Tax Type
Fiduciary Income Tax
Description
Resident Estates and Trusts; Defined; Litigation Settlement Fund
Topic
Estates and Trusts
Date Issued
11-05-1992
November 5, 1992
Re: Request for Ruling; Litigation Settlement Funds
Dear*****************
This will reply to your letter of February 1, 1991, in which you request a ruling as to the tax compliance and information reporting responsibilities of a litigation settlement fund.
FACTS
Monies resulting from the favorable resolution of a plaintiff class action either through trial or a settlement agreement are paid by a defendant to a litigation settlement fund ("Fund"). The monies paid are not distributed until each potential claimant can be certified as a member of the beneficiary class and an equitable allocation formula is created, both subject to court approval. The distribution to the beneficiaries may occur one or two years after a Fund receives the monies from the defendant.
After the Tax Reform Act of 1986, which added Internal Revenue Code (IRC) §468B, a Fund was recognized as a taxpayer. A Fund awaiting distribution is deemed subject to current income taxation. You assume a Fund is taxable in a manner similar to a complex trust and pose a series of questions based on this assumption. Your questions are based on an example set of facts (copy attached) and focus on determining the residence of a Fund and Virginia's tax compliance requirements.
RULING
Based on the information provided in the example set of facts, the residence of the Fund would be State T, the state where the court which ordered the settlement agreement final is located. It was the court's order which established the litigation settlement fund as an entity, separate from the defendants and the beneficiaries.
Under Virginia Regulation (VR) 630-5-302, the definition of a resident trust includes a trust being administered in Virginia. One manner in which a trust is administered in Virginia is if it is under the supervision of a Virginia court. Therefore, if the court which establishes a Fund is a Virginia court, a Fund is considered a Virginia resident trust.
If a Fund is a Virginia resident trust, it is required to file a Virginia fiduciary income tax return (Form 770) if either: (1) it is required to file a federal income tax return for the taxable year, or (2) it has any Virginia taxable income for the taxable year. Virginia taxable income is a Fund's federal taxable income for the taxable year, modified by the Fund's share of the Virginia fiduciary adjustment. The Virginia return must be accompanied by a copy of the federal fiduciary tax return and the accompanying schedules filed for the same taxable year. The return is due on May 1 of each year for fiduciaries filing on a calendar year basis; returns for a fractional part of a year are due on or before the 15th day of the fourth month after the close of the taxable year. See Va. Code §58.1-381.
If a Fund is a nonresident trust, it is required to file a Virginia fiduciary income tax return if it has Virginia taxable income for the taxable year. Virginia taxable income of a nonresident Fund is its share of income, gain, loss and deduction attributable to Virginia sources. See Virginia Regulation (VR) 630-5-362 and 6305-363. The Virginia return must be accompanied by a copy of the federal fiduciary return and the accompanying schedules filed for the same taxable year. The due dates for the nonresident return are the same as those for a resident return.
Proposed federal regulations: The Internal Revenue Service (IRS) has issued proposed regulations under IRC §468B. The regulations, proposed to be effective January 1, 1993, provide a single set of rules for the taxation of designated settlement funds and certain funds, accounts, or trusts called qualified settlement funds (QSFs). Under the proposed regulations, a QSF is treated as a corporation for procedural and administrative purposes, and any tax imposed on the fund's income is treated as a tax imposed under IRC §11 (corporate income tax). The corporate treatment extends to information and tax returns, the time and place for tax payments, and assessments and collections. Under VR 630-3-302, the definition of "corporation" includes any entity subject to corporation income taxes under the Internal Revenue Code. Accordingly, if a QSF is treated as a corporation for federal purposes, it will be treated similarly for Virginia purposes.
If you have any further questions, please contact the department.
Sincerely,
W. H. Forst
Tax Commissioner
OTP/4925F
Rulings of the Tax Commissioner