Tax Policy, Structured Settlements and Factoring: Making Exploitation Easy and Profitable

17 Pages Posted: 27 Oct 2020

See all articles by Karen Czapanskiy

Karen Czapanskiy

University of Maryland - Francis King Carey School of Law

Date Written: October 23, 2020

Abstract

Secondary sales of streams of income payable under structured settlements of tort claims are such a disfavored transaction that Congress imposed a punitive 40 percent excise tax on them. These “factoring transactions” are disfavored because it is believed that payees are likely to be exploited, to dissipate the lump sum which is paid for the stream of income and to become dependent on taxpayers when payees become indigent as a result. Congress was also persuaded that state courts could keep an eye on the problems, however, so the 40 percent excise tax is excused if the transaction is approved by a state court in a proceeding under a state “Structured Settlement Protection Act” or SSPA.

State court supervision of factoring transactions might be an adequate response to the problems raised by secondary sales if the only person who suffers negative consequences is a self-supporting individual who is likely to remain so even after spending the money paid for the factoring transaction. The reality, however, requires a deeper look at the context. Most of the tort plaintiffs who sell their streams of income may be vulnerable to commercial exploitation because they are disabled people with significant cognitive, behavioral, and emotional issues.4 If the factoring transaction results in the predicted dissipation of the lump sum payment, a payee’s loss of a regular stream of income and subsequent impoverishment may affect the people who care for them, mainly their mothers, and the people who care for their dependents, another group of women. Most payees live in communities of color characterized by concentrated poverty—communities that could benefit from having more residents with income-producing assets. The structured settlement factoring industry knows all of this and uses the overlapping vulnerabilities to strip the payees, their families, and their communities of the only major asset that most of the payees will ever own. Given this context, I argue that critical tax policy supports repealing the exemption of SSPA-approved factoring transactions from the excise tax.

Keywords: tax policy, structured settlements, SSPA, tort claims, factoring, disabled payee, excise tax

Suggested Citation

Czapanskiy, Karen, Tax Policy, Structured Settlements and Factoring: Making Exploitation Easy and Profitable (October 23, 2020). 93 University of Detroit Mercy Law Review 455 (2020), U of Maryland Legal Studies Research Paper No. 2020-19, Available at SSRN: https://ssrn.com/abstract=3717751

Karen Czapanskiy (Contact Author)

University of Maryland - Francis King Carey School of Law ( email )

500 West Baltimore Street
Baltimore, MD 21201-1786
United States

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