26 U.S.C. § 130 — Certain personal injury liability assignments

(a) In general. When someone agrees to take on ("qualified assignment" of) a liability to pay periodic personal-injury damages, and gets paid for agreeing to it, that payment isn't included in their gross income — but only up to the total cost of the "qualified funding assets" they buy to cover the payments. (b) Treatment of qualified funding asset. (1) The tax basis of a qualified funding asset gets reduced by whatever amount was excluded from income under subsection (a) because of buying that asset. (2) If the asset is later sold or disposed of at a gain, that gain counts as ordinary income (not capital gain). (c) Qualified assignment. A "qualified assignment" is an assignment of a liability to make periodic damage payments — whether from a lawsuit, a settlement agreement, or a workers' compensation claim — for personal injury or physical sickness, if (1) the person taking on the liability (the assignee) takes it over from someone who was a party to the suit, agreement, or workers' comp claim, and (2) (A) the periodic payments are fixed and set as to amount and timing, (B) the person receiving the payments can't speed them up, delay them, increase them, or decrease them, (C) the assignee's obligation is no bigger than what the original party owed, and (D) the payments would qualify as tax-excludable under section 104(a)(1) or (2). When figuring out, for tax purposes, when the recipient is treated as having gotten a payment under a qualified assignment, any part of the assignment giving the recipient rights better than an ordinary creditor's rights gets ignored. (d) Qualified funding asset. A "qualified funding asset" is an annuity contract from a state-licensed insurance company, or a U.S. government obligation, if (1) the assignee uses it to fund the periodic payments under the qualified assignment; (2) the payment schedule under the contract or obligation reasonably matches the schedule of payments owed under the assignment, and each payment under the contract or obligation isn't bigger than the payment it's meant to cover; (3) the taxpayer formally designates the contract or obligation, in the way the Secretary's regulations require, as being used for this section for that assignment; and (4) the taxpayer buys the contract or obligation no more than 60 days before, and no more than 60 days after, the date of the qualified assignment.