Appendix A(5) Treasury Regulations ¤¤ 1.468B and 1.468B-1 through B-5
¤ 1.468B Designated settlement fundsA designated settlement fund, as defined in section 468B(d)(2), is taxed
in the manner described in ¤ 1.468B-2. The rules for transferors to a qualified
settlement fund described in ¤ 1.468B-3 apply to transferors to a designated
settlement fund. Similarly, the rules for claimants of a qualified settlement
fund described in ¤ 1.468B-4 apply to claimants of a designated settlement fund.
A fund, account, or trust that does not qualify as a designated settlement fund
is, however, a qualified settlement fund if it meets the requirements of a
qualified settlement fund described in ¤ 1.468B-1.
¤ 1.468B-1 Qualified settlement funds
(a) In general. A qualified settlement fund is a fund, account, or trust
that satisfies the requirements of paragraph (c) of this section.
(b) Coordination with other entity classifications. If a fund, account,
or trust that is a qualified settlement fund could be classified as a trust
within the meaning of Sec. 301.7701-4 of this chapter, it is classified as a
qualified settlement fund for all purposes of the Internal Revenue Code (Code).
If a fund, account, or trust, organized as a trust under applicable state law,
is a qualified settlement fund, and could be classified as either an association
(within the meaning of Sec. 301.7701-2 of this chapter) or a partnership (within
the meaning of Sec. 301.7701-3 of this chapter), it is classified as a qualified
settlement fund for all purposes of the Code. If a fund, account, or trust,
established for contested liabilities pursuant to Sec. 1.461-2(c)(1) is a
qualified settlement fund, it is classified as a qualified settlement fund for
all purposes of the Code.
(c) Requirements. A fund, account, or trust satisfies the requirements of
this paragraph (c) if-
(1) It is established pursuant to an order of, or is approved by,
the United States, any state (including the District of Columbia), territory,
possession, or political subdivision thereof, or any agency or instrumentality
(including a court of law) of any of the foregoing and is subject to the
continuing jurisdiction of that governmental authority;
(2) It is established to resolve or satisfy one or more contested or
uncontested claims that have resulted or may result from an event (or related
series of events) that has occurred and that has given rise to at least one
claim asserting liability-
(i) Under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 (hereinafter referred to as CERCLA), as
amended, 42 U.S.C. 9601 et seq.; or
(ii) Arising out of a tort, breach of contract, or violation
of law; or
(iii) Designated by the Commissioner in a revenue ruling or
revenue procedure; and
(3) The fund, account, or trust is a trust under applicable state
law, or its assets are otherwise segregated from other assets of the transferor
(and related persons).
(d) Definitions. For purposes of this section-
(1) Transferor. A "transferor" is a person that transfers (or on
behalf of whom an insurer or other person transfers) money or property to a
qualified settlement fund to resolve or satisfy claims described in paragraph
(c)(2) of this section against that person. (2) Related person. A "related person" is any person who is related
to the transferor within the meaning of sections 267(b) or 707(b)(1).
(e) Governmental order or approval requirement-(1) In general. A fund, account, or trust is "ordered by" or
"approved by" a governmental authority described in paragraph (c)(1) of this
section when the authority issues its initial or preliminary order to establish,
or grants its initial or preliminary approval of, the fund, account, or trust,
even if that order or approval may be subject to review or revision. Except as
otherwise provided in paragraph (j)(2) of this section, the governmental
authority's order or approval has no retroactive effect and does not permit a
fund, account, or trust to be a qualified settlement fund prior to the date the
order is issued or the approval is granted.
(2) Arbitration panels. An arbitration award that orders the
establishment of, or approves, a fund, account, or trust is an order or approval
of a governmental authority described in paragraph (c)(1) of this section if-
(i) The arbitration award is judicially enforceable;
(ii) The arbitration award is issued pursuant to a bona fide
arbitration proceeding in accordance with rules that are approved by a
governmental authority described in paragraph (c)(1) of this section (such as
self-regulatory organization-administered arbitration proceedings in the
securities industry); and
(iii) The fund, account, or trust is subject to the continuing
jurisdiction of the arbitration panel, the court of law that has jurisdiction to
enforce the arbitration award, or the governmental authority that approved the
rules of the arbitration proceeding.
(f) Resolve or satisfy requirement-(1) Liabilities to provide services or property. Except as otherwise
provided in paragraph (f)(2) of this section, a liability is not described in
paragraph (c)(2) of this section if it is a liability for the provision of
services or property, unless the transferor's obligation to provide services or
property is extinguished by a transfer or transfers to the fund, account, or trust. (2) CERCLA liabilities. A transferor's liability under CERCLA to
provide services or property is described in paragraph (c)(2) of this section if
following its transfer to a fund, account, or trust the transferor's only
remaining liability to the Environmental Protection Agency (if any) is a remote,
future obligation to provide services or property.
(g) Excluded liabilities. A liability is not described in paragraph (c)(2)
of this section if it-
(1) Arises under a workers compensation act or a self-insured health
plan; (2) Is an obligation to refund the purchase price of, or to repair
or replace, products regularly sold in the ordinary course of the transferor's
trade or business;
(3) Is an obligation of the transferor to make payments to its
general trade creditors or debtholders that relates to a title 11 or similar
case (as defined in section 368(a)(3)(A)), or a workout; or (4) Is designated by the Commissioner in a revenue ruling or a
revenue procedure (see Sec. 601.601(d)(2)(ii)(b) of this chapter).
(h) Segregation requirement-
(1) In general. If it is not a trust under applicable state law, a
fund, account, or trust satisfies the requirements of paragraph (c)(3) of this
section if its assets are physically segregated from other assets of the
transferor (and related persons). For example, cash held by a transferor in a
separate bank account satisfies the segregation requirement of paragraph (c)(3)
of this section. (2) Classification of fund established to resolve or satisfy
allowable and non-allowable claims. If a fund, account, or trust is established
to resolve or satisfy claims described in paragraph (c)(2) of this section as
well as other types of claims (i.e., non-allowable claims) arising from the same
event or related series of events, the fund is a qualified settlement fund.
However, under Sec. 1.468B-3(c), economic performance does not occur with
respect to transfers to the qualified settlement fund for non-allowable claims.
(i) [Reserved]
(j) Classification of fund prior to satisfaction of requirements in
paragraph (c) of this section-
(1) In general. If a fund, account, or trust is established to
resolve or satisfy claims described in paragraph (c)(2) of this section, the
assets of the fund, account, or trust are treated as owned by the transferor of
those assets until the fund, account, or trust also meets the requirements of
paragraphs (c) (1) and (3) of this section. On the date the fund, account, or
trust satisfies all the requirements of paragraph (c) of this section, the
transferor is treated as transferring the assets to a qualified settlement fund.
(2) Relation-back rule-
(i) In general. If a fund, account, or trust meets the
requirements of paragraphs (c)(2) and (c)(3) of this section prior to the time
it meets the requirements of paragraph (c)(1) of this section, the transferor
and administrator (as defined in Sec. 1.468B-2(k)(3)) may jointly elect (a
relation-back election) to treat the fund, account, or trust as coming into
existence as a qualified settlement fund on the later of the date the fund,
account, or trust meets the requirements of paragraphs (c)(2) and (c)(3) of this
section or January 1 of the calendar year in which all the requirements of
paragraph (c) of this section are met. If a relation-back election is made, the
assets held by the fund, account, or trust on the date the qualified settlement
fund is treated as coming into existence are treated as transferred to the
qualified settlement fund on that date. (ii) Relation-back election. A relation-back election is made
by attaching a copy of the election statement, signed by each transferor and the
administrator, to (and as part of) the timely filed income tax return (including
extensions) of the qualified settlement fund for the taxable year in which the
fund is treated as coming into existence. A copy of the election statement must
also be attached to (and as part of) the timely filed income tax return
(including extensions), or an amended return that is consistent with the
requirements of Secs. 1.468B-1 through 1.468B-4, of each transferor for the
taxable year of the transferor that includes the date on which the qualified
settlement fund is treated as coming into existence. The election statement must contain-(A) A legend, "Sec. 1.468B-1 Relation-Back Election," at
the top of the first page; (B) Each transferor's name, address, and taxpayer
identification number;
(C) The qualified settlement fund's name, address, and
employer identification number;
(D) The date as of which the qualified settlement fund
is treated as coming into existence; and
(E) A schedule describing each asset treated as
transferred to the qualified settlement fund on the date the fund is treated as
coming into existence. The schedule of assets does not have to identify the
amount of cash or the property treated as transferred by a particular
transferor. If the schedule does not identify the transferor of each asset,
however, each transferor must include with the copy of the election statement
that is attached to its income tax return (or amended return) a schedule
describing each asset the transferor is treated as transferring to the qualified
settlement fund.
(k) Examples. The following examples illustrate the rules of this section:
Example 1. In a class action brought in a United States federal
district court, the court holds that the defendant, Corporation X, violated
certain securities laws and must pay damages in the amount of $150 million.
Pursuant to an order of the court, Corporation X transfers $50 million in cash
and transfers property with a fair market value of $75 million to a state law
trust. The trust will liquidate the property and distribute the cash proceeds to
the plaintiffs in the class action. The trust is a qualified settlement fund
because it was established pursuant to the order of a federal district court to
resolve or satisfy claims against Corporation X for securities law violations
that have occurred.
Example 2. (i) Assume the same facts as in Example 1, except that
Corporation X and the class of plaintiffs reach an out-of-court settlement that
requires Corporation X to establish and fund a state law trust before the
settlement agreement is submitted to the court for approval. (ii) The trust is not a qualified settlement fund because it
neither is established pursuant to an order of, nor has it been approved by, a
governmental authority described in paragraph (c)(1) of this section.
Example 3. On June 1, 1994, Corporation Y establishes a fund to
resolve or satisfy claims against it arising from the violation of certain
securities laws. On that date, Corporation Y transfers $10 million to a
segregated account. On December 1, 1994, a federal district court approves the
fund. Assuming Corporation Y and the administrator of the qualified settlement
fund do not make a relation-back election, Corporation Y is treated as the owner
of the $10 million, and is taxable on any income earned on that money, from June
1 through November 30, 1994. The fund is a qualified settlement fund beginning
on December 1, 1994.
Example 4.
(i) On September 1, 1993, Corporation X, which has a taxable
year ending on October 31, enters into a settlement agreement with a plaintiff
class for asserted tort liabilities. Under the settlement agreement, Corporation
X makes two $50 million payments into a segregated fund, one on September 1,
1993, and one on October 1, 1993, to resolve or satisfy the tort liabilities. A
federal district court approves the settlement agreement on November 1, 1993. (ii) The administrator of the fund and Corporation X elect to
treat the fund as a qualified settlement fund prior to governmental approval
under the relation-back rule of paragraph (j)(2) of this section. The
administrator must attach the relation-back election statement to the fund's
income tax return for calendar year 1993, and Corporation X must attach the
election to its original or amended income tax return for its taxable year
ending October 31, 1993. (iii) Pursuant to the relation-back election, the fund begins
its existence as a qualified settlement fund on September 1, 1993, and
Corporation X is treated as transferring $50 million to the qualified settlement
fund on September 1, 1993, and $50 million on October 1, 1993. (iv) With respect to these transfers, Corporation X must
provide the statement described in Sec. 1.468B-3(e) to the administrator of the
qualified settlement fund by February 15, 1994, and must attach a copy of this
statement to its original or amended income tax return for its taxable year
ending October 31, 1993.
Example 5. Assume the same facts as in Example 4, except that the
court approves the settlement on May 1, 1994. The administrator must attach the
relation-back election statement to the fund's income tax return for calendar
year 1994, and Corporation X must attach the election statement to its original
or amended income tax return for its taxable year ending October 31, 1994.
Pursuant to this election, the fund begins its existence as a qualified
settlement fund on January 1, 1994. In addition, Corporation X is treated as
transferring to the qualified settlement fund all amounts held in the fund on
January 1, 1994. With respect to the transfer, Corporation X must provide the
statement described in Sec. 1.468B-3(e) to the administrator of the qualified
settlement fund by February 15, 1995, and must attach a copy of this statement
to its income tax return for its taxable year ending October 31, 1994.
Example 6. Corporation Z establishes a fund that meets all the
requirements of section 468B(d)(2) for a designated settlement fund, except that
Corporation Z does not make the election under section 468B(d)(2)(F). Although
the fund does not qualify as a designated settlement fund, it is a qualified
settlement fund because the fund meets the requirements of paragraph (c) of this section.
Example 7. Corporation X owns and operates a landfill in State A.
State A requires Corporation X to transfer money to a trust annually based on
the total tonnage of material placed in the landfill during the year. Under the
laws of State A, Corporation X will be required to perform (either itself or
through contractors) specified closure activities when the landfill is full, and
the trust assets will be used to reimburse Corporation X for those closure
costs. The trust is not a qualified settlement fund because it is established to
secure the liability of Corporation X to perform the closure activities.
[T.D. 8459, 57 FR 60989, Dec. 23, 1992; 58 FR 7865, Feb. 10, 1993]
¤ 1.468B-2 Taxation of qualified settlement funds and related administrative requirements.
(a) In general. A qualified settlement fund is a United States person and
is subject to tax on its modified gross income for any taxable year at a rate
equal to the maximum rate in effect for that taxable year under section 1(e).
(b) Modified gross income. The "modified gross income" of a qualified
settlement fund is its gross income, as defined in section 61, computed with the
following modifications-
(1) In general, amounts transferred to the qualified settlement fund
by, or on behalf of, a transferor to resolve or satisfy a liability for which
the fund is established are excluded from gross income. However, dividends on
stock of a transferor (or a related person), interest on debt of a transferor
(or a related person), and payments in compensation for late or delayed
transfers, are not excluded from gross income. (2) A deduction is allowed for administrative costs and other
incidental expenses incurred in connection with the operation of the qualified
settlement fund that would be deductible under chapter 1 of the Internal Revenue
Code in determining the taxable income of a corporation. Administrative costs
and other incidental expenses include state and local taxes, legal, accounting,
and actuarial fees relating to the operation of the qualified settlement fund,
and expenses arising from the notification of claimants and the processing of
their claims. Administrative costs and other incidental expenses do not include
legal fees incurred by, or on behalf of, claimants. (3) A deduction is allowed for losses sustained by the qualified
settlement fund in connection with the sale, exchange, or worthlessness of
property held by the fund to the extent the losses would be deductible in
determining the taxable income of a corporation under section 165 (f) or (g),
and sections 1211(a) and 1212(a). (4) A deduction is allowed for the amount of a net operating loss of
the qualified settlement fund to the extent the loss would be deductible in
determining the taxable income of a corporation under section 172(a). For
purposes of this paragraph (b)(4), the net operating loss of a qualified
settlement fund for a taxable year is the amount by which the deductions allowed
under paragraphs (b)(2) and (b)(3) of this section exceed the gross income of
the fund computed with the modification described in paragraph (b)(1) of this section.
(c) Partnership interests held by a qualified settlement fund on February
14, 1992-
(1) In general. For taxable years ending prior to January 1, 2003, a
qualified settlement fund that holds a partnership interest it acquired prior to
February 15, 1992, is allowed a deduction for its distributive share of that
partnership's items of loss, deduction, or credit described in section 702(a)
that would be deductible in determining the taxable income (or in the case of a
credit, the income tax liability) of a corporation to the extent of the fund's
distributive share of that partnership's items of income and gain described in
section 702(a) for the same taxable year. For purposes of this paragraph (c)(1),
a distributive share of a partnership credit is treated as a deduction in an
amount equal to the amount of the credit divided by the rate described in
paragraph (a) of this section.
(2) Limitation on changes in partnership agreements and capital
contributions. For purposes of paragraph (c)(1) of this section, changes in a
qualified settlement fund's distributive share of items of income, gain, loss,
deduction, or credit are disregarded if-
(i) They result from a change in the terms of the partnership
agreement on or after December 18, 1992, or a capital contribution to the
partnership on or after December 18, 1992, unless the partnership agreement as
in effect prior to December 18, 1992, requires the contribution; and
(ii) A principal purpose of the change in the terms of the
partnership agreement or the capital contribution is to circumvent the
limitation described in paragraph (c)(1) of this section.
(d) Distributions to transferors and claimants. Amounts that are
distributed by a qualified settlement fund to, or on behalf of, a transferor or
a claimant are not deductible by the fund.
(e) Basis of property transferred to a qualified settlement fund. A
qualified settlement fund's initial basis in property it receives from a
transferor (or from an insurer or other person on behalf of a transferor) is the
fair market value of that property on the date of transfer to the fund.
(f) Distribution of property. A qualified settlement fund must treat a
distribution of property as a sale or exchange of that property for purposes of
section 1001(a). In computing gain or loss, the amount realized by the qualified
settlement fund is the fair market value of the property on the date of
distribution.
(g) Other taxes. The tax imposed under paragraph (a) of this section is in
lieu of any other taxation of the income of a qualified settlement fund under
subtitle A of the Internal Revenue Code. Thus, a qualified settlement fund is
not subject to the alternative minimum tax of section 55, the accumulated
earnings tax of section 531, the personal holding company tax of section 541, or
the maximum capital gains rate of section 1(h). A qualified settlement fund is,
however, subject to taxes that are not imposed on the income of a taxpayer, such
as the tax on transfers of property to foreign entities under section 1491.
(h) Denial of credits against tax. The tax imposed on the modified gross
income of a qualified settlement fund under paragraph (a) of this section may
not be reduced or offset by any credits against tax provided by part IV of
subchapter A of chapter 1 of the Internal Revenue Code.
(i) [Reserved]
(j) Taxable year and accounting method. The taxable year of a qualified
settlement fund is the calendar year. A qualified settlement fund must use an
accrual method of accounting within the meaning of section 446(c).
(k) Treatment as corporation for purposes of subtitle F. Except as
otherwise provided in Sec. 1.468B-5(b), for purposes of subtitle F of the
Internal Revenue Code, a qualified settlement fund is treated as a corporation
and any tax imposed under paragraph (a) of this section is treated as a tax
imposed by section 11. Subtitle F rules that apply to qualified settlement funds
include, but are not limited to-
(1) A qualified settlement fund must file an income tax return with
respect to the tax imposed under paragraph (a) of this section for each taxable
year that the fund is in existence, whether or not the fund has gross income for
that taxable year.
(2) A qualified settlement fund is in existence for the period that-
(i) Begins on the first date on which the fund is treated as a
qualified settlement fund under Sec. 1.468B-1; and
(ii) Ends on the earlier of the date the fund-
(A) No longer satisfies the requirements of Sec. 1.468B-
1; or (B) No longer has any assets and will not receive any
more transfers. (See paragraph (m) of this section for procedures for the prompt
assessment of tax.)
(3) The income tax return of the qualified settlement fund must be
filed on or before March 15 of the year following the close of the taxable year
of the qualified settlement fund unless the fund is granted an extension of time
for filing under section 6081. The return must be made by the administrator of
the qualified settlement fund. The "administrator" (which may include a trustee
if the qualified settlement fund is a trust) of a qualified settlement fund is,
in order of priority-
(i) The person designated, or approved, by the governmental
authority that ordered or approved the fund for purposes of Sec. 1.468B-1(c)(1); (ii) The person designated in the escrow agreement, settlement
agreement, or other similar agreement governing the fund;
(iii) The escrow agent, custodian, or other person in
possession or control of the fund's assets; or
(iv) The transferor or, if there are multiple transferors, all
the transferors, unless an agreement signed by all the transferors designates a
single transferor as the administrator.
(4) The administrator of a qualified settlement fund must obtain an
employer identification number for the fund. (5) A qualified settlement fund must deposit all payments of tax
imposed under paragraph (a) of this section (including any payments of estimated
tax) with an authorized government depositary in accordance with Sec. 1.6302-1. (6) A qualified settlement fund is subject to the addition to tax
imposed by section 6655 in the case of an underpayment of estimated tax computed
with respect to the tax imposed under paragraph (a) of this section. For
purposes of section 6655(g)(2), a qualified settlement fund's taxable income is
its modified gross income and a transferor is not considered a predecessor of a
qualified settlement fund.
(l) Information reporting and withholding requirements-
(1) Payments to a qualified settlement fund. Payments to a qualified
settlement fund are treated as payments to a corporation for purposes of the
information reporting requirements of part III of subchapter A of chapter 61 of
the Internal Revenue Code. (2) Payments and distributions by a qualified settlement fund-
(i) In general. Payments and distributions by a qualified
settlement fund are subject to the information reporting requirements of part
III of subchapter A of chapter 61 of the Internal Revenue Code (Code), and the
withholding requirements of subchapter A of chapter 3 of subtitle A and subtitle
C of the Code. (ii) Special rules. The following rules apply with respect to
payments and distributions by a qualified settlement fund-
(A) A qualified settlement fund must make a return for,
or must withhold tax on, a distribution to a claimant if one or more transferors
would have been required to make a return or withhold tax had that transferor
made the distribution directly to the claimant;
(B) For purposes of sections 6041(a) and 6041A, if a
qualified settlement fund makes a payment or distribution to a transferor, the
fund is deemed to make the payment or distribution to the transferor in the
course of a trade or business; (C) For purposes of sections 6041(a) and 6041A, if a
qualified settlement fund makes a payment or distribution on behalf of a
transferor or a claimant, the fund is deemed to make the payment or distribution
to the recipient of that payment or distribution in the course of a trade or business; (D) With respect to a distribution or payment described
in paragraph (1)(2)(ii)(C) of this section and the information reporting
requirements of part III of subchapter A of chapter 61 of the Internal Revenue
Code, the qualified settlement fund is also deemed to have made the distribution
or payment to the transferor or claimant.
(m) Request for prompt assessment. A qualified settlement fund is eligible
to request the prompt assessment of tax under section 6501(d). For purposes of
section 6501(d), a qualified settlement fund is treated as dissolving on the
date the fund no longer has any assets (other than a reasonable reserve for
potential tax liabilities and related professional fees) and will not receive
any more transfers.
(n) Examples. The following examples illustrate the rules of this section:
Example 1. On June 30, 1993, a United States federal district court
approves the settlement of a lawsuit under which Corporation X must transfer
$10,833,000 to a qualified settlement fund on August 1, 1993. The $10,833,000
includes $10 million of damages incurred by plaintiffs on October 1, 1992, and
$833,000 of interest calculated at 10 percent annually from October 1, 1992, to
August 1, 1993. The $833,000 of interest is not a payment to the qualified
settlement fund in compensation for a late or delayed transfer to the fund
within the meaning of paragraph (b)(1) of this section because the payment of
$10,833,000 to the fund is not due until August 1, 1993.
Example 2. Assume the same facts as in Example 1 except that the
settlement agreement also provides for interest to accrue at a rate of 12
percent annually on any amount not transferred to the qualified settlement fund
on August 1, 1993, and the only transfer Corporation X makes to the fund is
$11,374,650 on January 1, 1994. The additional payment of $541,650 ($11,374,650
paid on January 1, 1994, less $10,833,000 due on August 1, 1993) is a payment to
the qualified settlement fund in compensation for a late or delayed transfer to
the fund within the meaning of paragraph (b)(1) of this section.
[T.D. 8459, 57 FR 60991, Dec. 23, 1992; 58 FR 7865, Feb. 10, 1993]
¤ 1.468B-3 Rules applicable to the transferor. (a) Transfer of property-
(1) In general. A transferor must treat a transfer of property to a
qualified settlement fund as a sale or exchange of that property for purposes of
section 1001(a). In computing the gain or loss, the amount realized by the
transferor is the fair market value of the property on the date the transfer is
made (or is treated as made under Sec. 1.468B-1(g)) to the qualified settlement
fund. Because the issuance of a transferor's debt, obligation to provide
services or property in the future, or obligation to make a payment described in
Sec. 1.461-4(g), is generally not a transfer of property by the transferor, it
generally does not result in gain or loss to the transferor under this paragraph
(a)(1). If a person other than the transferor transfers property to a qualified
settlement fund, there may be other tax consequences as determined under general
federal income tax principles.(2) Anti-abuse rule. The Commissioner may disallow a loss resulting
from the transfer of property to a qualified settlement fund if the Commissioner
determines that a principal purpose for the transfer was to claim the loss and-
(i) The transferor places significant restrictions on the
fund's ability to use or dispose of the property; or
(ii) The property (or substantially similar property) is
distributed to the transferor (or a related person).
(b) Qualified appraisal requirement for transfers of certain property-
(1) In general. A transferor must obtain a qualified appraisal to
support a loss or deduction it claims with respect to a transfer to a qualified
settlement fund of the following types of property-
(i) Nonpublicly traded securities (as defined in Sec. 1.170A-
13(c)(7)(ix)) issued by the transferor (or a related person); and (ii) Interests in the transferor (if the transferor is a
partnership) and in a partnership in which the transferor (or a related person)
is a direct or indirect partner.
(2) Provision of copies. The transferor must provide a copy of the
qualified appraisal to the administrator of the qualified settlement fund no
later than February 15 of the year following the calendar year in which the
property is transferred. The transferor also must attach a copy of the qualified
appraisal to (and as part of) its timely filed income tax return (including
extensions) for the taxable year of the transferor in which the transfer is made. (3) Qualified appraisal. A "qualified appraisal" is a written
appraisal that-
(i) Is made within 60 days before or after the date the
property is transferred to the qualified settlement fund; (ii) Is prepared, signed, and dated by an individual who is a
qualified appraiser within the meaning of Sec. 1.170A-13(c)(5); (iii) Includes the information required by paragraph (b)(4) of
this section; and (iv) Does not involve an appraisal fee of the type prohibited
by Sec. 1.170A-13(c)(6).
(4) Information included in a qualified appraisal. A qualified
appraisal must include the following information-
(i) A description of the appraised property;
(ii) The date (or expected date) of the property's transfer to
the qualified settlement fund;
(iii) The appraised fair market value of the property on the
date (or expected date) of transfer;
(iv) The method of valuing the property, such as the
comparable sales approach;
(v) The specific basis for the valuation, such as specific
comparable sales or statistical sampling, including a justification for using
comparable sales or statistical sampling and an explanation of the procedure employed;
(vi) The terms of any agreement or understanding entered into
(or expected to be entered into) by or on behalf of the transferor (or a related
person) or the qualified settlement fund that relates to the use, sale, or other
disposition of the transferred property, including, for example, the terms of
any agreement or understanding that temporarily or permanently-
(A) Restricts the qualified settlement fund's right to
use or dispose of the property; or
(B) Reserves to, or confers upon, any person other than
the qualified settlement fund any right (including designating another person as
having the right) to income from the property, to possess the property
(including the right to purchase or otherwise acquire the property), or to
exercise any voting rights with respect to the property;
(vii) The name, address, and taxpayer identification number of
the qualified appraiser; and if the qualified appraiser is acting in his or her
capacity as a partner in a partnership, an employee of any person, or an
independent contractor engaged by a person other than the transferor, the name,
address, and taxpayer identification number of the partnership or the person who
employs or engages the qualified appraiser;
(viii) The qualifications of the qualified appraiser,
including the appraiser's background, experience, education, and membership, if
any, in professional appraisal associations; and
(ix) A statement that the appraisal was prepared for income
tax purposes.
(5) Effect of signature of the qualified appraiser. Any appraiser
who falsely or fraudulently overstates the value of the transferred property
referred to in a qualified appraisal may be subject to a civil penalty under
section 6701 for aiding and abetting an understatement of tax liability and may
have appraisals disregarded pursuant to 31 U.S.C. 330(c).
(c) Economic performance-(1) In general. Except as otherwise provided in this paragraph (c),
for purposes of section 461(h), economic performance occurs with respect to a
liability described in Sec. 1.468B-1(c)(2) (determined with regard to Sec.
1.468B-1(f) and (g)) to the extent the transferor makes a transfer to a
qualified settlement fund to resolve or satisfy the liability. (2) Right to a refund or reversion-
(i) In general. Economic performance does not occur to the
extent-
(A) The transferor (or a related person) has a right to
a refund or reversion of a transfer if that right is exercisable currently and
without the agreement of an unrelated person that is independent or has an
adverse interest (e.g., the court or agency that approved the fund, or the fund
claimants); or (B) Money or property is transferred under conditions
that allow its refund or reversion by reason of the occurrence of an event that
is certain to occur, such as the passage of time, or if restrictions on its
refund or reversion are illusory.(ii) Right extinguished. With respect to a transfer described
in paragraph (c)(2)(i) of this section, economic performance is deemed to occur
on the date, and to the extent, the transferor's right to a refund or reversion
is extinguished.
(3) Obligations of a transferor. Economic performance does not occur
when a transferor transfers to a qualified settlement fund its debt (or the debt
of a related person). Instead, economic performance occurs as the transferor (or
related person) makes principal payments on the debt. Similarly, economic
performance does not occur when a transferor transfers to a qualified settlement
fund its obligation (or the obligation of a related person) to provide services
or property in the future, or to make a payment described in Sec. 1.461-4(g).
Instead, economic performance with respect to such an obligation occurs as
services, property or payments are provided or made to the qualified settlement
fund or a claimant.
(d) Payment of insurance amounts. No deduction is allowed to a transferor
for a transfer to a qualified settlement fund to the extent the transferred
amounts represent amounts received from the settlement of an insurance claim and
are excludable from gross income. If the settlement of an insurance claim occurs
after a transferor makes a transfer to a qualified settlement fund for which a
deduction has been taken, the transferor must include in income the amounts
received from the settlement of the insurance claim to the extent of the
deduction.
(e) Statement to the qualified settlement fund and the Internal Revenue
Service-
(1) In general. A transferor must provide the statement described in
paragraph (e)(2) of this section to the administrator of a qualified settlement
fund no later than February 15 of the year following each calendar year in which
the transferor (or an insurer or other person on behalf of the transferor) makes
a transfer to the fund. The transferor must attach a copy of the statement to
(and as part of) its timely filed income tax return (including extensions) for
the taxable year of the transferor in which the transfer is made. (2) Required statement-
(i) In general. The statement required by this paragraph (e)
must provide the following information-
(A) A legend, "Sec. 1.468B-3 Statement," at the top of
the first page; (B) The transferor's name, address, and taxpayer
identification number;
(C) The qualified settlement fund's name, address, and
employer identification number;
(D) The date of each transfer;
(E) The amount of cash transferred; and
(F) A description of property transferred and its fair
market value on the date of transfer.
(ii) Combined statements. If a qualified settlement fund has
more than one transferor, any two or more of the transferors may provide a
combined statement to the administrator that does not identify the amount of
cash or the property transferred by a particular transferor. If a combined
statement is used, however, each transferor must include with its copy of the
statement that is attached to its income tax return a schedule describing each
asset that the transferor transferred to the qualified settlement fund.(f) Distributions to transferors-(1) In general. A transferor must include in gross income any
distribution (including a deemed distribution described in paragraph (f)(2) of
this section) it receives from a qualified settlement fund. If property is
distributed, the amount includible in gross income and the basis in that
property, is the fair market value of the property on the date of the
distribution.
(2) Deemed distributions-
(i) Other liabilities. If a qualified settlement fund makes a
distribution on behalf of a transferor to a person that is not a claimant, or to
a claimant to resolve or satisfy a liability of the transferor (or a related
person) other than a liability described in Sec. 1.468B-1(c)(2) for which the
fund was established, the distribution is deemed made by the fund to the
transferor. The transferor, in turn, is deemed to have made a payment to the
actual recipient.
(ii) Constructive receipt. To the extent a transferor acquires
a right to a refund or reversion described in paragraph (c)(2) of this section
of all or a portion of the assets of a qualified settlement fund subsequent to
the transfer of those assets to the fund, the fund is deemed to distribute those
assets to the transferor on the date the right is acquired.
(3) Tax benefit rule. A distribution described in paragraph (f)(1)
or (f)(2) of this section is excluded from the gross income of a transferor to
the extent provided by section 111(a).
(g) Example. The following example illustrates the rules of this section:
Example. On March 1, 1993, Individual A transfers $1 million to a
qualified settlement fund to resolve or satisfy claims against him resulting
from certain violations of securities laws. Individual A uses the cash receipts
and disbursements method of accounting. Since Individual A does not use the
accrual method of accounting, the economic performance rules of paragraph (c) of
this section are not applicable. Therefore, whether, when, and to what extent
Individual A can deduct the transfer is determined under applicable provisions
of the Internal Revenue Code, such as sections 162 and 461.
[T.D. 8459, 57 FR 60992, Dec. 23, 1992]
¤ 1.468B-4 Taxability of distributions to claimants. Whether a distribution to a claimant is includible in the claimant's gross
income is generally determined by reference to the claim in respect of which the
distribution is made and as if the distribution were made directly by the
transferor. For example, to the extent a distribution is in satisfaction of
damages on account of personal injury or sickness, the distribution may be
excludable from gross income under section 104(a)(2). Similarly, to the extent a
distribution is in satisfaction of a claim for foregone taxable interest, the
distribution is includible in the claimant's gross income under section 61(a)(4).
[T.D. 8459, 57 FR 60994, Dec. 23, 1992]
¤ 1.468B-5 Effective dates and transition rules. (a) In general. Section 468B, including section 468B(g), is effective as
provided in the Tax Reform Act of 1986 and the Technical and Miscellaneous
Revenue Act of 1988. Except as otherwise provided in this section, Secs. 1.468B-
1 through 1.468-4 are effective on January 1, 1993. Thus, the regulations apply
to income of a qualified settlement fund earned after December 31, 1992,
transfers to a fund after December 31, 1992, and distributions from a fund after
December 31, 1992. For purposes of Sec. 1.468B-3(c) (relating to economic
performance), previously transferred assets held by a qualified settlement fund
on the date these regulations first apply to the fund (i.e., January 1, 1993, or
the earlier date provided under paragraph (b)(2) of this section) are treated as
transferred to the fund on that date, to the extent no taxpayer has previously
claimed a deduction for the transfer.
(b) Taxation of certain pre-1996 fund income-(1) Reasonable method-(i) In general. With respect to a fund, account, or trust
established after August 16, 1986, but prior to February 15, 1992, that
satisfies (or, if it no longer exists, would have satisfied) the requirements of
Sec. 1.468B-1(c), the Internal Revenue Service will not challenge a reasonable,
consistently applied method of taxation for transfers to the fund, income earned
by the fund, and distributions made by the fund after August 16, 1986, but prior
to January 1, 1996. A method is generally considered reasonable if, depending on
the facts and circumstances, all transferors and the administrator of the fund
have consistently treated transfers to the fund, income earned by the fund, and
distributions made by the fund after August 16, 1986, as if the fund were-
(A) A grantor trust and the transferors are the
grantors;
(B) A complex trust and the transferors are the
grantors; or
(C) A designated settlement fund.
(ii) Qualified settlement funds established after February 14,
1992, but before January 1, 1993. With respect to a fund, account, or trust
established after February 14, 1992, but prior to January 1, 1993, that
satisfies the requirements of Sec. 1.468B-1(c), the Internal Revenue Service
will not challenge a reasonable, consistently applied method of taxation as
described in paragraph (b)(1)(i) of this section for transfers to, income earned
by, and distributions made by the fund prior to January 1, 1993. However,
pursuant to paragraph (a) of this section, sections 1.468B-1 through 1.468B-4
apply to transfers to, income earned by, and distributions made by the qualified
settlement fund after 1992. (iii) Use of cash method of accounting. For purposes of
paragraphs (b)(i) and (b)(ii) of this section, for taxable years beginning prior
to January 1, 1996, the Internal Revenue Service will not challenge the use of
the cash receipts and disbursement method of accounting by a fund, account, or trust. (iv) Unreasonable position. In no event is it a reasonable
position to assert, pursuant to Rev. Rul. 71-119 (see Sec. 601.601(d)(2)(ii)(b)
of this chapter), that there is no current taxation of the income of a fund
established after August 16, 1986.
(v) Waiver of penalties. For taxable years beginning prior to
January 1, 1993, if a fund, account or trust is subject to section 468B(g) and
the Internal Revenue Service does not challenge the method of taxation for
transfers to, income earned by, and distributions made by, the fund pursuant to
paragraph (b)(1)(i) or (b)(1)(ii) of this section, penalties will not be imposed
in connection with the use of such method. For example, the penalties under
section 6655 for failure to pay estimated tax, section 6651(a)(1) for failure to
file a return, section 6651(a)(2) for failure to pay tax, section 6656 for
failure to make deposit of taxes, and section 6662 for accuracy-related
underpayments will generally not be imposed.
(2) Election to apply qualified settlement fund rules-
(i) In general. The person that will be the administrator of a
qualified settlement fund may elect to apply Secs. 1.468B-1 through 1.468B-4 to
transfers to, income earned by, and distributions made by, the fund in taxable
years ending after August 16, 1986. The election is effective beginning on the
first day of the earliest open taxable year of the qualified settlement fund.
For purposes of this paragraph (b)(2), a taxable year is considered open if the
period for assessment and collection of tax has not expired pursuant to the
rules of section 6501. The election statement must provide the information
described in paragraph (b)(2)(ii) of this section and must be signed by the
person that will be the administrator. Such person must also provide each
transferor of the qualified settlement fund with a copy of the election
statement on or before March 15, 1993. (ii) Election statement. The election statement must provide
the following information-
(A) A legend, "Sec. 1.468B-5(b)(2) Election," at the top
of the first page; (B) Each transferor's name, address, and taxpayer
identification number;
(C) The qualified settlement fund's name, address, and
employer identification number; and
(D) The date the qualified settlement fund was
established within the meaning of Sec. 1.468B-1(j).
(iii) Due date of returns and amended returns. The election
statement described in paragraph (b)(2)(ii) of this section must be filed with,
and as part of, the qualified settlement fund's timely filed tax return for the
taxable year ended December 31, 1992. In addition, the qualified settlement fund
must file an amended return that is consistent with the requirements of Secs.
1.468B-1 through 1.468B-4 for any taxable year to which the election applies in
which the fund took a position inconsistent with those requirements. Any such
amended return must be filed no later than March 15, 1993, and must include a
copy of the election statement described in paragraph (b)(2)(ii) of this section.
(iv) Computation of interest and waiver of penalties. For
purposes of section 6601 and section 6611, the income tax return for each
taxable year of the qualified settlement fund to which the election applies is
due on March 15 of the year following the taxable year of the fund. For taxable
years of a qualified settlement fund ending prior to January 1, 1993, the income
earned by the fund is deemed to have been earned on December 31 of each taxable
year for purposes of section 6655. Thus, the addition to tax for failure to pay
estimated tax under section 6655 will not be imposed. The penalty for failure to
file a return under section 6651(a)(1), the penalty for failure to pay tax under
section 6651(a)(2), the penalty for failure to make deposit of taxes under
section 6656, and the accuracy-related penalty under section 6662 will not be
imposed on a qualified settlement fund if the fund files its tax returns for
taxable years ending prior to January 1, 1993, and pays any tax due for those
taxable years, on or before March 15, 1993.[T.D. 8459, 57 FR 60994, Dec. 23, 1992]
