Internal Revenue Code, Section 104(a)

Compensation for Injuries or Sickness
This section of the IRS Code allows claimants to exclude from their gross income monies received for personal injuries or sickness whether by suit or agreement and whether as lump sums or periodic payments. The Periodic Payments Act of 1982 amended this section to allow the recipient to exclude from gross income all of the payments from a suit or agreement, whether paid all at once or in the future.

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Internal Revenue Code, Section 104(a)

In General - Except in the case of amounts attributable to (and not in excess of) deductions allowed under section 213 (relating to medical, etc., expenses) for any prior taxable year, gross income does not include -

  1. amounts received under workmen's compensation acts as compensation for personal injuries or sickness;
  2. the amount of any damages received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal injuries or sickness;
  3. amounts received through accident or health insurance for personal injuries or sickness (other than amounts received by an employee, to the extent such amounts (A) are attributable to contributions by the employer which were not includible in the gross income of the employee, or (B) are paid by the employer);
  4. amounts received as a pension, annuity, or similar allowance for personal injuries or sickness resulting from active service in the armed forces of any country or in the Coast and Geodetic Survey or the Public Health Service, or as a disability annuity payable under the provisions of section 808 of the Foreign Service Act of 1980; and
  5. amounts received by an individual as disability income attributable to injuries incurred as a direct result of a violent attack which the Secretary of State determines to be a terrorist attack and which occurred while such individual was an employee of the United States engaged in the performance of his official duties outside the United States.

For purposes of paragraph (3), in the case of an individual who is, or has been, an employee within the meaning of section 401(c)(1) (relating to self-employed individuals), contributions made on behalf of such individual while he was such an employee to a trust described in section 401(a) which is exempt from tax under section 501(a), or under a plan described in section 403(a), shall, to the extent allowed as deductions under section 404, be treated as contributions by the employer which were not includible in the gross income of the employee. Paragraph (2) shall not apply to any punitive damages in connection with a case not involving physical injury or physical sickness.

Internal Revenue Code, Section 130

Certain Personal Injury Liability Agreements
This section of the IRS Code permits the amount of money used to purchase an annuity or government obligation to fund payments of a settlement agreement for a personal injury suit to be excluded from the assignee's gross income.

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Internal Revenue Code, Section 130

In General - Any amount received for agreeing to a qualified assignment shall not be included in gross income to the extent that such amount does not exceed the aggregate cost of any qualified funding assets.

Treatment of Qualified Funding Asset In the case of any qualified funding asset -

  1. the basis of such asset shall be reduced by the amount excluded from gross income under subsection (a) by reason of the purchase of such asset, and
  2. any gain recognized on a disposition of such asset shall be treated as ordinary income.

Qualified Assignment
For purposes of this section, the term "qualified assignment" means any assignment of a liability to make periodic payments as damages (whether by suit or agreement), or as compensation under any workmen's compensation act, on account of personal injury or sickness (in a case involving physical injury or physical sickness) -

  1. if the assignee assumes such liability from a person who is a party to the suit or agreement, or the workmen's compensation claim, and
  2. if -
    (a) such periodic payments are fixed and determinable as to amount and time of payment,
    (b) such periodic payments cannot be accelerated, deferred, increased, or decreased by the recipient of such payments,
    (c) the assignee does not provide to the recipient of such payments rights against the assignee which are greater than those of a general creditor,
    (d) the assignee's obligation on account of the personal injuries or sickness is no greater than the obligation of the person who assigned the liability, and
    (e) such periodic payments are excludable from the gross income of the recipient under paragraph (1) or (2) of section 104(a).

For purposes of this section, the term "qualified funding asset" means any annuity contract issued by a company licensed to do business as an insurance company under the laws of any State, or any obligation of the United States, if -

  1. such annuity contract or obligation is used by the assignee to fund periodic payments under any qualified assignment,
  2. the periods of the payments under the annuity contract or obligation are reasonably related to the periodic payments under the qualified assignment, and the amount of any such payment under the contract or obligation does not exceed the periodic payment to which it relates,
  3. such annuity contract or obligation is designated by the taxpayer (in such manner as the Secretary shall by regulations prescribe) as being taken into account under this section with respect to such qualified assignment, and
  4. such annuity contract or obligation is purchased by the taxpayer not more than 60 days before the date of the qualified assignment and not later than 60 days after the date of such assignment.

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