Structured Settlements Tax Treatment and Benefits of Structured Settlements

Question 1

Which Internal Revenue Code section excludes structured settlement periodic payments for physical personal injury from gross income?

Accepted Answer

IRC Section 104(a)(2)

Answer

IRC Section 104(a)(2) specifically excludes damages received on account of personal physical injuries or physical sickness, including structured settlement payments, from gross income.

Question 2

The Periodic Payment Settlement Act of 1982 was significant because it:

Accepted Answer

Formally established the tax-free treatment of periodic payments in personal injury settlements

Answer

The Periodic Payment Settlement Act of 1982 codified the tax-free treatment of structured settlement periodic payments and encouraged their use in personal injury and wrongful death cases.

Question 3

Under IRC Section 130, a qualified assignment allows the original obligor (defendant) to transfer settlement payment obligations to an assignment company. The assignment company receives:

Accepted Answer

An income exclusion for amounts received to fund the assigned obligation

Answer

IRC Section 130 allows the assignment company to exclude from income the amounts received from the defendant to fund the qualified assignment, making the transaction economically viable.

Question 4

Which type of damages in a structured settlement are generally NOT excluded from the claimant's taxable income?

Accepted Answer

Punitive damages

Answer

Punitive damages are included in gross income under IRC Section 104, even when arising from a physical injury case, because they are intended to punish the defendant rather than compensate the claimant.

Question 5

The 'constructive receipt' doctrine is relevant to structured settlements because it:

Accepted Answer

Would cause payments to be taxable if the claimant had the right to demand a lump sum at any time

Answer

If a claimant could demand immediate receipt of funds, constructive receipt would make those funds taxable; structured settlements are carefully designed so the claimant never has control over the funds.

Structured Settlements Practice Test

Structured Settlements Practice Test

Structured Settlements Tax Treatment and Benefits of Structured Settlements