Qualified Settlement Funds: Everything You Wanted To Know But Were Afraid To Ask

Q: What are Qualified Settlement Funds?

A: Qualified Settlement Funds, Qualified Settlement Trust, QSFs, 468B funds, and even DSFs or Designated Settlement funds (though those are slightly different) are all enabled by section 468B of the Internal Revenue Code, Basically, they are trusts or accounts set up to resolve claims.

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Rob Wood Primer on QSF's part 2 of 2

Everything You Always Wanted to Know about Qualified Settlement Funds, But Were Afraid to Ask....Part 2 of 2

Qualified Settlement Funds, aka QSFs, 468B Funds, or 468B Trusts, are key tools in dispute resolution and claims administration. Once upon a time, they were strictly the province of large class actions, designed to receive monies from defendants (so defendants could take their tax deduction and obtain a binding court-approved release), with the QSF thereafter dealing with claims administration and payouts to plaintiffs. Today, though, these flexible court-approved settlement funds are used in numerous non-class actions, even those involving a mere handful of clients and lawyers. Although a controversy simmers about QSFs involving only one claimant, there's no controversy whatsoever about the vast bulk of QSFs, or their enormous tax and nontax benefits.

So, whether you are a plaintiff's lawyer, defense lawyer, structured settlement broker, mediator, judge, insurance company representative—or even if you're a plaintiff or defendant in a case—this is information you need. Rob Wood of Wood & Porter in San Francisco, host of the Tax Law Channel, is interviewed by our own Scott Drake, in this not to be missed podcast.

Qualified Settlement Funds - Everything You Need to Know

Everything You Always Wanted to Know about Qualified Settlement Funds, But Were Afraid to Ask....Part 1 of 2

Qualified Settlement Funds, aka QSFs, 468B Funds, or 468B Trusts, are key tools in dispute resolution and claims administration.

Click to read more ...

Tax Bailouts for Consumers

Much of the news suggests that only huge institutions are getting any relief from our current economic woes.  Indeed, it's true that there's no bailout for American consumers and small business.  Still, there's at least some tax relief for consumers, buried among the byzantine complexity of several huge federal bills.  Congress' hit parade started in December 2007 with the Mortgage Forgiveness Debt Relief Act of 2007, then the Economic Stimulus Act of 2008, and in July, Congress passed the Housing and Economic Recovery Act of 2008.  There are some tax provisions in each of these optimistically named federal laws you should know.  In this podcast, we'll review the high points of relief from discharge of debt income, the new "repayable" tax credit for first time home buyers, and more.

Independent Contractor vs. Employee Controversies Looming

With the current economic malaise, more than a few companies are considering the significant savings that hiring independent contractors rather than employees can bring. But can such hiring practices really bring savings? Senator Obama, in introducing legislation on this topic, estimated savings at a whopping 30%. But are these companies really saving? Or are they the victims of wishful thinking, ultimately posing a trap that can bring tax and legal consequences of staggering impact? In this podcast, Scott Drake interviews Rob Wood (author of Legal Guide to Independent Contractor Status, 4th Edition 2007) over the differing legal standards at play in this increasingly important morass. Considering the seemingly small ways in which worker status issues can arise and the interrelationship of these rules, it can be like dominoes waiting to fall.

False imprisonment, taxble or tax free recovery?

Are recoveries excludable? It depends on the facts, but also on who you ask. Claims for false imprisonment or wrongful conviction can invoke the common law torts of false imprisonment, malicious prosecution, or abuse of process. Section 1983 allows suits for violation of constitutional rights.  Plus, twenty-two states, the District of Columbia, and the federal government now have compensation statutes for false imprisonment. Although the tax authorities are not clear about false imprisonment, being unlawfully confined behind bars seems by its very nature physical.  As the increase success of efforts such as the innocence project demonstrate, there are a lot of people in prison or on death row in the United States who are likely there based on faulty evidence or prosecutorial misconduct. The question in this podcast and Tax Note article is why should these already injured parties be forced to pay taxes on their awards or settlements?

Interestingly, payments to the following victims were all excluded from income: (1) survivors of Nazi persecution; (2) U.S. prisoners of war during World War II and the Korean War; and (3) Japanese-Americans placed in internment camps.  Unfortunately, though, the IRS has now declared that tax authority "obsolete."  


It is difficult to think of a decent argument for taxing these recoveries. However, by declaring its prior rulings on related subjects obsolete, the IRS has suggested these recoveries are taxable, adding one more gotcha to the odyssey of exonerated prisoners.                

This podcast with Scott Drake, Mark Wahlstrom, Chairman of the Legal Broadcast Network, and Rob Wood, host of the Tax Law Channel, explores what lawyers and settlement professionals can do to help in this growing field. We also have attached a link to the April 2008 edition of Tax Notes, in which Robert Wood elaborates on the rulings, thoughts and opinions that trial lawyers, state governments and settlements experts all need to consider when trying to determine or argue for tax free treatment of a settlement award.

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The Article from April 2008

Taxation on Molestation cases, the new reality.

In this week's edition of The Robert Wood tax commentaries, we bring you a podcast discussing the taxation of molestation cases.  This topic is in the news again, with additional molestation cases settling.  Moreover, now that Treasury has issued an ILM on the documentation requirements, taxpayers and attorneys have at least some guidance about whether such injuries may be considered to meet the "observable harm" standard.

This standard, originally discussed in 2000 in Private Letter Ruling 200041022, known as the "bruise" ruling, is pervasive.  It centers around the concept that where there is observable and documented observable physical harm, such as bruises, bleeding, broken bones, etc, a section 104 exclusion should be available.

However, in cases where observable harm is not present or can't be proven,  the IRS will presumably take the position that the recovery is taxable. 

This podcast features Tax Attorney Robert Wood and Mark Wahlstrom, the host of The Settlement Channel.  Wahlstrom and Wood explore this important observable bodily harm distinction, outlining the appropriate cautions for attorneys, settlement professionals and taxpayers.  You'll want to consider this standard before you have a client attempting to structure an annuity on a tax free basis. 

Click here to listen to the most recent podcast.

Final regulations on section 1.468B-6 trusts.

On this weeks Tax Talk, the weekly podcast feature of The Tax Law Channel, I am joined once again by Mark Wahlstrom, the host of The Settlement Channel and one of the nations leading experts on structured sales as they relate to real estate sales and section 1031 exchanges using structured sales as a fall back.  The reason for having Mark back two weeks in a row is the news that the Treasury has issued final regulations on section 468B-6 trusts and I wanted to get copies and material to my audience as soon as possible.

Now, before anyone gets too excited, these regulations and final rules are NOT related to the more commonly discussed 468B trust that is used for litigation and mass torts. These rules are not related to those trusts or the pending issue before Treasury regarding the taxation of single claimant structures, as much as we would like to get that ruling after all these years of waiting.

No, this podcast is relative to the section of those trusts that govern a variety of other trusts, but specifically those related to section 1031 exchanges and the trust accounts used to manage those transactions. Now, before you go away and don't read this, keep in mind that Allstate Life has their structured sale product, which is a vital element of the 1031 fall back or fall out market so knowledge of these provisions is of keen interest if you are involved in that market. There is a huge knowledge gap in both the real estate and structured settlement community on how useful this product is in resolving issues surrounding the failure of a 1031 exchange when the clients still want tax deferral.

I know it's a small niche as of yet, but a lot more producers should be looking at the 1031 fallback or fall out market as a means of getting into the structured sales arena. So take a few minutes, click on this link, and learn a little more about 468B-6 trusts and the new rules on section 1031 exchanges. 

You can also read more on these regulations and obtain a copy of this ruling by going over to The Tax Law Channel and looking for the pdf copy of the regulations.

Finally you can view the final regulations and rules by clicking here.

Rob Wood's commentary on PLR on Taxable damages

In this weeks edition of Tax Talk I am joined by noted national tax expert Robert Wood, who is also now the host of his own channel on The Legal Broadcast Network, entitled The Tax Law Channel. 

As many of you know a private letter ruling was obtained by the IFS group, spearheaded by John McColluch of EPS, in which the validity of using non-qualified assignments and annuity payments as a means of spreading out tax liability on taxable damage cases was affirmed.

In this podcast , heard first on Speaking of Settlements you can listen to Mark Wahlstrom and Rob Wood discuss this important ruling on taxable damage settlements by clicking here.

You can also go over to the Speaking of Settlements site to listen to the broadcast, get a copy of it, share it with clients and join the Speaking of Settlements network by filling out a free profile.

What made this PLR so important was not that there were questions on taxable damage cases and non-qualified assignments, but that there had never been a PLR on the topic. The resultant language and ruling from the IRS not only validated the concept, but through it's explanation probably further strengthened the ability of attorney's to structure their legal fees. 

You can also click here to get a full copy of the ruling in pdf of the ruling on taxable damages.

Hopefully this PLR, which was the result of the investment and foresite of IFS to get it done, will spur some of the other life markets besides Allstate and Prudential to jump with both feet into the non-qualified market. It is my professional opinion that it is a potentially huge market, particularly if tax rates jump in the next few years, as people will want to defer the tax hit that comes on any taxable damage case.

Attorney Robert Wood on Independent Contractor litigation and tax issues

In this weeks edition of Speaking of Justice, Scott Drake is joined by Attorney Shannon Liss Riordan and national tax expert and host of The Tax Law Channel, Attorney Robert Wood to discuss the recent case of Dierdre Keily, an ex web content editor who worked for the well known and hugely popular travel web site, "Trip Advisor" which is a subsidiary of the even larger Expedia travel web site. 

 In this timely and fascinating case and analysis, Rob Wood and Shannon Liss Riordan look into the issue of large web sites and internet firms categorizing professional writers, editors and technical experts as "independent contractors" as opposed to treating them as employees. This exceptionally common practice saves internet based employers a huge amount of money in benefits, insurance and other costs, but is basically a systematic process of outsourcing and isolating their staff.

In her suit on behalf of Ms. Kiely, Attorney Liss Riordan  is challenging Trip Advisor's labor policies over "illegal contractor status"... the story can be read online in the Boston Globe , and this podcast goes into both the legal and tax issues facing employers when they attempt to carelessly categorize staff as independent contractors to avoid employee classification. If you are engaged in a business that uses independent contractors or if you work for an internet based business that insists on classifying you in this fashion, this podcast will be of interest to you.

This is an area of litigation that is going to explode in the coming years and lawyers, employers and tax experts need to pay careful attention to the laws in this area. 

Podcast ~ Scott Drake interviews independent contractor expert Rob Wood and  the attorney representing Kiely Shannon Liss Riordan