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The tax implications related to selling or transferring annuity payments to another person, agent or company seems to be the following.  How I see it and I am not a tax advisor or tax professional is this, the laws have been created so that an injury victim (the structured settlement owner) is given an annuity insurance policy that pays periodic payments over time. This would be decided in the injury court case. Payments over time are said to be easier to manage than a large settlement amount. These payments can be monthly, qtrly, yearly, and other. They are not to create a tax burden for the injured, so they are not taxed income. The factoring transaction that has become popular is a transfer of these future payments to someone, agent or company. The injury victim can transfer (sell) these future payments. Now the cost of future money is a classic economic situation. Present value of money, future value of money and discount rate used. These transfer of payments just get sent to another party, the actual annuity (structured settlement) doesn’t change just someone else gets it.

So what is the value of 240 future monthly payments? Payments in the future of any given dollar amount must be calculated. Trying to find this present value and then offering this is called the sale, transaction or payoff, cash in, lump sum. The injury victim is able to sell these future payments of course it comes out to a much lower amount than if the owner waited for every payment for 240 months. Inflation, interest rates and risk among other factors are taken in consideration on offering the lower amount for the transfer. So IRS and the US code have set guidelines how this transaction should happen. These tax guidelines are bypasses if a court order approves the transfer of future payments. If a judge doesn't approve the transfer or it never is taken to a judge, then a 40% tax is due to the purchaser, this I think is to try to eliminate a purchaser that is not seeking court approval to not exploit the annuity owner. Once the annuity is transferred to someone else, it then becomes taxable income and the monthly payments are not exempt anymore from tax. When a factoring company does this transfer and gets it done by a court order the factoring company receives the future payments. Many of these future payments after bought are then sold again or used as a security backed investment. Insurance company issued annuities are considered a very secure and durable fund policy. 

An example of this factoring transaction may be the following: A $100,000.00 structured settlement paid over time to an injury victim by $416.66 a month for 240 months.  To sell all future payments the value today plus court and lawyer fees depending on the state may be an offer of $60,000. If presented to the court in an order, they may approve or not, the judge must act on the best interest of the injured victim. A good factoring company may have the experience to know the level of offer acceptance and what fees are accepted. An inexperienced purchaser may not be able to get a court to approve their offer and fees, thus taking more time to re present and maybe losing more money for time and advisors that get spent again. From IRS website "The purpose of IRC section 5891, is to deter the purchasers of payment rights under structured settlements from taking advantage of recipients who are entitled to receive tax free settlement payments, including payments under settlements received by victims of the 9/11 terrorist attack. The tax is basically a penalty tax imposed on purchasers of payment rights under structured settlements. The practical effect of section 5891 is to compel such purchasers to comply with State structured protection acts (“SSPAs”), which require that transfers of structured settlement payment rights receive advance court (or administrative authority) approval. Absent an appropriate court or administrative authority order, a party acquiring structured settlement payment rights must pay, up front, a tax equal to 40% of its expected gross profit on the transaction (i.e., the difference between the total undiscounted amount of the future payments it acquires and the amount that it pays to acquire them)." 

Does all this make sense to the casual reader? Please send any comments for corrections or clarity.

*IRS References

IRS web site

http://www.irs.gov/businesses/small/article/0,,id=185990,00.html

also

3.11.23.29  (01-01-2009)
Form 8876, Excise Tax on Structured Settlement Factoring Transactions
Form 8876, "Excise Tax on Structured Settlement Factoring Transactions" is used to report and pay an excise tax equal to 40% of the factoring discount imposed under IRC §5891. The excise tax is figured on the excess of the aggregate undiscounted amount of the payments being acquired over the total amount actually paid to acquire them. The Tax Class is 6 and the Document Code is 21.

3.11.23.29.1  (01-01-2009)
Tax Period - Form 8876
The Tax Period is determined by the receipt of the structured settlement payment rights. The date will appear on the line immediately below the form number. Edit this date in "YYMM" format to the left of the OMB number and Expiration Date.

3.11.23.29.2  (01-01-2009)
Received Date - Form 8876
The Form 8876 is due by the later of the 90th day following receipt of structured settlement payment rights. See IRM 3.11.23.12 for "Received Date Editing" procedures.

On July 8th, 2004, the IRS issued final regulations, Treasury Regulation section 157.5891-1, which substantially adopted and replaced the temporary regulation provisions.