What happens if a litigant obtains a judgment in a lawsuit, and then assigns that judgment to a third party before it is paid? The assignment of income doctrine generally provides that an assignor of a right to income will generally be taxable on the income when it is received by the transferee, even if the transferor no longer has any rights to the income. Does this mean the litigant under the above facts will be taxable when the transferee of his or her judgment gets paid by the defendant (assuming that the damages received are otherwise taxable)?
A recent private letter ruling reviewed existing case law on the subject. It summarized the law to be that a transferor who makes an effective transfer of a claim in litigation to a third person before the time of the expiration of appeals in the case is not required to include the proceeds of the judgment in income under the assignment of income doctrine because such claims are contingent and doubtful in nature. If the transfer is made after the appeals are done, then the assignment is no longer contingent and the assignment of income doctrine will apply.
Interestingly, in the ruling request, the assignment of the judgment was contingent on the issuance by the IRS that the assignment of income doctrine did not apply, so long as the ruling was issued before a final settlement of the lawsuit or the expiration of the appeals period. Thus, the ruling had to be issued while recovery was still contingent, and thus the IRS ruled that assignment of income did not apply. If the ruling could be issued after the expiration of the appeals period, then the assignment could be effective after it ceased to be contingent, and thus presumably in that circumstance the assignment of interest doctrine could apply. The result also did not change even though a portion of the judgment would be applied to the payment of attorneys fees.