In re Chilton

• Decision Date: 05 March 2010
• Docket Number: No. 08-43414.,08-43414.
• Citation: 426 B.R. 612
• Parties: In re Robert Gregg CHILTON and Janice Elaine Chilton, Debtors.
• Court: U.S. Bankruptcy Court — Eastern District of Texas

426 B.R. 612

In re Robert Gregg CHILTON and Janice Elaine Chilton, Debtors.

No. 08-43414.

United States Bankruptcy Court, E.D. Texas, Sherman Division.

March 5, 2010.

COPYRIGHT MATERIAL OMITTED

Robert M. Nicoud, Jr., Dallas, TX, for Debtors.

MEMORANDUM OPINION AND ORDER

BRENDA T. RHOADES, Bankruptcy Judge.

This matter is before the Court on an objection to the debtors' claim of an exemption in an individual retirement account inherited by Janice Chilton prior to bankruptcy. The parties to this matter agree that there are no disputes as to the material facts. The Court, having heard arguments of counsel and having reviewed the written memoranda of the parties, makes the following findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052. See FED. R. BANKR.P. 7052.

I. Findings of Fact

Prior to the debtors' bankruptcy, Janice Chilton's mother, Shirley Jean Heil, established an individual retirement account ("IRA") at RBC Dain Rauscher f/k/a RBC Wealth Management. Shirley Heil designated her daughter, Janice, as the beneficiary on the account. On November 28, 2007, Shirley Heil died.

On January 21, 2008, Janice Chilton established an IRA at RBC Dain Rauscher for the purpose of receiving the funds from her mother's IRA. The account title is "Janice Chilton, Beneficiary, Shirley Heil, Decedent." The assets of Shirley Heil's IRA were transferred directly to Janice Chilton's account. None of the funds or assets in the account is the result of contributions made by the debtors. Janice Chilton, who will be 52 years old in 2010, must begin taking lifespan-measured distributions from the inherited IRA in 2010, or she may chose to take the entire distribution by 2013 or earlier.¹

The debtors filed for relief under Chapter 7 of the Bankruptcy Code on December 18, 2008. In their bankruptcy schedules, the debtors disclosed a community property interest in the "Dean Rauscher IRA." The total value of the debtors' interest as of the petition date was $170,000. The debtors claimed this property as exempt from their creditors pursuant to 11 U.S.C. § 522(d)(12).

The Chapter 7 trustee objected to the debtors' claim of exemptions. The Chapter 7 trustee also filed a motion to dismiss the debtors' case for abuse. The debtors responded to the dismissal motion by agreeing to convert their case to Chapter 13. The Court entered an agreed order converting their case to Chapter 13 on April 20, 2009. The Chapter 13 trustee subsequently adopted the Chapter 7 trustee's objection to the debtors' claimed exemption of the inherited IRA.

II. Conclusions of Law

Upon the filing of a bankruptcy petition, an estate is created. The bankruptcy estate includes nearly all legal and equitable rights of the debtor as well as those interests recovered or recoverable through transfer and lien avoidance provisions. See 11 U.S.C. § 541. The Bankruptcy Code excludes certain property from this estate, see 11 U.S.C. §§ 541(b) and (c), and the Bankruptcy Code permits a debtor to "exempt" certain additional property, see 11 U.S.C. § 522(d). The Supreme Court has described an exemption as "an interest withdrawn from the estate (and hence from creditors) for the benefit of the debtor." Owen v. Owen, 500 U.S. 305, 308, 111 S.Ct. 1833, 114 L.Ed.2d 350 (1991).

Section 522(d) establishes a minimum set of federal exemptions. Although subsection (b)(2) empowers the states to "opt out" of the federal exemption scheme by prohibiting their citizens from selecting the exemptions set out in subsection (d), Texas permits a debtor in bankruptcy proceedings to choose between the federal and state exemptions. See Bradley v. Pacific Southwest Bank, F.S.B. (In re Bradley), 960 F.2d 502, 506 n. 2 (5th Cir.1992). The debtors in this case elected the federal exemption scheme, and they claim that the inherited IRA is exempt under § 522(d)(12).

Section 522(d)(12) allows the exemption of "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." In order to determine whether funds are exempt under § 522(d)(12), the Court must engage in a two-part test. 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.

A. The Burden of Proof

A claim of exemptions is presumptively valid. See 11 U.S.C. § 522(l) ("the property claimed as exempt is exempt" unless a party in interest objects to the claim). The bankruptcy rules place the burden of proof on the party alleging that the exemptions were not properly claimed. In particular, Bankruptcy Rule 4003(c) provides:

In any hearing under this rule, the objecting party has the burden of proving that the exemptions are not properly claimed. After hearing on notice, the court shall determine the issues presented by the objections.

A debtor is not required to make an affirmative showing that a claimed exemption is appropriate. See, e.g., Gagne v. Bergquist, 179 B.R. 884, 885 (D.Minn. 1994). The debtor need only characterize the claimed exemption as falling within an exempt category. See, e.g., Lester v. Storey (In re Lester), 141 B.R. 157, 161 (S.D.Ohio 1991). The objecting party must, to meet its burden, produce evidence which "rebuts the prima facie effect of the claimed exemption." Id.

B. Are the Funds Retirement Funds?

1. Inherited IRAs Distinguished From IRAs

As an initial matter, the Court recognizes that an inherited IRA is fundamentally different from an IRA. Congress enacted § 408(a) of the Internal Revenue Code, which provides for the creation of IRAs, as part of the Employee Retirement Income Security Act of 1974 ("ERISA"), Pub.L. 93-406, 88 Stat. 829. In enacting this provision of ERISA, "the goal of Congress was to create a system whereby employees not covered by qualified retirement plans would have the opportunity to set aside at least some retirement savings on a tax-sheltered basis." Campbell v. Comm'r, 108 T.C. 54, 62-63, 1997 WL 65944 (1997) (citing H. Rept. 93-807 (1974), 1974-3 C.B. (Supp.) 236, 361; S. Rept. 93-383 (1973), 1974-3 C.B. (Supp.) 80, 210). Under the statutory framework established by Congress, the IRA owner must begin taking distributions following the later of the calendar year in which the individual retires or April 1st of the calendar year in which the individual attains the age 70 1/2. See 26 U.S.C §§ 401(a)(9)(C)(i), 408(d)(1). IRA owners are not required to take distributions prior to the age 70 1/2, and they incur a 10% penalty for early withdrawal. See 26 U.S.C. §§ 72(t), 408(d)(1). Distributions from an IRA are taxable as gross income unless the distributions qualify as rollover contribution to another exempt account. See 26 U.S.C. §§ 408(d)(1) and (3).

In the event of the original account holder's death, the Internal Revenue Code allows the contents of the IRA to go to a beneficiary who is not the spouse of the account holder. The beneficiary may avoid immediately paying taxes on the full amount of the distribution if "a direct trustee-to-trustee transfer is made to an individual retirement plan ... established for the purposes of receiving the distribution" of the inheritance. 26 U.S.C. § 402(c)(11).² An "inherited IRA" is the vehicle used to receive this distribution. The inherited IRA must be set up and maintained in the name of the deceased IRA owner for the benefit of the beneficiary. See 26 U.S.C. § 402(c)(11)(A); Publication 590 at 20. The beneficiary may make no contributions to the new account, nor may he or she rollover the inherited funds into another retirement plan. See 26 U.S.C. §§ 402(c)(11)(A)(ii), 408(d)(3). Beneficiaries of inherited IRAs may make withdrawals at any time, without penalty and must either start taking lifespan-measured withdrawals within one year or take the entire amount within five years. See 26 U.S.C. §§ 401(a)(9)(B)(ii), 402(c)(11)(A)(iii), 408(a)(6). See also Publication 590 at 37.

2. The Plain Meaning of "Retirement Funds"

Turning to § 522(d)(12), the term "retirement funds" is not defined in the Bankruptcy Code. In their brief in support of the claimed exemption, the debtors argue that the plain meaning of "retirement funds logically means those funds legally authorized to be in a tax exempt account." The Court rejects this interpretation for several reasons. First, the debtors' argument violates a fundamental tenet of statutory construction—that all the words of a statute should be given meaning—by reading the word "retirement" out of "retirement funds." Moreover, the debtors' argument collapses the question of whether an inherited IRA is a tax exempt account with whether an inherited IRA contains retirement funds.

When engaged in the task of statutory interpretation, "courts ... should ... attempt to give meaning to each word and phrase." Fidelity Fed. Sav. & Loan Ass'n v. de la Cuesta, 458 U.S. 141, 163, 102 S.Ct. 3014, 73 L.Ed.2d 664 (1982). The Court assumes that, absent any contrary definition, "Congress intends the words in its enactments to carry their ordinary, contemporary, common meaning." Pioneer Investment Services v. Brunswick Associates, 507 U.S. 380, 389, 113 S.Ct. 1489, 123 L.Ed.2d 74 (1993) (internal quotation marks omitted). Only if the term is ambiguous will the Court proceed beyond the language as written. United States v. Ron Pair Enterprises, 489 U.S. 235, 241, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989). However, the words of a statute are not to be read in isolation when determining whether a term is ambiguous; statutory interpretation is a "holistic endeavor." United Sav. Assn. of Tex. v. Timbers of Inwood Forest Associates, Ltd., 484 U.S. 365, 371, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988). "Interpretation of a word or a phrase depends upon reading the whole statutory text, considering the...