The House of Representatives has passed the H.R. 1, the Tax Cuts and Jobs Act, and has sent it to the Senate for action. Plaintiffs’ lawyers will be wondering whether the law might have any effect on structured settlements for personal injury awards. In this report, San Francisco tax lawyer Rob Wood analyzes the bill as it stands to see whether it will affect the structured settlement world.
Wood’s view on whether the proposed law will affect structured settlements: “In large part, no.” This is a good thing for lawyers, clients, and the structured settlement industry. Wood notes that Section 104 of the tax code exempting personal injury payments from taxable income is not affected by H.R. 1. Section 104 has been in the tax code for eighty years. Wood cannot imagine that it would be changed by any tax reform provision, and he notes that the proposed tax reform neither does away with the section nor loosens its provisions. There has been talk in years past about tightening the eligibility requirements of the section, but H.R. 1 doesn’t do anything about Section 104. Likewise, Section 130 of the tax code that generally covers structured settlements is neither improved nor repealed. H.R. 1 has no provisions relating to it.
Offshore entity taxation has been the subject of much discussion. The question then arises whether H.R. 1 would affect non-qualified assignments and entities like Liberty Life. Wood’s take on H.R. 1 is that it has nothing to say about these entities and about non-qualified assignments. Of course, it is already the law that offshore investments need to be properly disclosed. Wood notes that most of the offshore entities involved in these arrangements have on-shore affiliates. The affiliate is often a life insurance company, and such companies are sophisticated taxpayers, or some other independent American company. Wood points out that the attention-grabbing items like the Paradise Papers have focused on non-disclosure. Structured settlements that are properly set up should have no such problems.
Wood also notes that nothing in H.R. 1 seems to be aimed at structured attorneys’ fees. Wood mentions this because attention is being paid to deferred compensation, and that could lead in time to congressional interest in how plaintiffs’ lawyers structure the contingent fees they receive. For now, everything seems to be fine. Proposed changes in tax brackets and deductions don’t really affect the desirability (or not) of structuring contingent fees. Wood suggests that a lawyer needs to analyze every situation to see what provides the best taxation result. Wood notes that plaintiffs’ lawyers are in a unique situation that permits such structuring of fee receipts.
Robert W. Wood is the Managing Partner of Wood LLP, San Francisco. Often listed among the best tax lawyers in America, Wood has broad experience in corporate, partnership and individual tax matters. Concerning the tax treatment of litigation settlements and judgments, he is perhaps the preeminent tax lawyer in the United States. He is also an authority on merger and acquisition tax matters, tax opinions, offshore account and entity disclosures, and many types of tax controversies. The Legal Broadcast Network is a featured network of Sequence Media Group.