Upholding the denial of an exemption covering an individual retirement account, or IRA, the Eleventh Circuit explained why an IRA that would be exempt under federal law might not be exempt under state law, and vice versa.
Years earlier, the debtor established a self-directed IRA that complied at the time with the IRS Code’s requirements for tax deferral. Later, the debtor used funds from the IRA to purchase a home in Puerto Rico for personal use. He also used the IRA to purchase two cars, also for personal use.
In 2015, the man filed a chapter 7 petition, later scheduling his IRA as exempt. After trial, Bankruptcy Judge Karen S. Jennemann denied the exemption claim and directed the trustee to seize the IRA. The district court affirmed.
The debtor conceded that his self-dealing actions constituted prohibited transactions under the IRS Code that made his IRA ineligible for federal tax exempt status as of Jan. 1, 2014.
On appeal in the Eleventh Circuit, the debtor argued that the IRA was exempt so long as the form of the governing documents satisfied the requirements of the IRS Code on paper.
Circuit Judge Britt C. Grant disagreed, affirmed the judgment of the district court and held that the debtor “forfeited his exemption [under state law] when he engaged in self-dealing transactions prohibited by the IRA’s governing documents.”
Florida opted out of federal exemptions and limits its citizens to state exemptions. Judge Grant’s June 26 opinion is significant because she explains why and how state and federal exemptions for IRAs are not always congruent.
Judge Grant explained that the Florida exemption statute imposes three different requirements on IRAs depending on whether and how the IRS had approved the plan’s exempt status. The case on appeal fell in the category pertaining to IRAs maintained in accordance with plan documents that the IRS has determined to be exempt from taxation under Section 408 of the IRS Code.
In turn, the applicable section in the Florida exemption statute has three requirements that all must be met. The failure to comply with any one will result in the loss of the exemption.
The chapter 7 trustee contended that the debtor’s IRA had not complied with the subsection requiring that the plan be “maintained in accordance with” the governing plan documents. Judge Grant was careful to point out that the exemption therefore turned on whether the IRA had been maintained in accordance with its own governing documents, “not whether the IRA has been maintained in compliance with” Section 408 of the IRS Code.
To answer the question, Judge Grant quoted from the agreement the debtor made with the trust company that sponsored the IRA, where he agreed that he would not engage in any prohibited transactions. She then said it was “plain” that the debtor had violated the terms of the agreement with the trust company, failed to maintain his IRA in accordance with the plan documents and was not entitled to exempt the IRA.
Tax mavens should read Judge Grant’s opinion, because she lucidly explains how an IRA might not be maintained in a manner satisfactory to the IRS but could still be exempt under Florida law. Conversely, she gave an example showing how an IRA might comply with the IRS Code but not meet the requirements of Florida law.
Judge Grant was a law clerk for U.S. Supreme Court Justice Brett M. Kavanaugh when he sat on the Court of Appeals for the District of Columbia Circuit.
Upholding the denial of an exemption covering an individual retirement account, or IRA, the Eleventh Circuit explained why an IRA that would be exempt under federal law might not be exempt under state law, and vice versa.
Years earlier, the debtor established a self-directed IRA that complied at the time with the IRS Code’s requirements for tax deferral. Later, the debtor used funds from the IRA to purchase a home in Puerto Rico for personal use. He also used the IRA to purchase two cars, also for personal use.
In 2015, the man filed a chapter 7 petition, later scheduling his IRA as exempt. After trial, Bankruptcy Judge Karen S. Jennemann denied the exemption claim and directed the trustee to seize the IRA. The district court affirmed.
The debtor conceded that his self-dealing actions constituted prohibited transactions under the IRS Code that made his IRA ineligible for federal tax exempt status as of Jan. 1, 2014.
On appeal in the Eleventh Circuit, the debtor argued that the IRA was exempt so long as the form of the governing documents satisfied the requirements of the IRS Code on paper.