Disability Law

Speaker Comments at the Treasury Hearing

By Patrick Hindert

After the Treasury hearing on February 23, 2010, S2KM asked structured settlement industry members who spoke at the hearing to comment on their reactions. John McCulloch, Vice-President of Integrated Financial Settlements, and Dick Risk, Attorney at the Risk Law Firm, provided their thoughts below.

John McCulloch, Vice-President, Integrated Financial Settlements

S2KM: The Treasury panel noted that private letter rulings are not ?black-letter law? more than once when you discussed the ?observable bodily harm? understanding of ?physical,? which stems from a 2000 private letter ruling. Did their comments or questions change how you thought about that standard at all?

McCulloch: While PLR?s may not be cited as precedent, courts routinely include them and cite them in their analysis and they are generally a good indication of the Service?s thoughts on a specific issue. The ?bruise ruling? has been the only guidance, informal though it may be, on what the Service considers a physical injury. My thoughts on the matter haven?t changed; taxpayers need clarity when it comes to certain types of injuries that fall within a grey area.

S2KM: One member of the Treasury panel asked you if it would be difficult to prove that a tort caused plaintiff an increase in blood pressure. Does this suggest to you that proving that a significant increase in blood pressure resulted from, for example, sexual harassment, could render a portion of sexual harassment damages non-taxable? How might this impact the argument that damages for causing a plaintiff?s mental chemistry to change should be non-taxable because they are on account of ?physical? injuries or ?physical? sickness?

McCulloch: I was pleased she was open to this line of reasoning, but I think it would be very difficult to sustain. Congressional intent in 1996 was to eliminate the exclusion being used for employment cases. The change in the law shut the door pretty firmly on employment damages and it would likely take a change in the law to open that door again. While the tax arguments can be made, one must balance that with any revenue loss that would be incurred when exempting all non-physical injuries from taxation.

S2KM: In arguing for more damages to be excluded as ?physical,? you limited your recommendation to sexual abuse and wrongful imprisonment damages. Why?

McCulloch: These are two types of cases that are clearly distinguishable and have well-documented, long term effects, as opposed to being short lived or transitory emotional/mental distress damages. As there was no Congressional intent to tax these two types of claims in the 1996, it followed that they should be excluded. Attempting to define what ?is? physical on a broad basis is too difficult; taking specific types of injuries and making them per se physical resolves the difficulty in trying to make a broad, one-size fits all standard. Further, because these are two very small groups of claimants, the revenue loss would be negligible.

S2KM: From a structured settlement industry perspective, was this hearing a success? What could or should the different groups in the industry have done better?

McCulloch: It?s too early to tell what the results will be, whether it was successful or not. I was pleased the Service and Treasury were receptive to my comments, asked a lot of questions and encouraged me to seek further support from the Hill.

Dick Risk, Attorney, Risk Law Firm
Risk offered two comments after the hearing. First, what he, as commissioner of the IRS, would say to staff.

The proposed revision is deficient, as pointed out in the written public comments and in the testimony at the hearing, as it fails to ?prescribe all needful rules and regulations for the enforcement? of Code section 104, as the law requires. The clarification of the single-claimant issue can be resolved with a single paragraph, consistent with congressional history, court decisions and the agency?s previous rulings, without creating new policy. The definition of ?personal physical injury or physical sickness,? as Congress has prescribed, which other commentators have recommended, also merits inclusion in this regulation. Fix it and publish it again as a revised proposal. I do not concur that the revision should be made final in its current state. Your duty is to serve the people, not operate for the convenience of the staff. Further, it is abusive to the people you are here to serve to have suggested during the hearing that they start the process over again by requesting that the single-claimant issue be placed on the Priority Guidance Plan, without giving any assurance that the result would be any different than when the request was first made, in June 2003, accepted as a project in April 2004, and finally abandoned in late 2009.

Second, his overall take of the hearing.

I am extremely disappointed at the staff?s position in favor of pushing through a shoddy and deficient product for its own convenience that fails to address legitimate issues brought to its attention by comments from the public, rather than doing the job right.

S2KM Footnote: S2KM readers can find the various hearing-related writings of structured settlement commentators here .

Full post as published by Beyond Structured Settlements on March 01, 2010 (boomark / email).