By: Donald L Swanson
Question: Can a retirement fund organized under Canadian law qualify for a state law exemption requiring that it “qualify as a retirement plan” under the Internal Revenue Code?
This question gets all the way to the U.S. Seventh Circuit Court of appeals, which issues a “No” answer, in Green v. Leibowitz, Case No. 23-2841 (decided 7/16/2024).
The Seventh Circuit explains its “No” answer as follows.
Broad & Narrow
This appeal is both broad and narrow:
- it is broad in that we must consider three areas of law—the Bankruptcy Code, the Internal Revenue Code, and Illinois state law—to answer the question presented; and
- it is narrow in that the question we must answer requires statutory interpretation of a single phrase.
The single phrase, in an Illinois exemption statute, is this:
- is the retirement plan “intended in good faith to qualify as a retirement plan under applicable provisions of the Internal Revenue Code.”
Background
Debtor files Chapter 7 Bankruptcy in Illinois.
In his bankruptcy schedules, Debtor:
- lists a Sun Life Fund (a Registered Retirement Savings Plan organized under Canadian law) as one of his assets; and
- claims the Sun Life Fund as exempt under an Illinois exemption statute titled, “Exemption for retirement plans” (735 ILCS 5/12-1006, herein “§ 12-1006”)
Debtor’s Chapter 7 Trustee objects to this claim of exemption on the grounds that (i) the Sun Life Fund is organized under the laws of Canada rather than the United States, and (ii) is, therefore, ineligible for the exemption.
The Bankruptcy Court sustains the objection.
Debtor appeals to the District Court, which affirms.
So, Debtor appeals to the Seventh Circuit Court of Appeals, which also affirms.
Seventh Circuit Analysis
The Seventh Circuit’s analysis starts with the Illinois exemption statute, § 12-1006, which provides:
- “A debtor’s interest in or right, whether vested or not, to the assets held in or to receive pensions, annuities, benefits, distributions, refunds of contributions, or other payments under a retirement plan is exempt from judgment, attachment, distress for rent, and seizure for the satisfaction of debts if the plan (i) is intended in good faith to qualify as a retirement plan under applicable provisions of the Internal Revenue Code . . .” (emphasis added).
–Rules of Statutory Construction
To decide the meaning of the single phrase, the Seventh Circuit applies Illinois’s rules of statutory construction. Such rules include:
- the primary goal is to ascertain and give effect to the intention of the legislature;
- legislative intent is best determined from the language of the statute, which if unambiguous should be enforced; and
- if an ambiguity exists, courts should consider the reason for the law, the problems to be remedied, and the objects and purposes sought.
–Complicating Factor
A complicating factor is this:
- the Internal Revenue Code does not specifically define “retirement plan,” at least for this purpose, or explicitly list out which provisions cover “retirement plans”;
- similarly, § 12-1006—likely for good reason—omits any specific statutory reference, opting instead for the general reference to “applicable provisions” of the Internal Revenue Code; and
- courts addressing § 12-1006 consistently find that only “tax-qualified retirement plans” under the Internal Revenue Code are exempt.
The question before the Seventh Circuit, therefore, is whether the Sun Life Fund is a “tax-qualified retirement plan” under “applicable provisions of the Internal Revenue Code.”
–Bankruptcy Code § 522(b)(3)
At least one Illinois court says that § 12-1006 mirrors § 522(b)(3) of the Bankruptcy Code and should, therefore, be interpreted in the same way as this Bankruptcy Code section is interpreted.
Notably, § 522(b)(3) references specific types of retirement plans, and the Sun Life Fund does not fall under any of those referenced plans.
–I.R.C. § 404A
So, Debtor proposes that the Sun Life Fund is tax-qualified because it is subject to special tax treatment under I.R.C. § 404A, which allows employers to deduct certain contributions to qualified foreign plans.
However, § 404A defines “qualified foreign plans,” not retirement plans, and the fact that the Sun Life Fund is a “retirement plan” is divorced from any criterion set out in the Internal Revenue Code.
–Does Not Qualify for Exemption
The Seventh Circuit’s opinion goes through a lengthy and detailed analysis of the Internal Revenue Code texts and Illinois statute § 12-1006, to address Debtor’s various arguments. And it reaches this conclusion:
- the Sun Life Fund does not qualify as a retirement plan under applicable provisions of the Internal Revenue Code.
–Liberal Construction
Then, the opinion addresses Debtor’s final argument: that Illinois’s personal property exemption statutes should be liberally construed.
The opinion rules:
- that § 12-1006 should be “liberally construed” does not mean that we must interpret it to defeat the intent of the legislature;
- to adopt Debtor’s interpretation of § 12-1006 would do just that; and
- liberal construction will not justify the exemption on its own.
Conclusion
A retirement plan organized under Canadian law does not qualify for a state-law exemption, which requires that the plan qualify as a retirement plan under applicable provisions of the Internal Revenue Code.
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