Market Based Structures and §130's Fixed and Determinable Requirement

A structure enables a Defendant/Payor to be released of the obligation of future periodic payments to a Payee. An Assignment Agreement is executed which assigns that obligation to a third party. Whether the structure involves a qualified or non-qualified assignment, the Agreement will include language from IRC §130[1].

A non-qualified assignment involves a structure that is not related to a personal injury or sickness as described in §130(c) and is not excludable from the gross income of the recipient under §104(a). Even when an assignment is “non-qualified,” the Assignment Agreement still references portions of §130(c)[2] to negate constructive receipt issues. (see Childs[3])

Market based structures are able to comply with §130’s requirement that “periodic payments [be] fixed and determinable as to amount and time of payment.”[4] How do market based payments satisfy this requirement when they fluctuate with the market? To answer this question, we look to the Service’s definition of “fixed” and “determinable.”

Fixed means the Assignee’s obligation to make the periodic payment is fixed with finality by the terms of the settlement agreement.

Determinable means that there is an objective basis for calculating the amount and time of the periodic payments.

The “fixed and determinable” requirement is met by converting the structure funding amount into units. Units make it possible to calculate an objective basis for the time and amount of pre-determined payments. The obligation to make the unit payments are “fixed with finality.” By entering into an Assignment Agreement, the obligation to make the future periodic payments is transferred from the Defendant/Payor to a third party. Payments in units squarely fit within the definition of “fixed and determinable” and therefore meet that requirement of §130.

[1] 26 U.S.C.A. § 130 (West)

[2] Specifically the language from §130(c)(2)(A), (B), and (C)

[3] Attorney lacked the requisite control to take constructive receipt of his attorney fees.

[4] 26 U.S.C.A. § 130(c)(2)(A) (West) (emphasis added)