In re Copulos
| Decision Date | 30 June 1997 |
| Docket Number | Bankruptcy No. 96-33290. |
| Citation | 210 BR 61 |
| Parties | In re George & Georgia Susan COPULOS, Debtors. |
| Court | U.S. Bankruptcy Court — District of New Jersey |
Peter Broege, Broege, Neumann, Fischer & Shaver, Manasquan, NJ, for Debtors.
Robert Nies, Wolff & Samson, Roseland, NJ, for First Indemnity of America Ins. Co. and Universal Bonding Ins. Co.
Karen Bezner, Scotch Plains, NJ, for Chapter 7 Trustee.
This matter comes before the court on two motions, one to strike or modify Debtors' claimed exemption of a Pension Plan, and the other to fix pension benefits reasonably necessary for support of the Debtors. Debtors cross move for a declaration that the Pension Plan is not property of the Estate. Although the parties raise many interesting issues under section 522(d)(10)(e), the court's conclusion that statutory restrictions on transfer of the funds contained in the Pension Plan are sufficient to exclude the assets from the estate under section 541(c)(2) obviates the need to address those issues.
George and Georgia Susan Copulos ("Debtors") filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code on April 19, 1996. In Schedule B, the Debtors listed a pension plan maintained by Associated Mechanical Systems, Inc. ("AMS Plan") as an asset producing monthly distributions of $4,370.00. On August 15, 1996, the Debtors amended Schedule B to indicate that the AMS Plan was not property of the estate pursuant to section 541(c)(2) of the Bankruptcy Code.
First Indemnity of America Insurance Company and Universal Bonding Insurance Company ("Sureties") filed the within motion to fix pension benefits reasonably necessary for the support of the Debtors and their dependents. In response to that motion, the Debtors claimed that the AMS Plan never became property of the estate, since it was both ERISA and tax qualified. In support of their position, the Debtors submitted copies of three favorable determination letters issued by the Internal Revenue Service ("IRS") reflecting that the AMS plan constituted a "qualified trust" under the terms of the Internal Revenue Code. The Sureties then moved to strike or modify the exemptions claimed by the Debtors. As a result of the submissions, the court scheduled an evidentiary hearing on the limited issue of whether the AMS plan had, as claimed by the Sureties, subsequently lost its qualified status.
On November 6, 1996, the parties presented their evidence. The focus of the evidence was qualification of the AMS Plan under both the Employee Retirement Income Security Act ("ERISA") and the Internal Revenue Code. Specifically, the evidence revealed an $80,000 distribution from the AMS Plan to the Debtors in 1994 in violation of the terms of the AMS Plan, and the failure of the AMS Plan to bond that transaction.
The Bankruptcy Code defines property of the estate to include "all legal and equitable interests of the debtor in property as of the commencement of the case" 11 U.S.C. § 541(a). The only exceptions are those provided in subsections (b) and (c)(2). Section 541(c)(2) provides that:
A restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a case under this title.
11 U.S.C. § 541(c)(2). In other words, interests of a debtor in property that are subject to enforceable restrictions on transfer under nonbankruptcy (i.e., state or federal) law are excluded from the definition of property of the estate, and never become part of the debtor's bankruptcy estate. See, e.g., Patterson v. Shumate, 504 U.S. 753, 112 S.Ct. 2242, 119 L.Ed.2d 519 (1992).
At the time the parties presented their evidence, the Third Circuit had not yet rendered its decision in In re Yuhas, 104 F.3d 612 (3d Cir.1997), cert. denied, ___ U.S. ___, 117 S.Ct. 248, 138 L.Ed.2d 990 (1997), and the state of the law was considerably more unsettled. It may be that federal law, without a state statute, requires a pension plan to qualify under both ERISA and the Internal Revenue Code in order to qualify as exempt.1 Post-Yuhas, however, it is clear that when New Jersey law applies, a plan need only meet the requirements of a "qualified trust" under the Internal Revenue Code in order to be excluded from the estate pursuant to section 541(c)(2) and N.J.S.A. 25:2-1(b).
Section 1b exempts any property held in a "qualifying trust" from the claims of creditors. "Qualifying trust" is statutorily defined to include trusts created or qualified and maintained under section 401 of the Internal Revenue Code. Section 401 provides:
(a) requirements of qualification. A trust created or organized in the United States and forming part of a stock bonus, pension, or profit sharing plan of an employer for the exclusive benefit of his employees or their beneficiaries shall constitute a qualified trust under this section. Qualified pension plans are governed by this section.
26 U.S.C. § 401(a). It is clear from the plain language of the statutes that if a plan meets the requirements of a "qualifying trust" pursuant to section 401 of the Internal Revenue Code, transfer of its corpus is restricted by N.J.S.A. 25:2-1(b).
In Yuhas, the Third Circuit squarely held that the restrictions imposed by N.J.S.A. 25:2-1(b) were enforceable restrictions on transfer such as to bring trusts described in the state statute within 541(c)(2)'s exception to 541(a)'s broad definition of property of the estate. Consequently, if the Debtors' AMS Plan meets the requirements of a "qualifying trust" pursuant to section 401 of the Internal Revenue Code, the plan is excluded from the definition of property of the estate under section 541(c)(2). ERISA qualification is not a condition precedent to the AMS Plan being exempt under New Jersey law. Therefore, the court concludes that it need not make a determination of ERISA qualification because the New Jersey statute explicitly offers protection to plans qualified under the Internal Revenue Code without reference to ERISA. See e.g., In re Luttge, 204 B.R. 259 (Bankr.S.D.Fla.1997)(court determined that a plan that did not qualify as a retirement plan under ERISA was still exempt under Florida statute because it complied with section 408 of the tax code).
Written "determination letters" by the IRS may not be used or cited as precedent in other cases; however, they are entitled to some weight. Kaplan v. First Options of Chicago, 189 B.R. 882, 890-91 (E.D.Pa.1995), citing Amato v. Western Union International, 773 F.2d 1402, 1412-13 (2d Cir.1985). Moreover, the force of determination letters is enhanced by the limited circumstances under which the IRS issues them. Id.
In Kaplan, the court concluded that bankruptcy courts should defer to the IRS on issues of tax qualification. Relying on the Fifth Circuit's reasoning in Youngblood, the court noted:
"The IRS which has been entrusted with the task of implementing the Internal Revenue Code, has adopted extensive rules and regulations governing income tax in general, and the taxability of pension plans in particular." In Youngblood, the Fifth Circuit considered whether a bankruptcy court had erred in independently finding that a pension was not qualified under federal tax law . . . despite the fact that the IRS had specifically found the plan to be qualified. In reversing the bankruptcy court and district court\'s holding, the Fifth Circuit commented:
Kaplan v. First Options of Chicago, 189 B.R. 882, 891 (E.D.Pa.1995), quoting In re Youngblood, 29 F.3d 225, 229 (5th Cir.1994). This Court believes the rationale employed by the Fifth Circuit in Youngblood is both sound and applicable in this case.
Moreover, principles of comity suggest that this Court defer to the expertise of the United States Tax Court on tax matters. Section 7476 of the Internal Revenue Code imbues the tax court with the power to make a declaration respecting the initial or continuing qualification of a retirement plan under section 401(a):
The Tax Court has jurisdiction to review favorable determination letter where employee claims that employer\'s pension plan does not meet rules for qualification under 26 U.S.C. § 401(a); in making its determination, Tax Court does not re-examine...
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