Source: https://www.bna.com/qsf-and-section468b-p11850/
Timestamp: 2018-07-22 20:20:07
Document Index: 111225292

Matched Legal Cases: ['§468', '§ 461', '§ 1', '§ 1', '§ 1', '§ 1']

Qualified Settlement Funds and Section 468B (Portfolio 738) | Bloomberg Tax
Tax Management Portfolio, Qualified Settlement Funds and Section 468B, No. 738, describes the nature, uses, mechanics and pitfalls of using these funds for dispute resolution. They are authorized by Internal Revenue Code §468B. Since that section was added to the Code in 1986, and especially since the Treasury Department expanded the concept materially in regulations issued in 1993, these dispute resolution mechanisms have literally exploded in growth.
Portfolio gives drafting and practice guidance, from the genesis to the termination of a QSF. It considers the perspective of both plaintiff and defense counsel, as well as the trust administration, accounting and compliance duties that maintaining a QSF requires.
Robert W. Wood is a 1979 graduate of the University of Chicago Law School where he received the Florence James Adams Prize and a University of Chicago Scholarship. He practices law with Wood & Porter, a tax law firm in San Francisco, California (www.woodporter.com). Mr. Wood is a member of the bars of California, New York, Arizona, Montana, Wyoming, Texas, Washington, and the District of Columbia. He is also enrolled as a Solicitor in England and Wales. Mr. Wood is a Certified Specialist in Taxation by the California Board of Legal Specialization.
Mr. Wood is the author of more than 35 books, and has long been recognized as a leading authority and commentator. He is a leading expert on the taxation of damage awards and settlement payments, and is the author of the seminal treatise, Taxation of Damage Awards and Settlement Payments (Tax Institute, Third Edition 2008, available at www.taxinstitute.com). Mr. Wood is also the founder and Editor-in-Chief of The M&A Tax Report (CCH), a national monthly newsletter addressing tax techniques and trends affecting mergers and acquisitions. He is the author of the following BNA Tax Management Portfolios: 66 T.M., Real Estate Mortgages; 547 T.M., Home Office, Vacation Home, and Home Rental Deductions; 548 T.M., Hobby Losses; and 552 T.M., Tax Aspects of Settlements and Judgments. For a complete list of his publications, please visit www.woodporter.com.
A. Establishment Requirements
B. Approval Requirement
1. Consider Venue
2. Arbitration Order or Approval
3. Petition or Motion
4. Proposed Order
5. Selecting a Trustee and/or Administrator
6. When to Establish QSF: Consider Tax Issues
7. Time When QSF Is Established
a. Typical Timing
b. Relation-Back Election
c. Time Period of QSF's Existence
C. Resolve Claims Requirement
1. Allowed QSF Liabilities: Will a QSF Work for Your Situation?
2. Disallowed QSF Liabilities
3. Resolve or Satisfy Element
D. Single Claimant Controversy
1. What Constitutes Multiple Claimants?
2. Control and Commissions
3. Doctrine of Constructive Receipt
4. Economic Benefit Doctrine
5. Periodic Payments to Personal Physical Injury Claimants
a. Section 104(a)(2)
b. Section 130 Qualified Assignments of Periodic Payment Obligations
(1) Qualified Assignment
(2) Qualified Funding Asset
c. Revenue Procedure 93-34
E. State Law Requirement
B. Trust Agreement Elements
3. Trust Purpose
4. Identification of Parties
a. Governmental Authority
b. Settlor
d. Administrator and Trustee
(1) Who Can Serve as Administrator?
(2) Administrator's Functions
(3) Trustee/Administrator or Trustee and Administrator?
(4) Who Can Serve as Trustee?
(5) Transferor as Trustee
(6) Beneficiary as Trustee
(7) Attorney as Trustee
e. Successor Administrators and Trustees
f. Co-Trustees
C. Trustee Duties and Powers
1. Trustee Duties Pursuant to Statutory and Common Law
2. Trustee Duties Specific to QSF Trust Agreement
a. Distribution of Trust Property
b. Termination of Trust
c. Maintenance of QSF Qualification
d. Tax Preparation, Reporting, Withholding, and Related Duties
3. Trustee Powers Under Statutory and Common Law
a. General Trustee Powers
b. Specific Trustee Powers
c. Administrator Powers
D. Compensation, Immunity, and Indemnification
2. Immunity and Indemnification
A. Initial Administrative Duties
1. Obtain an EIN
2. Establish Bank Account
B. Transfers to a QSF
1. Release of Transferor
a. Timing of Release
b. Administrative Responsibilities Related to Release
2. Dismissal with Prejudice
C. Assets Held by the QSF
D. Tax Filing, Payments, Reporting, and Withholding
B. Deductibility of Defendants' Settlement Payments
1. General Business Expense Requirements
2. Even Rare Expenses May Qualify as Ordinary and Necessary
3. No Deduction for Capital Expenditures
4. Origin of Claim Analysis
a. Examples of Settlements as Deductible Business Expenses
(2) Claims Paid by Individual for Suit Against Business
(3) Products Liability Suit
b. Settlements Constituting Capital Expenditures
c. Origin of Claim Analysis with Legal Fees
(1) Allocations Between Deductible and Capital
(2) Allocations Between Business and Personal
d. Reasonableness of Expenses
e. Trade or Business Nexus
(1) Directly Connected
(2) Required Nexus
(3) Payor Identity
f. Nexus to Income-Producing Activity
5. Timing of Deductions in General
6. Economic Performance in Absence of QSF
a. Tort Liabilities and Workers Compensation
b. Other Deductions for Liability Under § 461(h)
C. Deductions in Presence of QSF
1. Liabilities Allowing Economic Performance upon Transfer
2. Timing of Deductions with QSF
3. Transfers to QSF Where Economic Performance Has Not Occurred
a. Liabilities Not Allowing Economic Performance upon Transfer
b. Refund or Reversionary Rights
c. Transfer of Debt, Service, Property, and Future Payment Obligations
d. Insurance Amounts Received from Insurance Claims
D. Property Transfers to a QSF
1. Sale or Exchange Status
2. Basis of Property Transferred to QSF
3. Taxation Rates for Transferors
4. Limitations on Transferor's Recognition of Gain or Loss
5. No Gain or Loss Realization for Transfer of Section 1.461-4(g) Obligations
6. Debt Is Not Property
7. Nonrecognition for Corporation's Exchange of Stock for Debt
8. Anti-Abuse Rule Regarding Loss Realization
9. Qualified Appraisal
10. Anti-Abuse and Qualified Appraisal Rules Compared
11. No Deduction on Transfer of Amounts in Settlement of Insurance Claims
A. QSF Modified Gross Income
1. QSF Taxed on Modified Gross Income
2. Definition of Gross Income
3. Exclusion from Modified Gross Income
4. United States v. Brown
5. Letter Rulings Regarding Modified Gross Income
6. Exclusion for Income of U.S. Government, States, Municipalities, and Possessions
7. Time During Which a QSF Can Earn Modified Gross Income
B. Transfers to and Distributions from a QSF
1. Tax on Sales and Exchanges
2. Basis of Property Distributed
3. Treatment of Transfers to a QSF
a. Transferor's Realization of Gain or Loss
b. Limitations on Transferor's Gain or Loss
c. Examples of Sales or Exchanges upon Transfer to a QSF
C. QSF Deductions
1. Deductions from QSF's Modified Gross Income
2. Deduction for Administrative Costs and Other Incidental Expenses
3. Deduction for Certain Specified Losses
4. Deduction for Net Operating Losses
D. Alternatives to Taxation Methodology
1. QSFs Established After August 16, 1986, but Before February 15, 1992
2. QSF Established After February 14, 1992, but Before January 1, 1993
3. Election to Apply QSF Rules for Post-August 16, 1986 QSFs
4. Grantor Trust Election for QSFs Established After February 3, 2006
a. Only Single Transferors May Make Grantor Trust Election
b. Special Rule for Pre-February QSFs Established by U.S. Government
1. Cash Distributions
2. Property Distributions from QSF
a. Basis of Property Transferred to QSF
b. Sale or Exchange Status
c. Treatment of Property Distributions to Transferor
d. Treatment of Property to Claimants
B. Release of a QSF
3. Distributions to Charitable Organizations
C. Structured Settlement Distributions
1. Section 104(a)(2)
2. Third-Party Assignees
3. Section 130 Qualified Assignments of Periodic Payment Obligations
4. Qualified Assignments and Qualified Funding Assets
a. Qualified Assignment Elements
b. Qualified Funding Asset Elements
D. Structuring Attorney Fees
1. QSF May Pay Attorney Fees
2. QSF May Facilitate Structured Fee Payments
3. Structure Attorney Fees Carefully
E. Taxable Non-Qualified Structures
1. Non-Qualified Assignment Basics
2. Receipt of Income by Claimant
3. Non-Qualified Assignment by QSF
A. QSF Filing Requirements
1. Administrator Responsible for Income Tax Return
a. Relation-Back Election
b. Grantor Trust Election Exception
3. Depository Taxes
4. Other Forms to File
5. Payment Due Dates
a. Ways to Extend Time for Payment
b. File Form 1138 When NOL Carryback Expected
c. Form 1139 Can Extend Payment Deadline
6. Estimated Tax Payments
7. Reporting and Withholding
3. Failure to Pay Estimated Tax
4. Other Penalties
a. Trust Fund Recovery Penalty
b. Accuracy and Fraudulent Underpayment Penalties
c. Reporting-Related Penalties
a. Debit Interest
b. Credit Interest
C. When QSF Filing Requirements Apply
1. Filing Requirements During QSF's Existence
2. Request for Prompt Assessment
D. Filing Requirements for Certain Pre-January 1, 1993 QSFs
1. When QSF Filing Requirements May Not Apply
2. Election to Apply QSF Filing Requirements
E. Filing Requirements for a Grantor Trust Election
A. Payments and Transfers to a QSF
B. Reporting Payments and Distributions
1. Payments and Distributions
2. Distributions to Claimants
3. Payments to Transferors, or on Behalf of Transferors or Claimants
4. Reporting Requirements Under Sections 6041 and 6041A
5. Section 6041 Reporting Examples
a. Reporting of Attorney Fees for Class Counsel
b. No Reporting When Distributions Are Neither Fixed Nor Determinable
(1) Incentive Awards to Class Representatives
(2) Tax Benefit Rule
(3) Compensation for Destroyed or Injured Capital
(4) Insufficient Information to Know Payment Characterization
c. No Reporting for Amounts Excluded from Gross Income
C. Reporting and Withholding Under Sections 6045, 6049, and 3406
1. Multiple Reporting Requirements
2. Section 6045(a) Reporting Regarding Brokers
3. Section 6045(f) Reporting Regarding Payments to Attorneys
4. Section 6049 Reporting Regarding Interest
5. No Reporting for Amounts that Are Not “Interest”
D. Section 3406 Backup Withholding Requirements
1. Backup Withholding Requirements on Certain Reportable Payments
2. QSF Compliance With Backup Withholding
A. Permitted Administrators
B. Administrator Duties and Powers
1. Income Tax Returns and Tax Payments
2. Reporting and Withholding
3. Other Administrator Matters
a. Qualified Appraisals and Section 1.468B-3 Statements
b. QSF Transactions
4. QSF Termination
b. Prompt Assessment
c. Request Court Order Confirming Termination
C. Trustee Versus Administrator
C. Court Order Confirming QSF Termination
B. Designated Settlement Funds
2. Timing of Deductions
3. Taxation of DSFs
a. Modified Gross Income
b. Exclusion from Modified Gross Income
c. Deductions from Modified Gross Income
d. Exemption for CERCLA Settlement Funds Owned by U.S.
4. Distinctions Between DSFs and QSFs
a. QSFs Cover Broader Scope of Claims
b. QSFs Have Fewer Establishment Requirements
c. QSFs Need Not Receive Qualified Payments
d. No Election to Establish QSF
e. DSFs Do Not Require Continuing Court Jurisdiction
f. DSFs Require Administration Independent of Taxpayer
C. Section 1.468B-6 Deferred-Exchange Funds
2. Regs. § 1.468B-6 Addresses Taxation of Escrows, Trusts, and Deferred Exchanges
D. Regs. § 1.468B-7 Pre-Closing Escrow Funds
E. Regs. § 1.468B-8 Contingent-at-Closing Escrow Funds
F. Regs. § 1.468B-9 Disputed Ownership Funds
Worksheet 1 Sample Petition
Worksheet 2 Sample Order
Worksheet 3 Sample Trust Agreement for the Beneficiaries' QSF
Worksheet 4 Release and Indemnity Agreement Between QSF Trust, Claimants/Releasors, and Transferors/Releasees
Worksheet 5 Release and Hold Harmless Agreement Between Claimant/Releasor and QSF/Releasee
Worksheet 6 Petition to Terminate Beneficiaries' Section 468B QSF
Worksheet 7 Proposed Order Terminating Beneficiaries' Section 468B QSF