Document Type
Article
Publication Date
2025
Abstract
This article shows how tax law has long subsidized tortfeasors, often to the detriment of victims. Changes in the 1980s reduced the tortfeasor subsidy but did not eliminate it. The article shows how various changes which purported to help victims have, in practical terms, helped tortfeasors.
The article first covers the pre-1985 tax history of making torts profitable. The resulting financial incentives triggered multiple legal changes, which the article outlines prior to covering them in depth. The statutory issues involve Internal Revenue Code sections 104 (allowing victims to exclude personal physical injury payments from income); 130 (purporting to facilitate structured settlements to help victims); 461(h)(2)(C) (purporting to defer deductions for tortfeasors); and 468B (purporting to facilitate structured settlements to help victims).
The body of the article starts with a discussion of the Supreme Court's unfortunate 1981 decision in Norfolk & W. Ry. Co. v. Liepelt, which purported to remove a victim subsidy but, in practical terms, created a tortfeasor subsidy. Unfortunately, the Liepelt doctrine continues to spread.
The article then demonstrates how sections 130, 461(h), and 468B each fail to accomplish their intended goal of aiding victims or of removing tortfeasor subsidies. The article shows how, in practical terms, each provision, contrary to common wisdom, hurts victims and helps tortfeasors.
In conclusion, the article suggests simple statutory changes which would eliminate tortfeasor subsidies. Congress and state legislatures should statutorily remove the Liepelt "net-of-tax" computation. Congress should amend section 104 to eliminate the exclusion for lost wages. Congress should amend section 416(h) to permit an accrued deduction for the present value of tort obligations. Congress should combine sections 130 and 468B into a single provision that facilitates a tortfeasor deduction for a present value payment to a settlement fund. This fund should retain a cost basis in an annuity funding payment to victims. With these simple changes, Liepelt and sections 104, 130, 461, and 468B will function as apparently intended by eliminating favoritism toward tortfeasors while actually helping victims. As a result, their practical unintended tortfeasor subsidies will disappear.
Recommended Citation
Steven J. Willis, Taxing Torts Today and Tomorrow, 92 Tenn. L. Rev. 817 (2025).