Content area
Full Text
MAJOR REFERENCES:
Secs461(h) and 468B: Regs. Secs1.461-4(g) and 1.468B; Rev. Rul. 71-119, 1971-1 C.B. 163.
INTRODUCTION
The IRS issued final regulations under sec468B which extend the exception to the economic performance rule accorded designated settlement funds (DSF) by that section to a new type of liability fund which the regulations refer to as a qualified settlement fund (QSF). In the case of a liability arising out of a tort, breach of contract, or violation of law, economic performance under sec461(h) does not occur and, therefore, a deduction may not be taken until payment is made to the person to whom the liability is owed.(1) Under the general rule, therefore, economic performance does not occur as payments are made to any other person, including a trust, escrow account, court-administered fund, or any similar arrangement, but rather occurs as payments are made from that person to the person to whom the liability is owed.(2) Section 468B, however, provides that, in the case of a DSF, economic performance occurs as qualified payments are made by the taxpayer to the fund.(3) The final regulations under sec468B extend this exception to transfers to a QSF.
The final regulations provide guidance as to the tax treatment of transfers to QSFs and the taxation of income earned by, and distributions made out of, these funds.(4) The final regulations further provide that the rules regarding the taxation of a QSF and its transferors and claimants also apply to DSFs, as defined in sec468B(d)(2). The definition of a QSF is broader than the definition of a DSF and the regulations provide that if a fund fails to meet the requirements of a DSF but meets the requirements of a QSF, it is to be treated as a QSF.
The IRS declined to adopt the recommendation of some commentators that the QSF rules be elective. Accordingly, the final regulations require QSF treatment for funds, accounts, and trusts that satisfy the QSF requirements.
REQUIREMENTS OF A QUALIFIED SETTLEMENT FUND
IN GENERAL
A qualified settlement fund is a fund, account, or trust:
(i) that is established pursuant to an order of, or is approved by, a governmental authority and is subject to the continuing jurisdiction of that government authority;(5)
(ii) that is established to resolve or...