A Private Letter Ruling (the PLR) recently issued by the Internal Revenue Service (the Service) makes it clear that structured settlement commutations are valid, provided they are effectuated in accordance with Section 5891 of the Internal Revenue Code and state transfer acts.
In Priv. Ltr. Rul. 09-18-001 (Nov. 3, 2008), which was released on May 1, 2009, the Service opined that an assignment company that assumed structured settlement payment obligations under Section 130, and subsequently commuted certain of those payments pursuant to a “qualified order” under Section 5891, was not required to report the consideration paid by the assignment company to the payee. The Service concluded that the payments to be made by the assignment company in lieu of the future structured settlement payments were damages received on account of personal injuries or sickness under Section 104(a)(2) (and therefore not subject to the reporting requirements of Section 6041), so long as certain criteria were met.1 Implicit in the PLR’s analysis is that a commutation falls within the scope of Section 5891 and is therefore valid when (among other things) it is effectuated in accordance therewith. Indeed, the Service acknowledged early in the PLR that “[t]he final order is a qualified order under § 5891(b)(2).”
Notably, the PLR comes on the heels of Warde v. Gershom, et al., 2008 N.Y. Misc. LEXIS 6380 (Sup. Ct., Kings Cty., NY, Oct. 28, 2008), which effectively stands for the proposition that a commutation of structured settlement payment rights is permissible if and only if it is effectuated in accordance with Section 5891 and any applicable state transfer act(s).2 [click here for DBR’s December 2008 Warde alert]
At this point, there appears to be little room for debate as to Section 5891’s application to commutations. The PLR, along with Warde, provide further support for carriers who seek to utilize structured settlement commutations, as long as the commutations are effectuated in accordance with Section 5891 and state transfer acts.