Taxing Structured Settlements

50 Pages Posted: 21 May 2009 Last revised: 23 Sep 2009

See all articles by Gregg D. Polsky

Gregg D. Polsky

University of Georgia School of Law

Brant J. Hellwig

Washington and Lee University - School of Law

Date Written: May 12, 2009


Congress has granted a tax subsidy to physically injured tort plaintiffs who enter into structured settlements. The subsidy allows these plaintiffs to exempt from the tax the investment yield imbedded within the structured settlement. The apparent purpose of the subsidy is to encourage physically injured plaintiffs to invest, rather than presently consume, their litigation recoveries. While the statutory subsidy by its terms is available only to physically injured tort plaintiffs, a growing structured settlement industry now contends that the same tax benefit of yield exemption is available to plaintiffs’ lawyers and non-physically injured tort plaintiffs under general, common-law tax principles. If the structured settlement industry is correct, then all tort plaintiffs and their lawyers may invest their litigation proceeds in a tax-free manner simply by using structured payment arrangements Structured arrangements would therefore be far superior to traditional tax-favored retirement accounts (e.g., 401(k)s, IRAs), which provide the same tax benefit of yield exemption but are subject to significant constraints. Accordingly, if proponents of structured arrangements are correct in their interpretation of the tax law, these arrangements can be described as “super-IRAs,” because they provide full yield exemption without any corresponding limitations or restrictions. This Article examines the taxation of structured payment arrangements, ultimately concluding that the structured settlement industry’s positions are unpersuasive. Nevertheless, because of the muddled state of the tax law on the issue, the Article recommends legislative and administrative action to close the yield exemption loophole with respect to its unintended beneficiaries.

Suggested Citation

Polsky, Gregg D. and Hellwig, Brant J., Taxing Structured Settlements (May 12, 2009). Boston College Law Review, Forthcoming; FSU College of Law, Public Law Research Paper No. 373. Available at SSRN:

Gregg D. Polsky (Contact Author)

University of Georgia School of Law ( email )

225 Herty Drive
Athens, GA 30602
United States

Brant J. Hellwig

Washington and Lee University - School of Law ( email )

Sydney Lewis Hall
Lexington, VA 24450
United States

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