Paul L. Caron

Saturday, November 28, 2020

Czapanskiy: Tax Policy, Structured Settlements, And Factoring

Karen Czapanskiy (Maryland), Tax Policy, Structured Settlements and Factoring: Making Exploitation Easy and Profitable, 93 U. Detroit Mercy L. Rev. 455 (2020):

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.

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