Using powers of equity and common sense, Bankruptcy Judge Daniel S. Opperman of Bay City, Mich., didn’t allow a grinch to steal a disabled man’s IRA.
A chapter 7 debtor was permanently disabled. Before filing, he was forced to draw down some of his individual retirement account to pay expenses. Because he was less than 59½ years of age and had not at that time been declared permanently disabled, the bank holding his IRA was required to withhold and pay over a 10% early withdrawal fee to the Internal Revenue Service.
The debtor filed his tax return and claimed a refund for the early withdrawal. After filing, the IRS agreed that he was permanently disabled and sent the debtor a refund of about $3,000. The debtor continued holding the $3,000 refund.
The debtor claimed an exemption for the refund under Michigan law. The chapter 7 trustee conceded that $10,000 remaining in the IRA was exempt, but objected to the claim of exemption for the $3,000 refund because the money was not in an IRA.
Judge Opperman upheld the exemption in an opinion on May 11.
Michigan law exempts “[a]ll individual retirement accounts” and “the payments or distributions from those accounts.” The trustee argued that the refund was not exempt under state law because the refund was not in an IRA account, nor was it a payment or distribution from an IRA.
As a “starting point,” Judge Opperman was “guided by the general principle that exemptions are to be construed liberally in favor of the debtor in keeping with the Bankruptcy Code’s general policy of providing a fresh start to the honest, but unfortunate debtor.”
“On its face,” Judge Opperman said, the trustee’s objection “appears well-founded,” because the $3,000 was not in an IRA. However, he said that Michigan law also exempts “payments and distributions from those accounts.”
Judge Opperman said that the debtor’s “only recourse” was to claim a refund, because the bank was required to withhold and pay the penalty to the IRS. The debtor also said that he could not compel the IRS to pay the refund directly into his IRA.
“Generally,” Judge Opperman said, “Michigan courts have allowed for the tracing of proceeds from an exempt status such that the debtor can claim that the asset retains its exempt status.”
Applying “these principles” and construing the exemption liberally, Judge Opperman said he could “trac[e] . . . the exempt funds from [the debtor’s] IRA that were withheld by the IRA administrator to the United States of America and then back to [the debtor] in the form of an income tax refund.”
“Accordingly,” Judge Opperman held, the $3,000 was “exempt and the objections to the exemptions claimed by [the debtor] are overruled.”
Using powers of equity and common sense, Bankruptcy Judge Daniel S. Opperman of Bay City, Mich., didn’t allow a grinch to steal a disabled man’s IRA.
A chapter 7 debtor was permanently disabled. Before filing, he was forced to draw down some of his individual retirement account to pay expenses. Because he was less than 59½ years of age and had not at that time been declared permanently disabled, the bank holding his IRA was required to withhold and pay over a 10% early withdrawal fee to the Internal Revenue Service.
The debtor filed his tax return and claimed a refund for the early withdrawal. After filing, the IRS agreed that he was permanently disabled and sent the debtor a refund of about $3,000. The debtor continued holding the $3,000 refund.
The debtor claimed an exemption for the refund under Michigan law. The chapter 7 trustee conceded that $10,000 remaining in the IRA was exempt, but objected to the claim of exemption for the $3,000 refund because the money was not in an IRA.
Judge Opperman upheld the exemption in an opinion on May 11.