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WHAT IS CONSTRUCTIVE RECEIPT?

An understanding of the income tax doctrine of constructive receipt is on critical importance to maintaining the tax-free status of a structured settlement. In order for a plaintiff to receive the future payments from a structured settlement income tax-free, the plaintiff must not have been in constructive receipt of the money used to fund the structured settlement.

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Constructive receipt is the issue faced in attempting to determine when payments are to be recognized as income. Internal Revenue Code Section 451(a) states essentially that income is taxable (for cash basis taxpayers) in the year within which it is either actually or constructively received. Treasury Regulation 1.451-2(a) clarified the definition of constructive receipt when it stated that,

"... Income although not actually reduced to a taxpayer's possession is constructively received by him in the taxable year during which it is credited to his account, set apart for him, or otherwise made available so that he may draw upon it at anytime, or so that he could have drawn upon it during the taxable year if notice of intention to withdraw had been given. However, income is not constructively received if the taxpayer's control of its receipt is subject to substantial limitations or restrictions."
Therefore, generally speaking, a plaintiff will not be deemed to be in constructive receipt of funds if he only has the right to receive the future structured payments and the payments cannot be modified or accelerated by the plaintiff. The income tax exclusion which is fully intended to be available to a plaintiff in wrongful death, personal injury or sickness cases can be achieved by following the principles:

  • The structured settlement payments must be fixed and determinable as to the amount and time of each payment. The plaintiff must not have the right to accelerate, increase, or decrease the structured settlement payments.

  • The plaintiff should be entitled to only each structured settlement payment as it becomes due.

  • The plaintiff must not be entitled to be designated as the owner of the structured settlement, as this would be evidence of ownership.
Does knowledge of the cost of a structured settlement constitute constructive receipt?

Unequivocally NO! For more than 20 years, there has been the common fallacy that mere knowledge, by the plaintiff, of the cost of a structured settlement, would constitute constructive receipt. In 1983, the IRS issued Private Letter Ruling 83-33035, which affirmed that disclosure of the cost of a structured settlement does not constitute constructive receipt. Furthermore, the ruling stated "... knowledge is not the determinative in deciding a question of constructive receipt, but that unqualified availability is decisive."

Sample Constructive Receipt Scenarios

The plaintiff attorney accepts and places the settlement check in his/her trust account and then proceeds to purchase a structured settlement that will generate future payments to the plaintiff.

This IS constructive receipt.

The case has survived the appellate process and a final verdict from which there is no appeal has been rendered. A structured settlement proposal is presented and accepted.

This IS constructive receipt.

The plaintiff attorney agrees, verbally, to a specific dollar value to settle a case. Subsequent to this verbal agreement the defense presents a structured settlement of equal value, which is accepted fully executed.

This is NOT constructive receipt.

Agreement has been reached and the funds have been placed into a 468(b)(1), qualified settlement fund.

This is NOT constructive receipt.

The plaintiff attorney designs their own structured settlement proposal or alters a defense structured settlement proposal to meet the unique needs of his client.

This is NOT constructive receipt.

The case has gone to the jury, a verdict has been rendered and the defendant is either considering an appeal or has appealed the verdict. During this period, settlement negotiations continue and subsequently a structured settlement proposal is presented and accepted.

This is NOT constructive receipt.