Stephenson et al
Filing
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OPINION AND ORDER reversing Bankruptcy Court's order sustaining Trustee's objections to Appellants' claimed exemptions. Signed by District Judge Mark A. Goldsmith. (DPer)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
IN THE MATTER OF
DANIEL E. STEPHENSON and
JANET L. STEPHENSON and
Debtors-Appellants.
Case No. 11-cv-10848
Hon. Mark A. Goldsmith
______________________________/
Opinion and Order Reversing Bankruptcy Court’s Order Sustaining Trustee’s Objections
to Appellants’ Claimed Exemptions
I. Introduction
This is an appeal from a final judgment of the United States Bankruptcy Court for the
Eastern District of Michigan.1 Appellants Daniel and Janet Stephenson jointly filed for Chapter
7 bankruptcy protection on August 23, 2010.
In their bankruptcy disclosure, Appellants
disclosed three individual retirement accounts inherited from Janet Stephenson’s mother upon
her death in 2008 (the “inherited IRAs”). Appellants sought to exempt these accounts from the
bankruptcy estate pursuant to 11 U.S.C. § 552(d)(12), which provides exemptions for “retirement
funds to the extent that those funds are in a fund or account that is exempt from taxation under
section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986.”
On October 29, 2010, the Trustee, K. Jin Lim, objected to the exemption, arguing that (i)
the accounts in question are not “retirement funds” covered by § 552(d)(12), and (ii) the accounts
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The Court has jurisdiction to hear appeals from a final judgment of the United States
Bankruptcy Court pursuant to 28 U.S.C. § 158(a)(1).
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are not “exempt from taxation” under the listed sections of the tax code. In a response dated
February 4, 2011 to Trustee’s reply brief dated January 18, 2011, Appellants argued that a
majority of courts have held that inherited IRAs are exempt from the bankruptcy estate because
funds from such accounts retirement funds are tax exempt pursuant to § 408 of the Internal
Revenue Code (“IRC”). Following additional briefing, the Bankruptcy Court held a hearing on
the matter on February 22, 2011.
The Bankruptcy Court agreed with the Trustee and found in an oral pronouncement and a
subsequent written order that the inherited IRAs were not exempt under § 552(d)(12) (R. 10, 13).
The Bankruptcy Court granted Appellants’ oral motion to stay the turnover of the inherited IRAs
to the Trustee pending this appeal (R. 12). Appellants filed a notice of appeal March 3, 2011
(Dkt. 1). Both parties have filed briefs on appeal, and the Court held a hearing on the matter on
November 3, 2011.
For the reasons that follow, the Court reverses the decision of the
Bankruptcy Court and remands the case for further proceedings consistent with this Opinion and
Order.
II. Standard of Review
This matter on appeal deals solely with issues of law; accordingly, the Court reviews the
Bankruptcy Court’s decision de novo. In re Hurtado, 342 F.3d 528, 531 (6th Cir. 2003).
III. Discussion
The Bankruptcy Code allows a debtor to exempt certain property from the bankruptcy
estate. 11 U.S.C. § 522. Exemptions are to be construed by courts liberally in favor of the
debtor, and the burden is on objecting parties to prove that an exemption is not validly claimed.
Menninger v. Schramm (In re Schramm), 431 B.R. 397, 400 (B.A.P. 6th Cir. 2010). The
exemption at issue is the retirement fund exemption provided under § 552(d)(12), quoted in full
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above. This section requires a two-pronged analysis in determining whether an account contains
exempt funds:
First, the Court must determine whether the funds are “retirement funds.”
Second, if the funds are retirement funds, the Court must determine whether the
funds are exempt from taxation under the applicable provisions of the Internal
Revenue Code.
In re Chilton, 426 B.R. 612, 616 (Bankr. E.D. Tex. 2010), rev’d, 444 B.R. 548 (E.D. Tex. 2011).
Whether an inherited IRA satisfies these two prongs has been the subject of substantial
litigation in a number of jurisdictions, and the Bankruptcy Court acknowledged a split in the case
law in issuing its opinion. Feb. 22, 2011 Hearing Transcript at 4 (Rec. 10). There is no
controlling authority in the Sixth Circuit on point, but the parties have sufficiently described the
holdings of various other courts addressing these matters. See Doeling v. Nessa (In re Nessa),
426 B.R. 312 (8th Cir. BAP 2010) (exemption applies to inherited IRAs); In re Chilton, 426 B.R.
612 (Bankr. E.D. Tex. 2010) (inherited IRAs are not akin to traditional IRAs and are not
exempt); In re Kuchta, 434 B.R 837 (Bankr. N.D. Ohio 2010) (following Nessa); In re Tabor,
433 B.R. 469 (Bankr. M.D. Pa. 2010) (following Nessa); In re Weilhammer, 2010 WL 3431465
(Bankr. S.D. Cal. 2010) (following Nessa); In re Thiem, 443 B.R 832 (Bankr. D. Ariz. 2011)
(following Nessa); In re Clark, 450 B.R. 858 (Bankr. W.D. Wis. 2011) (following Chilton);
Chilton v. Moser (In re Chilton), 444 B.R. 548 (E.D. Tex. 2011) (reversing previous Chilton
decision and following Nessa and its progeny).2
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Several of these cases analyzed a related section of the Bankruptcy Code, § 522(b)(3)(C),
which concerns federal exemptions for debtors who are otherwise claiming exemptions pursuant
to state law, rather than § 522(d)(12), which concerns debtors, who – as in the instant case –
claim exemptions solely under federal law. Nevertheless, these cases have noted that the
exemptions provided in the two sections are identical, and thus the same analysis applies in
determining whether an inherited IRA may be exempted. See, e.g., Kuchta, 434 B.R. at 843844; Weilhammer, 2010 WL 3431465 at *4.
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In reaching its decision sustaining the Trustee’s objections, the Bankruptcy Court
primarily relied on one of these cases, In re Chilton, from the United States Bankruptcy Court for
the Eastern District of Texas:
I do find the In re Chilton case to be an incredibly well-reasoned decision walking
through all the sections of the Code. In fact, I almost just adopted an opinion that
said see In re Chilton, but I felt it might be helpful to an appellate court to have a
little bit more discourse on the subject. I’m just going to issue a ruling that says
for the reasons set forth on the record, the trustee’s objection to exemptions is
granted.
Hearing Transcript at 14. In support of their argument that the Bankruptcy Court was wrong to
rely on Chilton, Appellants note that that case was subsequently reversed on appeal by the
United States District Court for the Eastern District of Texas, after the Bankruptcy Court issued
its opinion. Chilton v. Moser (In re Chilton), 444 B.R. 548 (E.D. Tex. 2011). Further, argue
Appellants, all other cases that addressed whether inherited IRAs are exempt under federal
bankruptcy law, with the exception of In re Clark, have concluded that such accounts are indeed
exempt.3 The Trustee maintains that the Chilton bankruptcy court ruling and the Bankruptcy
Court below were correctly reasoned.
In light of the weight of persuasive authority, the Eastern District of Texas’s reversal of
Chilton, and a recent ruling from another bankruptcy judge in this district, In re Kalso, No. 1072587, 2011 WL 3678326, at *1 (Bankr. E.D. Mich. Aug. 19, 2011), the Court concludes that
inherited IRAs are subject to exemption under § 552(d)(12). Accordingly, the Court reverses the
Bankruptcy Court’s ruling.
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Several cases have concluded that inherited IRAs are not exempt under various state exemption
statutes, but as U.S. Bankruptcy Judge Walter Shapero explained in the recent decision in In re
Kalso, No. 10-72587, 2011 WL 3678326, *1 (Bankr. E.D. Mich. Aug. 19, 2011), these cases are
not relevant to our inquiry. See, e.g., In re Navarre, 332 B.R. 24 (Bankr. M.D. Ala. 2004)
(inherited IRAs not exempt under state law); In re Ard, 435 B.R. 719 (Bankr. M.D. Fla. 2010)
(same); In re Klipsch, 435 B.R. 586 (Bankr. S.D. Ind. 2010) (same).
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a. Inherited IRAs
The first step in the inquiry is to determine whether funds in an inherited IRA are
“retirement funds” within the meaning of the statue. In re Chilton, 426 B.R. at 616. While §
552(d)(12) only exempts “retirement funds,” the statute does not require that the funds be the
debtor’s retirement funds. In re Nessa, 426 B.R. at 314. Limiting the exemption to funds the
debtor herself contributed for retirement would “impermissibly limit the statue beyond its plain
language.”
Id.
This is precisely what the Bankruptcy Court did in interpreting the term
“retirement funds” to exclude inherited IRAs. See Hearing Transcript at 12 (“An inherited IRA
is not a retirement fund of the debtor’s. . . . in my view, when you look at plain meaning, a
retirement fund is a fund . . . that has been saved by a person for their retirement.”).
Accordingly, the Court concludes that the Bankruptcy Court’s interpretation is erroneous.
The second step is to determine whether funds in inherited IRAs are exempt from
taxation under the relevant sections of the IRC. Because a debtor is not taxed until funds are
withdrawn from an inherited IRA, such funds must be considered tax exempt. In re Nessa, 426
B.R. at 315. The Trustee argues that because inherited IRAs (inherited from persons other than
spouses) are subject to rules regarding distribution and contribution that are different from those
that govern traditional IRAs, they are not tax exempt in the same way as traditional IRAs.4 For
example, non-spouse beneficiaries of inherited IRAs must withdraw all funds within five years
following the year of the original owner’s death. Internal Rev. Serv. Pub. 590, Cat. No. 15160X,
at 35 (Jan. 7, 2010). Non-spouse beneficiaries also may not roll over funds into or out of
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An exception is where an IRA is inherited by a spouse, in which case the Internal Revenue
Service allows the inherited IRA to be treated as a traditional IRA for tax purposes. Internal
Rev. Serv. Pub. 590, Cat. No. 15160X, 18, 35 (Jan. 7, 2010). That is not the case here, where
Appellant Janet Stephenson is a child of the original owner of the IRA.
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inherited IRAs, unlike traditional IRAs. Id. at 18. However, the Nessa court rejected this
argument and reasoned that “[i]t is irrelevant whether a traditional IRA and an inherited IRA
have different rules regarding minimum required distributions.” Doeling v. Nessa (In re Nessa),
426 B.R. at 315. Nessa and its progeny have based their conclusion on the language of § 408(e)
of the IRC, which exempts “any individual retirement account” from taxation and does not
distinguish between different types of IRAs, even if they have dissimilar distribution
requirements. In re Nessa, 426 B.R. at 315; In re Thiem, 443 B.R at 845; In re Weilhammer,
2010 WL 3431465, at *4. Accordingly, the retirement funds in an inherited IRA are considered
tax exempt under § 408 of the IRC and thus qualify for the § 522(d)(12) bankruptcy exemption.
In further support of its conclusion that inherited IRAs are exempt under § 552(d)(12),
the Nessa court cited § 552(b)(4)(C), a statutory provision not mentioned by the Chilton
bankruptcy court. This section states that a direct transfer of retirement funds from a fund or
account that is exempt from taxation under § 408 of the IRC “shall not cease to qualify for
exemption under paragraph (3)(C) or subsection (d)(12) by reason of such direct transfer.” The
district court in Chilton based its reversal of the bankruptcy court’s decision on this section and
“[f]or the reasons discussed at length by the Nessa, Tabor, Kuchta, Thiem, and Weilhammer
courts.” Chilton, 444 B.R. at 552.
The Trustee argues that the legislative history supports the notion that inherited IRAs are
not meant to be treated equivalently to traditional IRAs for the purposes of bankruptcy
exemptions, given that at the time § 552(d)(12) was enacted, inherited IRAs were immediately
included as income, and only with the passage of the Pension Protection Act of 2006, Pub. L.
No. 109-280 (2006), did Congress allow tax deferment for a limited period of time and in a
limited manner. Trustee’s Br. at 18-19. Similarly, the Bankruptcy Court reasoned that because
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“[i]nherited IRA’s are fundamentally different from traditional IRA’s in both purpose and
treatment under bankruptcy law,” § 552(d)(12) should not be used to exempt inherited IRAs in
the same manner as traditional IRAs. However, while Congress may or may not have considered
the future effect on inherited IRAs when enacting the bankruptcy exemptions of § 552, it is clear
that the plain meaning of the statutory language encompasses such accounts, for the reasons
described above and in the cases cited. In interpreting statutes, this Court is governed by the
language Congress used. Lamie v. U.S. Trustee, 540 U.S. 526, 535 (2004). Further, the Court
notes that a recent ruling from a bankruptcy court in this district is in accord with the weight of
authority following the statute’s plain language. In re Kalso, No. 10-72587, 2011 WL 3678326.
Finally, Appellants acknowledge that one case, In re Clark, 450 B.R. 858 (Bankr. W.D.
Wis. 2011), remains contrary to their position. That ruling, currently on appeal, does not
persuade the Court that the overwhelming weight of authority was incorrectly decided,
particularly in light of the Eastern District of Texas’s reversal of Chilton and the recent authority
in this district.
IV. Conclusion
For the reasons stated, the Bankruptcy Court’s grant of the Trustee’s objection is
reversed.
SO ORDERED.
Dated: December 12, 2011
Flint, Michigan
s/Mark A. Goldsmith
MARK A. GOLDSMITH
United States District Judge
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CERTIFICATE OF SERVICE
The undersigned certifies that the foregoing document was served upon counsel of record
and any unrepresented parties via the Court's ECF System to their respective email or First Class
U.S. mail addresses disclosed on the Notice of Electronic Filing on December 12, 2011.
s/Deborah J. Goltz
DEBORAH J. GOLTZ
Case Manager
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