Dallas Bar Association
HEADNOTES
Focus Tort & Insurance Law
October 2011 Volume 36 Number 10
Vision, Leadership & Commitment to Access to Justice by Alicia Hernandez
Most attorneys believe in the concept that the justice system should be open to all people. No one should be barred from seeking redress from the courts. Everyone’s voice should have the opportunity to be heard. Impartial jurists and juries of peers should make thoughtful decisions based on
fairness and the rule of law. This is, after all, America. But the road to the courthouse is perilous. It is oftentimes a slow and unsteady journey. Deadlines and details run rampant. Obstacles are thrown in the path. Laws and procedures are not clear. Courthouses are intimidating and seemingly impervious structures of brick and mortar,
Andy Payne and Jim Mitchell
Focus
flesh and blood to be respected, entrusted, and feared. Attorneys are professionals, but they have families to support, bills to pay, and have not gone unscathed by the tough economic times. And even the most reasonable legal fees are insurmountable to significant numbers of people. For those who cannot afford the journey through the legal process, they simply do not go. Their rights are not protected. They never have an opportunity to have Hon. Deborah Hankinson wrongs remedied. Those who have preyed on them proceed unchecked and unhindered on to the next victim. And, then, we have the leaders. These are the people with vision, generous hearts, and compassion. Their strong beliefs in the justice system lead them to make the road to the courthouse a reality for those who otherwise would only see it as a dream. Andy Payne and Jim Mitchell, of Payne Mitchell Law Group LLP, are two of those leaders. Plaintiff’s attorneys in
their private practices, they understand real world problems of ordinary people. They have stood up to the challenge by making a $25,000 kickoff donation to the 2012 Equal Access to Justice Campaign benefitting the Dallas Volunteer Attorney Program. Andy Payne and Jim Mitchell have donated $101,750 to the campaign since 2007. Because of their generosity, the troubles of DVAP’s clients, ordinary people simply trying to raise families, work for a living, and contribute to society as best they can, are able to open the courthouse doors and be given the equal access promised to Continued on page 15
Torts & Insurance Law
What Is A QSF And When Should It Be Used? Birth of the QSF
by Tab Keener
A Qualified Settlement Fund (QSF) allows taxpayers involved in litigation to receive settlement funds and potentially avoid tax ramifications until the funds are otherwise paid to the taxpayer. Oftentimes a QSF is used in mass tort or other types of class action litigation. A defendant or its insurer may pay money into the QSF, often through a structured settlement, and receive a release of claims by court order while multiple claimants decide upon an allocation among themselves. Insurance companies and large selfinsured businesses typically resist the use of a QSF. Their concern is magnified when a suit involves a single injury and derivative claimants (as in wrongful death and survival actions). The uncertainty is the belief that claimants may have essentially received the economic benefit of the money immediately upon payment into the QSF. The worry is that taxpayers, if taxed, would be motivated to sue the entity funding the settlement to offset the unexpected tax liability.
Structured settlements became popular in the late 1970’s and 1980’s. Insurance companies funding structured settlements became concerned that payments made to an entity, rather than the claimant, would not be tax deductible—as they clearly would be if paid to an individual. Defendants and their insurance carriers wanted to make sure that they could deduct payments in the year in which they were paid rather than when the money was distributed. Congress enacted Section 468B of the Internal Revenue Code in 1986 to address such concerns. When Section 468B was first enacted it only addressed a “Designated Settlement Fund.” Section 468B was later amended to add an additional section giving the Secretary of the Treasury additional authority to draft regulations further addressing the potential tax ramifications of such a fund. Through a series of regulations, the QSF was created. To be a QSF, a fund must first be “established pursuant to an order of, or approved by, the United States, any state (including the District of Columbia)… and is
subject to the continuing jurisdiction of that governmental authority.” Second, the fund must be “established to resolve or satisfy one or more contested or uncontested claim asserting liability…” The third and final requirement is that the fund must be a “trust under applicable state law, or its assets are otherwise segregated from the assets of the transferor (and related persons).”
Using a QSF When Only a Single Injury Is Involved Defendants and their insurers often have concern about the potential future tax liability associated with a QSF, which is afforded different tax treatment than a typical settlement annuity. A settlement annuity grows tax free to the benefit of the claimant while earnings in a QSF are taxable to the fund itself. A taxpayer could face serious tax ramifications because of the doctrines of constructive receipt and economic benefit. This is especially true in the case of a young minor child who would have many years of earnings growth. After reaching
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the age of majority, the child could bring suit contending that she was not adequately protected through the creation and use of the QSF and should now be entitled to recover the amount of lost earnings due to unfavorable tax treatment. The risk is whether the tax benefits of a structured settlement are lost when a QSF is created and periodic payments begin that only benefit a single claimant or derivative claimants. To alleviate these problems, claimants and their attorneys may suggest providing additional indemnification and promises to execute a Compromise Settlement Agreement. Such indemnification can add to uncertainty if unfavorable tax treatment were to occur. However, no revenue ruling or regulation clearly describes how a QSF is used when dealing with a single claimant or single injury involving derivative claimants and a structured settlement funds the QSF. Until additional regulations are promulgated, at least be aware that unfavorable tax treatment is a possibility that could HN undo a hard-fought settlement. Tab H. Keener is a Shareholder with Downs Stanford, P.C. He can be reached at tkeener@downsstanford.com.
DBA MEMBER REMINDER: Your 2012 DBA DUES STATEMENT will be mailed to your office or home on October 13, 2011. 2012 DBA DUES must be paid by December 31, 2011 to continue receiving ALL your member benefits. Thank you for your support of the Dallas Bar Association!