special tax rules to encourage insurance companies to use
structured settlements as a means to settle personal injury litigation.
Let the record be clear that JGW emphatically believes that structured
settlements are an appropriate vehicle to settle litigation or
potential litigation. Structured settlements are especially effective
to provide particular claimants with catastrophic injuries. However,
the explosion in the use of structured settlements since the enactment
of favorable tax legislation in 1982 belies the myth that structured
settlements are used to protect catastrophically-injured individuals
who are incapable of making informed financial decisions. Recent
statistics indicate that between $5 and $10 billion in new structured
settlements are generated annually. Information circulated by one of
the largest structured settlement brokers states that over 50 percent
of all cases structured in 1997 involved premiums of $50,000 or less
and that only 12 percent included premiums over $250,000.
Other assertions made against structured settlement purchases
allege the following:
Structured settlement purchases trigger the very same
dissipation risks that structured settlements are designed to avoid.
Untrue. JGW, and virtually every structured settlement purchasing
company, As noted above, JGW attempts to quantify the need of a
claimant before providing them with a variety of purchase options.
Company statistics for calendar year 1998 transactions demonstrate that
the average amount purchased was slightly over $16,000
Structured settlement purchases often are made at sharp
discounts.
Untrue. The average discount rate for structured settlement
purchases has fallen steadily over the past two years. The most-recent
statistics for the three months ended December 31, 1998 indicate that
the average discount rate is 16.64 percent. JGW and the member
companies of the National Association of Settlement Purchasers (NASP)
firmly believe that discount rates will fall dramatically if
appropriate measures can be enacted to further streamline and make
clear that sales of structured settlements are permitted under
appropriate circumstances. Consumers would be the ultimate
beneficiaries from clarification of the tax and other rules that apply
when settlements are purchased.
Structured settlement purchasing companies prey upon the
weakest, most gullible and most vulnerable in our society and engage in
unconscionable, high-pressure marketing practices.
Untrue. JGW and NASP members have adopted a code of conduct and
specific guidelines governing the sale of settlements. JGW will not
purchase from minors, individuals who have been legally declared
incompetent, or guardians (unless under court order); individuals who
have been declared incompetent or guardians (unless under court order);
individuals who depend on future payments for a medical treatment; the
unemployed or unemployable whose payments are their only income.
JGW company statistics demonstrate that only 3 out of every 100
calls received by the company from individuals inquiring about
potential sales ultimately result in a purchase transaction.
Prospective customers are fully apprised of the underwriting
process and are advised of the requirement to consult with an attorney
prior to signing and returning needed materials to JGW. Potential
customers are advised in boldface documents that the transaction is a
sale, not a loan and are advised to explore all appropriate financial
options before entering into the purchase transaction. The documents
furnished to each potential customer include a rate disclosure
statement 1as well as a purchase agreement including a three-day right
of rescission clause that remains effective after funding has occurred.
Recent Publicity
As the largest purchaser of structured settlements, JGW has
become a ``lightening rod'' for those who would criticize a
marketplace that permits consumers to choose to sell one of
their assets to meet certain financial objectives. It is
important to note that JGW is involved in a consumer business
and each day interacts with hundreds of potential customers. As
noted above, it is estimated that JGW enters into a purchase
transaction with only 3 percent of those individuals that
contact the company after viewing a JGW advertisement. JGW does
not engage in ``cold calling'' and its independence from the
broker community permits JGW to control the integrity of its
origination process, avoid conflicts among origination channels
and to provide more responsive customer service to claimants
with legitimate requests for funding.
Earlier this year, U.S. News & World Report (U.S. News)
published a story entitled ``Settling for Less--Should accident
victims sell their monthly payouts?'' (January 25, 1999, pp.
62-66). That story includes four examples of individuals who
engaged in purchase transactions with JGW and now express
dissatisfaction with the company. There are compelling facts
that were not included in the article about each of the
individuals identified in the article. Importantly,
notwithstanding each individual's serious physical difficulty,
none of the individuals were, at the time they entered into
their transaction with JGW, mentally incompetent or unable to
work. In each case, JGW responded to the needs of the
individuals as expressed on their application form. Moreover,
in each case, the individual described in the article actively
defrauded JGW by keeping or diverting payments purchased by
JGW. Accordingly, JGW asserted its rights.
Specifically, one individual, who was homeless when he
contacted JGW, engaged in two transactions with the company
after expressing a need to use the funds to assist with his
living arrangements. A second individual sold roughly one-third
of her future payments, entering into the transaction after
being taken advantage of by friends and family members and
after defaulting on a series of prior loans with banks that
would not lend against her settlement. A third individual
received a lump sum from JGW but continued to receive payments
from the annuity company, keeping the payments purchased by
JGW. During a two-month period, JGW attempted to work with the
individual (even offering to forgive certain payments it did
not receive) to direct the payments to JGW as he was
contractually required. Only after these repeated attempts
failed did JGW utilize a confession of judgment remedy to which
the company was entitled. A fourth individual mentioned in the
story has, by his own admission, been receiving payments that
JGW has purchased. The annuity company had continued to send
payments to his address. Again, JGW attempted to work with the
individual and has also offered to completely unwind the
purchase transaction, even allowing him to keep JGW's lump sum
payment. He has refused, choosing instead to pursue litigation
against the company.
The U.S. News article and criticism from others makes
reference to the fact that JGW uses confession of judgment in
limited circumstances. In testimony aimed at putting companies
such as JGW out of business, groups such as the National Spinal
Cord Injury Association assert that JGW uses ``unethical legal
maneuvers and stratagems such as the use of a confessed
judgment against the victim in a distant court to garnish the
victim's payments. This remedy is legal in Pennsylvania and
several other states. Courts in New Jersey and California (the
only two instances in which this remedy has been challenged)
have upheld its use in terms of due process. JGW follows the
Pennsylvania Rules of Civil Procedure to ensure certain
protections such as service and notice are afforded to the
claimant who has sold payments and complied with its
underwriting and documentation. In fact, JGW provides an
additional protection not required by the Rules of Civil
Procedure by both sending notice to the claimant of the filing
of the papers by both certified and regular mail. Moreover, it
is a remedy that JGW employs only if there has been
intentional, active fraud by a claimant. JGW will only confess
upon a default under the terms of its documents, and does so
only after its Customer Services and Collections departments
have attempted to resolve the matter amicably. To date, no
judgments obtained have ever been exercised against a claimant
directly, other than by garnishing the annuity against the
annuity payor.
Consumer Protection
As the largest purchaser of structured settlements in the
United States, JGW joins with its fellow NASP members in
embracing meaningful consumer protection standards and
regulations. JGW fully supports NASP-sponsored legislative
initiatives which provide major safeguards for consumers and
protects their rights to make their own financial decisions.
Such initiatives are currently underway in over twenty
different state legislatures. Consumers deserve the right to
choose whether or not to receive a lump sum or a structured
settlement payment. This choice should be available, both
during settlement negotiations and years later. Claimants who
decide to receive a structured settlement should have the right
to sell that payment, not be forced to continue with inflexible
periodic payments that do not meet their needs.
Liberty Funding Corp.,
4303 Liberty Avenue
North Bergen, NJ 07047
April 14, 1999
The Honorable A.L. Singleton, Chief of Staff
Committee on Ways and Means
United States of Representatives
1102 Longworth House Office Building
Washington, DC 20515
Dear Representative Singleton:
I urge you to proceed with extreme prudence concerning proposed
bill H.R. 263 until all of the data necessary to make an educated and
unbiased decision as to the validity of the assertions contrived by the
NSSTA (National Structured Settlement Trade Association) have been
attained. Until now, only the NSSTA's unsubstantiated allegations
regarding our effort to Re-Structure structured settlements have been
heard by committee members. I am sure that as a highly-respected member
of congress you would prefer to have all of the facts prior to forming
your opinion, and I trust that you will make a concerted effort to be
as fair and impartial as possible.
This sense of fair play can only be achieved by courteously
granting us the opportunity to present our position and evidence
thereof. Prior to committing to a hasty, biased decision, please take
some time to consider the devastating affect that this bill would have
upon the thousands of people this industry employs, and more
importantly, cautiously consider the onerous consequences which will be
forced upon the very people that the NSSTA are reportedly attempting to
protect, but may in fact be victimizing once again.
As an employee of a Settlement Purchasing company I find the term
``gray market,'' coined by the NSSTA, insulting and unsubstantiated.
NSSTA members are virtually comprised of insurance brokers (a/k/a
middlemen) whose high-pressure tactics force clients, often without the
benefit of legal counsel, to commit to a settlement wherein they will
receive their payments in future installments. These brokers are not
required to disclose the current value of the settlement (i.e. purchase
price of the annuity), nor do they inform these unwitting clients that
they (the brokers) are being paid a commission fee for negotiating the
settlement. I do not wish to demean the NSSTA, as they are in the
business of making money, albeit from another's misfortune. However,
before they can accuse factoring companies of exploitation, I suggest
that they first look in the mirror. If ever there was a case of the
``pot calling the kettle gray,'' this is surely it!
I am still at a loss as to why the NSSTA and certain insurance
companies are opposed to our business, except for the fact that we are
enlightening the public as to the true ``time value of money''!
Purchasing the right to receive payments does not affect their tax
status, nor does it keep potential clients from accepting installment
payments as a condition of the settlement. In fact, we make an effort
to inform plaintiff attorneys of our existence and encourage them to
advise their clients that should the need arise, there are options
available to them in the future. Most of these attorneys have expressed
to me that because an option exists allowing these clients to re-
structure their structured settlement, the clients have been more
willing to agree to settle via a structured settlement than they have
in the past.
Our industry has recognized the need for people with limited access
to traditional sources of capital to have an alternative. A vast
majority of our clients are minorities and/or are in low or moderate
income households. The NSSTA is of the opinion that families are being
``held together by a structured settlement.'' In some instances this
may be true, and if the circumstances are such that the client has no
other means of support, under our self-imposed regulations those
individuals are usually denied for funding, or are limited to assigning
only a minimal portion of their periodic payment. In essence the best
of both worlds; they have the benefit of a lump sum now, in addition to
the security of continuing to receive most of their installment
payments. Our decisions as to who is approved for funding and who is
not, has a great deal to do with the client's well-being and their
ability to live within the terms of the transaction, without government
assistance and/or resorting to bankruptcy. In fact, we have saved
numerous people from bankruptcy, so that they do not have to rely on
already overburdened entitlement programs for support.
All of our potential clients are subject to intense scrutiny as to
their financial obligations. As a prerequisite to funding, they must
authorize a complete background search including outstanding judgments,
liens, child-support payments and the like. The searches are complete
and thorough, and outstanding debts must be satisfied prior to funding,
including but not limited to, child-support arrears, tax liens and
overdue mortgage payments.
Since structured settlements cannot be used as collateral by the
client because the insurance company, not the client, usually ``owns''
the annuity, our industry has afforded clients their only means of
obtaining money now in order to address a financial concern. Some of
the items the money has been applied to include; debt consolidation,
health emergencies, college/trade school tuition, down-payments on
homes, business opportunities, foreclosure aversions, farm equipment
and transportation.
Most clients are not aware that the insurance company can assign
the obligation to pay (via Qualified Assignment) to an entity other
than themselves. This provides no benefit to the client, but rather it
allows the insurance company an opportunity to capitalize on the
favorable tax incentives provided to the insurance industry.
Additionally, the client has not been told that in the event that the
assignor becomes insolvent, as with Executive Life and Confederation
Life, who are currently in rehabilitation, the client will be unable to
sell their payments and reinvest in treasury bonds or similar, more
secure investments.
Despite obvious problems within the insurance industry, I am
obviously not opposed to settling personal injury claims via structured
settlements. At the time of the settlement, installment payments may
have been the best course of action, but circumstances often change.
Unfortunately, structured settlements do not provide for those changes
and can do more harm than good for those in immediate need of money to
which they are rightfully entitled. In a free society, it is up to the
individual to determine what is right for them, and by imposing a 50%
excise tax on our industry, particularly in light of the current budget
surplus, you will be adversely affecting those who can least afford it
by virtually severing the only option available to them. I feel that by
imposing this unfair excise tax, you will have infringed upon an
individual's right to freedom of choice, and on our right to free
enterprise.
I do not want to lose my job, and I am confident that you will not
rush to judgment. Thank you for your time and consideration.
Sincerely,
Lisa Terlizzi
Owner
Fury Nardone
Sales Representative
Doreen Kirchoff
Office Manager
Lee Anne Rizzotto
Sales Manager
Hogan & Hartson L.L.P.
Columbia Square
555 Thirteenth Street, NW.
Washington, DC 20004-1109
March 31, 1999
BY HAND DELIVERY
Hon. Amo Houghton, Jr.
Chairman
Subcommittee on Oversight
House Committee on Ways and Means
1136 Longworth House Office Building
Washington, DC 205l5
Re: Follow-Up Submissions for Hearing Record of March 18 Oversight
Subcommittee Hearing on Structured Settlement Factoring
Dear Chairman Houghton:
Enclosed for filing as part of the hearing record for the March 18
hearing held by the Oversight Subcommittee on the tax treatment of
structured settlements and structured settlement factoring are 6 copies
(and a disk in Word Perfect 5.1 format, where possible) of the
following documents:
(1) A memorandum of the National Structured Settlements Trade
Association entitled, ``Point-Counterpoint--Responses to Assertions
Made by Factoring Companies Regarding the Factoring of Structured
Settlements,'' dated March 25, 1999 (document on hard copy and disk);
(2) A memorandum of Hogan & Hartson L.L.P. entitled, ``Overview of
Tax Concerns Raised for Structured Settlements by Factoring
Transactions,'' dated March 24, 1999 (document on hard copy and disk);
(3) A memorandum of Hogan & Hartson L.L.P. entitled, ``March 18
Oversight Subcommittee Hearing on Structured Settlement Factoring--The
Commonwealth of Pennsylvania Medical Professional Liability Catastrophe
Loss Fund's Experience with the Factoring Companies,'' dated March 25,
1999, to which is attached the brief of the Medical Professional
Liability Catastrophe Loss Fund before the Supreme Court of
Pennsylvania in the case of Legal Capital, LLC and Charles I. Artz v.
Medical Professional Liability Catastrophe Loss Fund. (The memorandum
of Hogan & Hartson L.L.P. is provided on both hard copy and disk; the
attached brief is provided on hard copy only).
(4) A letter from Hogan & Hartson L.L.P. to Hon. Scott McInnis,
dated March 19, 1999 responding to a question that he raised during the
March 18 hearing regarding factoring company discount rates, together
with attachments to the letter: (i) a document entitled, ``Discount
Rates Charged to Settlement Recipients in Factoring Transactions (Drawn
from Court Records),'' dated March 15, 1999; and (ii) a document
entitled, ``Factoring Companies Routinely Sue their Own Customers,
Obtaining Judgments in Amounts That Dwarf the Amounts the Customers
Have Received,'' dated February, 1999, to which is attached a series of
court docket sheets. (All of these documents, with the exception of the
court docket sheets, are provided on both hard copy and disk; the court
docket sheets are provided on hard copy only);
(5) A series of sample factoring company advertisements offering to
purchase structured settlement payments. (These documents are provided
on hard copy only);
(6) A memorandum of Hogan & Hartson L.L.P. entitled, ``Presentation
of Cost Information to Injured Victim at Time of Structured Settlement
Offer,'' dated March 25, 1999, to which is attached a series of four
examples of the detailed structured settlement illustrations that are
presented to the victim and counsel during the settlement negotiations.
(The memorandum of Hogan & Hartson L.L.P. is provided on both hard copy
and disk; the attached structured settlement illustrations are provided
on hard copy only); and
(7) Relevant portions of two studies prepared by the Insurance
Services Office, Inc. entitled ``Closed Claim Survey for Commercial
General Liability: Survey Results, 1997'' and ``Closed Claim Survey for
Commercial General
Liability: Survey Results, 1995.'' (These documents are provided on
hard copy only).
Sincerely,
John S. Stanton
Enclosures
cc: Hon. William J. Coyne
Ranking Minority Member
Subcommittee on Oversight
House Committee on Ways and Means--Minority Office
1106 Longworth House Office Building
[Attachments to this letter and an additional letter and
attachments are being retained in the Committee files.]