Court-approved settlement trust qualifies as a qualified settlement fund

Plain-English summary

A court approved a statutory trust to help resolve product-related claims against manufacturers and distributors. The trust receives a stated share of settlement payments through a separate administrative trust, remains under the court's jurisdiction, and will distribute any remaining assets only to the beneficiaries. The IRS ruled that the trust is a qualified settlement fund because it was court approved, resolves claims arising from alleged torts and legal violations, and is a trust under state law. It also ruled that settlement payments transferred through the administrative trust may be excluded from the fund's modified gross income. That exclusion depends on the representation that the payments are not dividends, related-party debt interest, or compensation for late or delayed transfers.

Ruling snapshot

• Question: Does the court-approved trust qualify as a qualified settlement fund, and may it exclude the transferred settlement payments from modified gross income?
• Outcome: Approved for both requested rulings
• Key authorities: IRC §§ 61, 468B(g); Treas. Reg. §§ 1.468B-1, 1.468B-2

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202446003 [Third Party Communication:
Release Date: 11/15/2024 Date of Communication: Month DD, YYYY]
Index Number: 468B.01-00
Person To Contact:
------------------------------------------------------------ ---------------------, ID No. -----------------
----------------------------------------- Telephone Number:
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--------------------- Refer Reply To:
----------------------------------- CC:ITA:B06
PLR-102711-24
Date:
August 06, 2024

Legend:
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Trust 1 = --------------------------------------------------------------------
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Product Z = ----------
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Activities = -------------------------------------------------------
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Date 1 = -------------------------------------------------------------------------------
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Court = -------------------------------------------------------------------------------
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Beneficiaries = ---------------------------------------------
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Date 2 = -------------------------------------------------------------------------------
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Trust Y = --------------------------------------------------------------------------
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Date 3 = -------------------------------------------------------------------------------
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Defendants = -----------------------------------------------------------
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Date 4 = -------------------------------------------------------------------------------
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Date 5 = -------------------------------------------------------------------------------
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State = -------------------------------------------------------------------------------

PLR 102711-24 2

Special Master = -------------------------------------------------------------------------------
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Percentage 1 = --------------
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Percentage 2 = --------------

Dear ----------------------------------------------------------------------:

This letter responds to your letter dated January 30, 2024, and supplemented by
correspondence dated June 14, July 26 and August 1, 2024, submitted on behalf of
Trust 1, requesting certain rulings concerning the application of various sections of the
Internal Revenue Code and the Income Tax Regulations to Trust 1. Specifically, you
requested the following rulings:

1. Trust 1 is a qualified settlement fund under § 1.468B-1(c); and

2. Trust 1 may exclude under § 1.468B-2(b)(1) from its modified gross income the
   assets received or to be received.

A taxpayer conference of right was held on May 20, 2024.

FACTS

Various plaintiffs filed actions against manufacturers and distributors of Product Z
alleging a variety of claims regarding the defendants’ Activities of Product Z. The claims
included public nuisance, negligence, civil conspiracy, fraud, products liability, unfair or
deceptive trade practices, false advertising, and other violations. Collectively, these
claims are referred to as the Liabilities. On Date 1, all Product Z-related litigation
pending in U.S. federal courts was transferred to the Court for consolidated pretrial
proceedings. Plaintiffs included Beneficiaries.

On Date 2, the Court ordered that Trust Y be established to aid in the administration of
settlements between plaintiffs and defendants. Trust Y is not part of this ruling. On
Date 3, Defendants and Trust 1 entered into a Master Settlement Agreement (MSA)
contingent on acceptance of the MSA by a minimum number of Beneficiaries. On Date
4, the MSA was approved by the Court, and Trust 1’s trust agreement was ordered to
be established as a qualified settlement fund within the meaning of § 1.468B-1. On
Date 5, Trust 1 was formed as a State statutory trust. The MSA and the payments from
Defendants to Trust Y resolved the Liabilities with respect to Beneficiaries’ claims
against Defendants with respect to Product Z.

Pursuant to the Court’s order, Special Master was appointed as Trust Y’s trust
administrator and is authorized to receive the payments under the MSA. Under the
MSA, Defendants make payments to Trust Y, and Special Master transfers Percentage

PLR 102711-24 3

1 of the funds to Trust 1. The remaining Percentage 2 of the funds are set aside for a
separate attorney fee fund to pay attorneys’ fees and litigation costs. Trust 1 and Trust
Y both remain subject to the ongoing jurisdiction of the Court.

Under Trust 1’s trust agreement, the trustees may invest and reinvest the principal and
income of Trust 1. The transfer of funds from Trust Y to Trust 1 does not represent
dividends on stock of a transferor (or related person), interest on debt of a transferor (or
a related person), or payments in compensation for late or delayed transfers.

Upon dissolution, any assets remaining in Trust 1 will be distributed only to the
Beneficiaries in accordance with Trust 1’s trust agreement. The Beneficiaries do not
retain any ownership or residual interest in the assets of Trust 1 nor any proceeds from
those assets, nor investment income from those assets.

Trust 1 uses the cash receipts and disbursements method of accounting and a taxable
year that ends on December 31.

RULINGS REQUESTED:

 1. Trust 1 is a qualified settlement fund under § 1.468B-1(c); and

 2. Trust 1 may exclude under § 1.468B-2(b)(1) from its modified gross income the
    assets received or to be received.

LAW & ANALYSIS

1. Trust 1’s Status as a Qualified Settlement Fund under § 1.468B-1(c)

Section 468B(g)(1) provides that “[n]othing in any provision of law shall be construed as
providing that an escrow account, settlement fund, or similar fund is not subject to
current income tax.” Section 468B(g)(1) authorizes the issuance of regulations
providing for the taxation of any such account or fund whether as a grantor trust or
otherwise. Sections 1.468B-1 through 1.468B-5 regarding qualified settlement funds
were issued pursuant to § 468B(g).

Section 1.468B-1(a) provides that a qualified settlement fund is a fund, account, or trust
that satisfies the three requirements of § 1.468B-1(c). First, § 1.468B-1(c)(1) requires
that the fund, account, or trust is established pursuant to an order of, or it is approved
by, the United States, any state (including the District of Columbia), territory,
possession, or political subdivision thereof, or any agency or instrumentality (including a
court of law) of any of the foregoing and is subject to the continuing jurisdiction of that
governmental authority. Second, § 1.468B-1(c)(2) requires that the fund, account, or
trust is established to resolve or satisfy one or more contested or uncontested claims
that have resulted or may result from an event (or related series of events) that has
occurred and that has given rise to at least one claim asserting liability (i) under the

PLR 102711-24 4

Comprehensive Environmental Response, Compensation and Liability Act of 1980; (ii)
arising out of a tort, breach of contract, or violation of law; or (iii) designated by the
Commissioner in a revenue ruling or revenue procedure. Third, § 1.468B-1(c)(3)
provides that the fund, account, or trust must be a trust under applicable state law, or its
assets must be otherwise segregated from other assets of the transferor (and related
persons).

Based on the facts represented by Trust 1, the three requirements of § 1.468B-1(c) are
satisfied, and as such, Trust 1 is a qualified settlement fund for federal income tax
purposes. First, the Court entered an order approving the establishment of Trust 1, and
Trust 1 remains subject to the continuing jurisdiction of the Court. See § 1.468B-1(c)(1).
Second, Trust 1 was established to resolve or satisfy claims of the Beneficiaries that
arose from the Defendants’ Activities regarding Product Z that have given rise to the
Liabilities. See § 1.468B-1(c)(2). Third, Trust 1 was organized as a trust under
applicable state law. See § 1.468B-1(c)(3).

2. Transferred Funds Excluded from Modified Gross Income under § 1.468B-2(b)(1)

Section 61(a) provides that gross income means all income from whatever source
derived.

Section 1.468B-2(a) provides that a qualified settlement fund is a United States person
and is subject to tax on its modified gross income for any taxable year at a rate equal to
the maximum rate in effect for that taxable year under § 1(e).

Section 1.468B-2(b) provides that the term modified gross income means “gross
income,” as defined in § 61, computed with certain modifications.

Under § 1.468B-2(b)(1), amounts transferred to the qualified settlement fund by, or on
behalf of, a transferor to resolve or satisfy a liability for which the fund is established are
excluded from gross income. However, dividends on stock of a transferor (or a related
person), interest on debt of a transferor (or a related person), and payments in
compensation for late or delayed transfers, are not excluded from gross income.

Trust 1 was established to resolve or satisfy claims of the Beneficiaries that arose from
the Defendants’ Activities of Product Z. The transfers of funds from Trust Y were and
will be made to resolve or satisfy the related Liabilities. Such transfers were or will be
made by the Defendants to Trust 1 through Trust Y in accordance with the MSA. As
represented by Trust 1, none of the transfers of funds fall within the three specific
exceptions to the general provision in § 1.468B-2(b)(1) that excludes transfers into Trust
1 from the Trust 1's gross income.

Accordingly, based on the information submitted and representations made, we
conclude that Trust 1 may exclude the transfers of funds from Trust Y from its gross
income under § 1.468B-2(b)(1).

PLR 102711-24 5

The rulings contained in this letter is based upon information and representations
submitted by or on behalf of Trust 1 and accompanied by a penalty of perjury statement
executed by an individual with authority to bind Trust 1 and upon the understanding that
there will be no material changes in the facts. While this office has not verified any of
the material submitted in support of the request for this ruling, it is subject to verification
on examination. The Associate office will revoke or modify a letter ruling and apply the
revocation retroactively if there has been a misstatement or omission of controlling
facts; the facts at the time of the transaction are materially different from the controlling
facts on which the ruling was based; or, in the case of a transaction involving a
continuing action or series of actions, the controlling facts change during the course of
the transaction. See section 11.05 of Rev. Proc. 2024-1, 2024-1 I.R.B. 1.

No opinion is expressed concerning the federal tax consequences under any Code
provision other than the provisions specifically cited above. Except as expressly
provided herein, no opinion is expressed or implied concerning the tax consequences of
any aspect of any transaction or item discussed or referenced in this letter. This ruling
concerns only the federal income tax treatment of Trust 1's income and may not be
cited or relied upon by any other taxpayer, including Trust 1's beneficiaries.

This ruling is directed only to Trust 1 as the taxpayer requesting it. Section 6110(k)(3)
provides that it may not be used or cited as precedent.

A copy of this letter must be attached to any income tax return to which it is relevant.

In accordance with the power of attorney on file with this office, a copy of this letter is
being sent to Trust 1's authorized representative.

                                    Sincerely,


                                    ANNA W. GLEYSTEEN
                                    Senior Technician Reviewer, Branch 6
                                    Office of Associate Chief Counsel
                                    (Income Tax & Accounting)

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