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26 U.S.C. § 5891 - Internal Revenue Code

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INTERNAL REVENUE CODE SECTION 5891
STRUCTURED SETTLEMENT FACTORING TRANSACTIONS

APPENDIX A(7)

(a) IMPOSITION OF TAX—There is hereby imposed on any person who acquires directly or indirectly structured settlement payment rights in a structured settlement factoring transaction a tax equal to 40 percent of the factoring discount as determined under subsection (c)(4) with respect to such factoring transaction.

(b) EXCEPTION FOR CERTAIN APPROVED TRANSACTIONS—

(1) IN GENERAL—The tax under subsection (a) shall not apply in the case of a structured settlement factoring transaction in which the transfer of structured settlement payment rights is approved in advance in a qualified order.

(2) QUALIFIED ORDER—For purposes of this section, the term “qualified order” means a final order, judgment, or decree which—

(A) finds that the transfer described in paragraph (1)—

(i) does not contravene any Federal or State statute or the order of any court or responsible administrative authority, and

(ii) is in the best interest of the payee, taking into account the welfare and support of the payee’s dependents, and

(B) is issued—

(i) under the authority of an applicable State statute by an applicable State court, or

(ii) by the responsible administrative authority (if any) which has exclusive jurisdiction over the underlying action or proceeding which was resolved by means of the structured settlement.

(3) APPLICABLE STATE STATUTE—For purposes of this section, the term “applicable State statute” means a statute providing for the entry of an order, judgment, or decree described in paragraph (2)(A) which is enacted by—

(A) the State in which the payee of the structured settlement is domiciled, or

(B) if there is no statute described in subparagraph (A), the State in which either the party to the structured settlement (including an assignee under a qualified assignment under section 130) or the person issuing the funding asset for the structured settlement is domiciled or has its principal place of business.

(4) APPLICABLE STATE COURT—For purposes of this section—

(A) IN GENERAL—The term “applicable State court” means, with respect to any applicable State statute, a court of the State which enacted such statute.

(B) SPECIAL RULE—In the case of an applicable State statute described in paragraph (3)(B), such term also includes a court of the State in which the payee of the structured settlement is domiciled.

(5) QUALIFIED ORDER DISPOSITIVE—A qualified order shall be treated as dispositive for purposes of the exception under this subsection.

(c) DEFINITIONS—For purposes of this section—

(1) STRUCTURED SETTLEMENT—The term “structured settlement” means an arrangement

(A) which is established by—

(i) suit or agreement for the periodic payment of damages excludable from the gross income of the recipient under section 104(a)(2), or

(ii) agreement for the periodic payment of compensation under any workers` compensation law excludable from the gross income of the recipient under section 104(a)(1), and

(B) under which the periodic payments are—

(i) of the character described in subparagraphs (A) and (B) of section 130(c)(2), and

(ii) payable by a person who is a party to the suit or agreement or to the workers` compensation claim or by a person who has assumed the liability for such periodic payments under a qualified assignment in accordance with section 130.

(2) STRUCTURED SETTLEMENT PAYMENT RIGHTS—The term “structured settlement payment rights” means rights to receive payments under a structured settlement.

(3) STRUCTURED SETTLEMENT FACTORING TRANSACTION—

(A) IN GENERAL—The term “structured settlement factoring transaction” means a transfer of structured settlement payment rights (including portions of structured settlement payments) made for consideration by means of sale, assignment, pledge, or other form of encumbrance or alienation for consideration.

(B) EXCEPTION—Such term shall not include—

(i) the creation or perfection of a security interest in structured settlement payment rights under a blanket security agreement entered into with an insured depository institution in the absence of any action to redirect the structured settlement payments to such institution (or agent or successor thereof) or otherwise to enforce such blanket security interest as against the structured settlement payment rights, or

(ii) a subsequent transfer of structured settlement payment rights acquired in a structured settlement factoring transaction.

(4) FACTORING DISCOUNT—The term “factoring discount” means an amount equal to the excess of—

(A) the aggregate undiscounted amount of structured settlement payments being acquired in the structured settlement factoring transaction, over

(B) the total amount actually paid by the acquirer to the person from whom such structured settlement payments are acquired.

(5) RESPONSIBLE ADMINISTRATIVE AUTHORITY—The term “responsible administrative authority” means the administrative authority which had jurisdiction over the underlying action or proceeding which was resolved by means of the structured settlement.

(6) STATE—The term “State” includes the Commonwealth of Puerto Rico and any possession of the United States.

(d) COORDINATION WITH OTHER PROVISIONS—

(1) IN GENERAL—If the applicable requirements of sections 72, 104(a)(1), 104(a)(2), 130, and 461(h) were satisfied at the time the structured settlement involving structured settlement payment rights was entered into, the subsequent occurrence of a structured settlement factoring transaction shall not affect the application of the provisions of such sections to the parties to the structured settlement (including an assignee under a qualified assignment under section 130) in any taxable year.

(2) NO WITHHOLDING OF TAX—The provisions of section 3405 regarding withholding of tax shall not apply to the person making the payments in the event of a structured settlement factoring transaction.

(e) CLERICAL AMENDMENT—The table of chapters for subtitle E is amended by adding at the end the following new item: Chapter 55. Structured settlement factoring transactions.

(f) EFFECTIVE DATES—

(1) IN GENERAL—The amendments made by this section (other than the provisions of section 5891(d) of the Internal Revenue Code of 1986, as added by this section) shall apply to structured settlement factoring transactions (as defined in section 5891(c) of such Code (as so added)) entered into on or after the 30th day following the date of the enactment of this Act.

(2) CLARIFICATION OF EXISTING LAW—Section 5891(d) of such Code (as so added) shall apply to structured settlement factoring transactions (as defined in section 5891(c) of such Code (as so added)) entered into before, on, or after such 30th day.

(3) TRANSITION RULE—In the case of a structured settlement factoring transaction entered into during the period beginning on the 30th day following the date of the enactment of this Act and ending on July 1, 2002, no tax shall be imposed under section 5891(a) of such Code if—

(A) the structured settlement payee is domiciled in a State (or possession of the United States) which has not enacted a statute providing that the structured settlement factoring transaction is ineffective unless the transaction has been approved by an order, judgment, or decree of a court (or where applicable, a responsible administrative authority) which finds that such transaction—

(i) does not contravene any Federal or State statute or the order of any court (or responsible administrative authority); and

(ii) is in the best interest of the structured settlement payee or is appropriate in light of a hardship faced by the payee; and

(B) the person acquiring the structured settlement payment rights discloses to the structured settlement payee in advance of the structured settlement factoring transaction the amounts and due dates of the payments to be transferred, the aggregate amount to be transferred, the consideration to be received by the structured settlement payee for the transferred payments, the discounted present value of the transferred payments (including the present value as determined in the manner described in section 7520 of such Code), and the expenses required under the terms of the structured settlement factoring transaction to be paid by the structured settlement payee or deducted from the proceeds of such transaction.

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What 26 U.S.C. § 5891 Covers and why it matters

26 U.S.C. § 5891 is an Internal Revenue Code citation used as the identifier for a federal tax statute. This page provides practical guidance for locating the statutory text, understanding compliance implications, and preparing associated filings or notices. Use this guidance to organize supporting documents, confirm applicable deadlines, and determine whether signatures or attestations are required under federal and state law.

Why understanding 26 U.S.C. § 5891 is important for compliance

Knowing the scope of 26 U.S.C. § 5891 helps organizations identify when federal tax rules apply, avoid filing errors, and plan recordkeeping. Early review reduces the risk of late reporting, assessment of penalties, and administrative disputes with the IRS or state tax authorities.

Why understanding 26 U.S.C. § 5891 is important for compliance

Which stakeholders typically reference 26 U.S.C. § 5891

Consult a tax attorney or the IRS for questions about how the statute applies to a specific transaction; internal reviewers should document their analysis for auditability.

  • Tax advisors and CPAs who determine reporting and withholding requirements for clients
  • In-house counsel and compliance managers ensuring corporate procedures meet federal tax rules
  • Payroll and finance teams preparing records and reconciliations tied to federal reporting

Step-by-step checklist for preparing documentation tied to 26 U.S.C. § 5891

Follow these sequential steps to gather information, verify requirements, and preserve an auditable record.

  • 01
    Confirm applicability: Review the statute and guidance to confirm it applies to the transaction.
  • 02
    Gather records: Assemble contracts, invoices, and supporting documents with exact dates and amounts.
  • 03
    Complete fields: Populate required fields (name, TIN, date, amount) following the fillable fields guide.
  • 04
    Preserve evidence: Capture signatures, audit trail, and retention disposition for future review.

How online documentation and eSigning typically flow for tax-related records

The following stages describe a typical online signing and record capture workflow you can apply to documents referencing 26 U.S.C. § 5891.

  • Upload: Sender uploads the signed document as a PDF or DOCX file.
  • Place fields: Signature, date, and data fields are placed on the document.
  • Authenticate signer: Signer authenticates via email link, SMS code, or stronger methods.
  • Complete and store: Signed copy and audit trail are stored in an encrypted repository.

Recommended eSignature workflow settings for tax documents

Configure authentication, field types, and retention settings to support legal validity and audit readiness.

Field Configuration
Authentication Email + optional SMS code; use KBA for higher risk
Signature Type Visible e-signature with audit trail metadata
Document Format PDF/A for long-term preservation
Retention Apply retention policy matching tax and HIPAA rules

Technical requirements for secure eSubmission of tax-related records

Use a platform that produces a tamper-evident signed document and a complete audit trail to support legal defensibility and administrative review.

  • Integrations: Connectors to systems like Salesforce, NetSuite, and Google Workspace simplify record linking.
  • Formats: Platform should export signed PDF and preserve an audit trail.
  • Security: TLS in transit and AES-256 at rest are required for sensitive records.

Common filing and reporting dates relevant to federal tax records

While 26 U.S.C. § 5891 itself may drive specific timing, the following federal deadlines are commonly relevant for tax reporting and related information returns.

Form W-9 delivery:

No fixed deadline — provide upon request

1099-NEC:

Recipient and IRS due January 31

1099-MISC:

Recipient due January 31; paper IRS due February 28

Form 1040:

Individual return due April 15 (extensions available)

FBAR:

Due April 15 with automatic extension to October 15

Key compliance milestones when assessing statutory obligations

Sequence and document important milestones to meet reporting and retention requirements tied to tax statutes.

01

Research statutory text

Identify the relevant IRC section and any Treasury guidance that interprets it.

02

Internal review

Coordinate tax, legal, and finance teams to document the analysis.

03

File or report

Submit required information returns by the applicable IRS deadlines.

04

Retain records

Store signed records and audit trails per retention rules.

Essential data elements to capture and retain

Taxpayer Name: Full legal name
Tax ID: TIN or EIN
Transaction Date: MM/DD/YYYY format
Amount: Numeric with two decimals
Document Version: Version number or revision date
Audit Trail: Timestamps, IP, and signer identity

Potential penalties and risks if reporting is incorrect or late

1099 Late (≤30d): $60 per form — IRC §6721
1099 Late (31–Aug1): $130 per form — IRC §6721
1099 Late (after Aug1): $330 per form — IRC §6721
Intentional Disregard: $660+ per form — no cap
I-9 Paperwork: $281–$2,789 per violation
Backup Withholding: 24% withholding for missing TIN

Common preparation mistakes that increase audit risk

  • Using abbreviated or inconsistent legal names across documents, causing IRS matching failures and correspondence delays.
  • Failing to verify the correct TIN for payees, which can trigger backup withholding and slow reconciliation.
  • Relying on unsigned or poorly tracked approvals without an audit trail, reducing ability to demonstrate intent to sign.
  • Ignoring state-specific notarization or witness rules that affect enforceability for related legal instruments.

Real-world examples of secure eSignature use for tax and compliance workflows

These short case notes illustrate how organizations capture signatures, maintain records, and reduce turnaround time in regulated workflows.

Optica Ventures LLC — COO

Optica’s compliance team adopted online signing to centralize records and reduce paper processing.

  • The interface is simple and easy-to-use.
  • The company reports fewer document exceptions and a clearer audit trail, which simplified internal reviews and accelerated responses to external requests.

Martin Properties — Founder

A real estate operator moved signature workflows online to avoid in-person meetings and improve record retention.

  • I can process and execute all documents online.
  • Having consistent signed PDFs and timestamps made document retrieval faster and improved coordination between leasing, legal, and accounting teams.

Comparing electronic signature types and legal characteristics

Different signature technologies provide varying levels of assurance; choose the method aligned with regulatory needs and evidentiary requirements.

Criteria Electronic Signature Digital (PKI) Signature
Definition broad electronic process cryptographic pki method
Non-repudiation audit trail dependent strong cryptographic assurance
Use cases general contracts, notices high-assurance regulatory filings
Standards esign / ueta acceptance iso/pki and pdf digital signature

Representative eSignature vendor pricing and capability snapshot

This vendor comparison highlights starting prices and a few capabilities relevant to handling tax and compliance documents; signNow is listed first per platform comparisons.

signNow DocuSign Adobe Sign PandaDoc HelloSign
Starting Price $8/user/mo $15/user/mo $14/user/mo $19/user/mo $15/user/mo
Free Trial 7-day free trial Varies by plan Varies by plan Varies by plan Varies by plan
Bulk Send Yes Varies by plan Varies by plan Varies by plan Varies by plan
Audit Trail Yes Yes Yes Yes Yes
Envelope Cap No cap 100 envelopes/user/year Varies by plan Varies by plan Varies by plan

FAQs and troubleshooting for eSigning and recordkeeping related to 26 U.S.C. § 5891

Answers to common questions about electronic signatures, authentication, retention, and risk when working with tax statutes and related documentation.


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