26 U.S.C. § 468B — Special rules for designated settlement funds

(a) In general For purposes of section 461(h) (economic performance), a taxpayer is treated as having economically performed as it makes qualified payments to a designated settlement fund. (b) Taxation of designated settlement fund (1) In general: a designated settlement fund's gross income is taxed each year at a rate equal to the highest rate in effect that year under section 1(e). (2) Certain expenses allowed: for that tax, gross income is reduced by administrative costs (including state and local taxes) and other incidental expenses of the fund — like legal, accounting, and actuarial expenses — that are tied to running the fund and that would be deductible in figuring a corporation's taxable income; no other deduction is allowed to the fund. (3) Transfers to the fund: for a qualified payment made to the fund, (A) the payment is not treated as the fund's income, (B) the fund's basis in any property that makes up the payment equals that property's fair market value when paid, and (C) the fund is treated as owning that property (and any earnings on it). (4) Tax in lieu of other taxation: this tax replaces any other tax on the income from the fund's assets. (5) Coordination with subtitle F: for that subtitle, the fund is treated as a corporation, and this tax is treated as the tax imposed by section 11. (c) Deductions not allowed for transfer of insurance amounts No deduction is allowed for a taxpayer's qualified payment of amounts it received from settling an insurance claim, to the extent those amounts were excluded from the taxpayer's gross income. (d) Definitions (1) Qualified payment: money or property transferred to a designated settlement fund under a court order, except (A) any amount that could be transferred back to the taxpayer (or a related person), or (B) a transfer of the taxpayer's own stock or debt. (2) Designated settlement fund: a fund that (A) is set up under a court order and completely ends the taxpayer's tort liability for the claims described in (D); (B) can receive only qualified payments; (C) is run mostly by people independent of the taxpayer; (D) exists mainly to resolve current and future claims against the taxpayer (or a related or formerly related person) arising from personal injury, death, or property damage; (E) does not let the taxpayer (or a related person) hold any beneficial interest in the fund's income or principal; and (F) is one the taxpayer has elected this treatment for — the election is made when and how Treasury regulations require, and once made can be revoked only with the Secretary's consent. (3) Related person: has the meaning given in section 267(b). (e) Nonapplicability of section This section (other than subsection (g)) does not apply to a taxpayer's liability under any workers' compensation law, or to a "contested liability" as defined in section 461(f). (f) Other funds Except as regulations provide, a payment for a liability described in (d)(2)(D) that is not covered by (e), made to a trust or escrow fund that is not a designated settlement fund, does not count as economic performance. (g) Clarification of taxation of certain funds (1) In general: except as (2) provides, no law should be read as saying an escrow account, settlement fund, or similar fund is not subject to current income tax; the Secretary must write regulations taxing such an account or fund, whether as a grantor trust or otherwise. (2) Exemption from tax for certain settlement funds: such a fund is treated as owned by the United States, and is exempt from tax, if (A) it is set up under a consent decree entered by a United States District Court judge; (B) it is created to receive settlement payments, as directed by a government entity, solely to resolve claims of liability under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980; (C) that government entity controls how the fund's money — including contributions and any earnings — is spent; and (D) when the fund ends, any money left over goes to that government entity for lawful use. "Government entity" means the United States, any State or one of its political subdivisions, the District of Columbia, any U.S. possession, and any agency or instrumentality of any of these.