Need Advice with the Tax Consequences of Selling Structured Settlement

[anne17]

Hello, and thank you for your assistance.

A short summary of the issue:

1.) In 1991 I was involved in an accident. I received a lump sum and a structured settlement (periodic payments, every 5 years, beginning in 2001).

2.) In 2005 we sold - or is the right word, 'assigned' - our remaining payments to a company that purchases such (factoring company I assume). We thought we did our homework on this and were led to believe there were no tax consequences to this due to implementation of HR 2884, which we understood meant, in essence, that to avoid the excise tax penalty associated with selling our payments, HR2884 requires that all structured settlement factoring transactions be approved by a state court, in accordance with a qualified state statute. Ours was (approved by a state court). We thought that was end of the story. I now believe that HR2884 actually protects the factoring company from having to pay the excise tax, but at the same time, the language almost reads as if the law was enacted in part to protect *us* as well.

3.)2006 would have been a year for us to receive a periodic payment. We of course did not personally receive the payment because that payment was assigned to the factoring company - they received it - not us.

4.) Today we received a 1099 Misc for the payment amount in 2006. This means it must be included in OUR taxable income, even though we technically didn't receive it - the factoring company did.

This is heartbreaking because if I add up the taxable liability on the amount of the the 2006 payment and all remaining payments , then the tax liability to us may actually be equal to (if not greater) than the discounted amount we received!

In essence, we will lose money on the net transaction!

I thought we were protected, first by the fact that periodic payments as part of my structured settlement are not subject to tax liability and secondly by not having to pay a tax on the discounted lump sum amount we received due to the court process (required by HR 2884).

I have read countless articles that all suggest that HR2884 specifically states that neither the issuers, owners, nor annuitants will suffer tax consequences as a result of these types of transfers. Yet here I am, about to file income taxes with a HUGE amount to now add in to my income - and in future years, that amount will be even higher, making my tax liability worse (the payments increase in the future)!

Ironically, I would have rather paid taxes on the DISCOUNTED lump sum since it was a much smaller amount obviously.

Something does not seem right here...I received a 1099-MISC for money that I did NOT receive last year because that money was assigned to someone else. So why do *I* pay taxes on it? If, on one hand, I am the recipient of the money (and simply assigned it to someone else) then it seems logical that receipt of that money would still fall under tax-free status of periodic payments in accordance with Internal Revenue Code § 130; in that case, I could see where I might have had to pay on the lump sum in 2005, but future periodic payments would remain tax-free (but HR2884 says even the lump sum is tax free).

If on the other hand I am NOT the recipient of the money in 2006 (which I wasn't, as it went to the factoring company) then why would I have to include that in my income? How can it be both ways? I am very confused. Please help if possible.

Thank you for any advice you may offer, I am honestly do not know where to begin and am very scared.

[Mr. Knowitall]

You probably signed a rather lengthy contract, full of intricate clauses and contingencies, in association with the sale of your structured settlement. In this article on selling structured settlements it is suggested,

It is wise to consult a lawyer in relation to the sale of your settlement before signing a contract. A lawyer can help ensure that your rights are protected, and that you will not be subject to consequences for events outside of your control, for example if the company which purchases your settlement is later unable to collect payments from the insurance company which issued the annuities in your settlement package. A lawyer will be able to tell you if the terms of the purchase agreement are reasonable, and may also be able to advise you as to whether the offer made for your settlement is adequate.

If you did consult a lawyer, schedule an appointment and discuss what is happening and, if this is what the contract contemplated, why it is that the consequences of the deal were not properly explained to you.

If you did not have the contract reviewed by a lawyer, unfortunately, you'll probably need to do so in order to figure out if your rights are being violated under the terms of the contract.

[anne17]

You probably signed a rather lengthy contract, full of intricate clauses and contingencies, in association with the sale of your structured settlement. In this article on selling structured settlements it is suggested,If you did consult a lawyer, schedule an appointment and discuss what is happening and, if this is what the contract contemplated, why it is that the consequences of the deal were not properly explained to you.

If you did not have the contract reviewed by a lawyer, unfortunately, you'll probably need to do so in order to figure out if your rights are being violated under the terms of the contract.

We did consult a lawyer at the time, but we never discussed future tax liability. At the time, the big question was whether we would have a liability on the LUMP SUM. Never occurred to any of us that there might be a liability on the FUTURE payments. Frankly I don't see how there can be???

My issue right now seems to be with the company holding the annuity (insurance company that is paying the periodic payments). THEY are the ones that sent ME a 1099-MISC form, for 'non-employee compensation' for $20,000 paid in 2006. Well, of course I did not receive $20,000. The factoring company did.

I called the insurance company to inquire and they said, "Since you sold your payments, they are now considered taxable". That makes no sense. The payments were NEVER taxable as my income because they qualified under the IRS section 104. Just because I entered a third party transaction to assign my payment should not affect the tax liability of the payment itself (not from the insurance companies' viewpoint anyway, because that would cause a tax issue for THEM as well as they fund the payments from interest on the annuity)....It doesn't make sense?

I could actually understand paying taxes on the discounted lump sum we received in 2005. That might actually make sense. But not on the periodic payment itself. That's a protected payment.

[llworking]

We did consult a lawyer at the time, but we never discussed future tax liability. At the time, the big question was whether we would have a liability on the LUMP SUM. Never occurred to any of us that there might be a liability on the FUTURE payments. Frankly I don't see how there can be???

My issue right now seems to be with the company holding the annuity (insurance company that is paying the periodic payments). THEY are the ones that sent ME a 1099-MISC form, for 'non-employee compensation' for $20,000 paid in 2006. Well, of course I did not receive $20,000. The factoring company did.

I called the insurance company to inquire and they said, "Since you sold your payments, they are now considered taxable". That makes no sense. The payments were NEVER taxable as my income because they qualified under the IRS section 104. Just because I entered a third party transaction to assign my payment should not affect the tax liability of the payment itself (not from the insurance companies' viewpoint anyway, because that would cause a tax issue for THEM as well as they fund the payments from interest on the annuity)....It doesn't make sense?

I could actually understand paying taxes on the discounted lump sum we received in 2005. That might actually make sense. But not on the periodic payment itself. That's a protected payment.

http://community.lawyers.com/message...lId=19&mbId=43

Go to the above forum and post that question for Taxagent.

I am fairly certain that its not taxable income to you, and that the insurance company made an error when they issued you a 1099 Misc. They should have issued it to the factoring company, because it became taxable income to them, not to you.