Eligibility
Requires a court order, a fund independent of the taxpayer, and an election to extinguish completely the taxpayer's tort liability.
Frequently Asked Questions
Who is eligible for the Designated Settlement Fund Deduction?
Requires a court order, a fund independent of the taxpayer, and an election to extinguish completely the taxpayer's tort liability.
How does the Designated Settlement Fund Deduction work?
Taxpayers can treat payments to a court-ordered settlement fund as 'economic performance,' allowing an immediate deduction for tort liabilities before the funds are actually distributed to claimants.
What law authorizes the Designated Settlement Fund Deduction?
The Designated Settlement Fund Deduction is authorized under IRC §468B of the Internal Revenue Code (Title 26, United States Code).
Statutory Text — IRC §468B
Source: Internal Revenue Code, Title 26, United States Code
§ 468B. Special rules for designated settlement funds(a) In generalFor purposes of section 461(h), economic performance shall be deemed to occur as qualified payments are made by the taxpayer to a designated settlement fund.
(b) Taxation of designated settlement fund(1) In generalThere is imposed on the gross income of any designated settlement fund for any taxable year a tax at a rate equal to the maximum rate in effect for such taxable year under section 1(e).
(2) Certain expenses allowedFor purposes of paragraph (1), gross income for any taxable year shall be reduced by the amount of any administrative costs (including State and local taxes) and other incidental expenses of the designated settlement fund (including legal, accounting, and actuarial expenses)—(A) which are incurred in connection with the operation of the fund, and
(B) which would be deductible under this chapter for purposes of determining the taxable income of a corporation.
No other deduction shall be allowed to the fund.
(3) Transfers to the fundIn the case of any qualified payment made to the fund—(A) the amount of such payment shall not be treated as income of the designated settlement fund,
(B) the basis of the fund in any property which constitutes a qualified payment shall be equal to the fair market value of such property at the time of payment, and
(C) the fund shall be treated as the owner of the property in the fund (and any earnings thereon).
(4) Tax in lieu of other taxationThe tax imposed by paragraph (1) shall be in lieu of any other taxation under this subtitle of income from assets in the designated settlement fund.
(5) Coordination with subtitle FFor purposes of subtitle F—(A) a designated settlement fund shall be treated as a corporation, and
(B) any tax imposed by this subsection shall be treated as a tax imposed by section 11.
(c) Deductions not allowed for transfer of insurance amountsNo deduction shall be allowable for any qualified payment by the taxpayer of any amounts received from the settlement of any insurance claim to the extent such amounts are excluded from the gross income of the taxpayer.
(d) DefinitionsFor purposes of this section—(1) Qualified paymentThe term “qualified payment” means any money or property which is transferred to any designated settlement fund pursuant to a court order, other than—(A) any amount which may be transferred from the fund to the taxpayer (or any related person), or
(B) the transfer of any stock or indebtedness of the taxpayer (or any related person).
(2) Designated settlement fundThe term “designated settlement fund” means any fund—(A) which is established pursuant to a court order and which extinguishes completely the taxpayer’s tort liability with respect to claims described in subparagraph (D),
(B) with respect to which no amounts may be transferred other than in the form of qualified payments,
(C) which is administered by persons a majority of whom are independent of the taxpayer,
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