Recent years have seen the rise of the irony of all ironies: A handful of insurance company issuers of structured settlement annuities have made forays into the factoring business, usually in the form of offering to commute the very policies they wrote. These commutations generally take the form and appearance of structured settlement factoring transactions, in that they are offers to exchange rights to future payments for a present lump sum paid to the annuitant. The insurers even go through the court approval process. It has long been my opinion that such commutations, no matter how costumed, were in fact “accelerations” as described and prohibited by Internal Revenue Code § 130. I am not a tax specialist by any stretch, but in my opinion, the tax code that provides so great a benefit to settling defendants and insurers is violated when the insurer later commutes the payments, contravening the very documents that establish the structured settlement. Apparent compliance with the federal and state factoring laws does not sanctify this questionable practice.

The National Structured Settlement Trade Association (“NSSTA”) may or may not share this view, but late in 2006 its bylaws were changed to exclude insurers who engage directly in factoring (or commuting) their own policies. Thus, the first shoe dropped.

The second shoe dropped shortly thereafter when Symetra resigned from the NSSTA. Symetra actively solicits its customers to commute their payments, through its subsidiary “Clearscape Funding.”

Coincidence or not, after the NSSTA shined a light on the commutation problem, noted tax lawyer Robert Wood examined the situation and wrote on its tax consequences in his article “Structured Settlements: Factor or Commute?” Although couched in conservative tones, Mr. Wood does reach some interesting conclusions about insurer commutations, concluding that they seem to violate the tax code, and “prudent tax practitioners” should advise their insurer clients to steer clear.

I mentioned that insurers commuting payments was the “irony of all ironies.” Not so many years ago, these very insurers fought long and expensive fights in the courts and legislatures of the United States, attempting to outlaw all factoring. One reason they sought such a ban was the fear that factoring (by a 3rd party) would be considered a de facto acceleration, and therefore would create a tax liability for the insurers. That position was proven false, as clarified by subsequent amendments to the tax code. Now, these same companies are blatantly accelerating and commuting, which, as Mr. Wood says, is “flatly prohibited” by IRC 130.

Ironies aside, perhaps now that the 3rd shoe has dropped, cooler and more prudent heads will prevail.