On the Friday before Labor Day (read: the government either wanted to bury it or someone was in a pre-holiday rush to clear out old business), the Internal Revenue Service (IRS) released Private Letter Ruling 143928-13, dated April 14, 2014 and authored by Mike Montemurro, Chief, Branch 4 at the IRS’ Office of the Associate Chief Counsel (Income tax & Accounting). Montemurro’s letter, apparently requested by Pacific Life, approved favorable tax treatment for a structured settlement annuity with annual payment adjustments based on the S&P 500 Index performance. The letter also included the possibility of a commutation pursuant to a Notice of Hardship.
Not surprisingly, this PLR touched a nerve among the structured settlement industry’s commentariat. The industry’s ever-tenacious Watchdog offered insights here and former NSSTA President Pat Hindert suggested a “game-changing” aspect to the commutation language here.
While I respect Pat tremendously – after all, his book Structured Settlements & Periodic Payments is rightly the main textbook for NSSTA’s certification class – I don’t see this language having such a major future impact. Somewhat like Barack Obama’s self-described views on gay marriage, the IRS’ view on the secondary market has been “evolving” in recent years.
A few years ago, Montemurro himself spoke at a NSSTA meeting about structures and the secondary market and his comments that day presaged his language in the new PLR. Under gentle questioning from Drinker Biddle’s estimable Mike Miller about the assignability of periodic payments, Montemurro replied, in part:
We went through this before [Section] 5891 came into effect. The assignment companies were concerned that if they had these factoring transactions, it could blow up the old [Section] 130 deal.
Certainly the transaction has to be valid under state law. It’s always an assumption that the transaction is going to be enforceable under state law. And one thing we always assume in these rulings too is that these things are ‘sales’ of the periodic payments because there’s another way you could phrase these things and that is that they’re secured loans, where you’d end up with a different answer.
It’s actually important for state law because these [transactions] can be for usurious rates and that causes problems.
We’re very careful to make sure that it has to be an enforceable obligation under state law. We always assume in these transactions that taxpayers are treating them as sales, not as loans [although the IRS] won’t rule on whether it’s a sale or a loan [because] it becomes very difficult to make the distinction.
In short, Montemurro offered a pretty clear recognition of Section 5891’s acceptance of structured settlement sales. In subsequent comments that day, he reaffirmed the IRS’ approval in concept of these transfers, subject to IRC rules. Hence, Montemurro’s PLR, while important, doesn’t strike me as going significantly further than he did in that NSSTA presentation.
Incidentally, if anyone is interested in Montemurro’s comments on this or other topics – for example, non-qualified assignments and single-claimant 468(b) – let me know.
P.S.: To anyone in PacLife’s management who’s reading this, You have the best life company team in the structured settlement industry.