In re Jolly

• Decision Date: 27 February 2017
• Docket Number: Case No. 16–10824
• Citation: 567 B.R. 480
• Court: U.S. Bankruptcy Court — Middle District of North Carolina
• Parties: IN RE: Loretta Dae JOLLY, Debtor.

567 B.R. 480

IN RE: Loretta Dae JOLLY, Debtor.

Case No. 16–10824

United States Bankruptcy Court, M.D. North Carolina, Greensboro Division.

Signed February 27, 2017

Jennifer Adams Ledford, Higgins Benjamin PLLC, Greensboro, NC, for Debtor.

Everett B. Saslow, Jr., Greensboro, NC, pro se.

ORDER SUSTAINING OBJECTION TO EXEMPTIONS

BENJAMIN A. KAHN, UNITED STATES BANKRUPTCY JUDGE

This case came before the Court for hearing on January 10, 2017, on Trustee's Objection to Debtor's Claim for Property Exemptions (the "Trustee's Objection to Exemptions") filed by Everett B. Saslow, Jr. ("Trustee"). Trustee appeared at the hearing. Jennifer A. Ledford appeared as counsel for Loretta Dae Jolly ("Debtor"). For the reasons stated herein, Trustee's Objection to Exemptions will be sustained.

FACTS

Debtor filed her chapter 7 petition on August 8, 2016, and asserted an exemption under N.C. Gen. Stat. 1C–1601(a)(9) in a "Retirement Annuity: Prudential Retirement Accounts Through Geneos Wealth Management," with an exemption value of $178,694.80. [Doc. # 1, p. 19] (the "Annuity"). Trustee timely filed his objection to Debtor's exemptions on October 6, 2016. Trustee contends that the Annuity is not the type of annuity which falls within the contemplation of N.C. Gen. Stat. § 1C–1601(a)(9). The Court admitted into evidence the Prudential Annuity Contract [Plaintiff's Exhibit A] (the "Annuity Contract") for the Annuity and a prospectus for the Prudential Premier Retirement Variable Annuity B Series ("B Series"), Prudential Premier Retirement Variable Annuity L Series ("L Series"), Prudential Premier Retirement Variable Annuity C Series ("C Series") dated April 28, 2016 (the "Prospectus"). [Plaintiff's Exhibit B] (with various supplements dated November 14, 2016, October 27, 2016, September 20, 2016, September 13, 2016, August 16, 2016, August 8, 2016, July 1, 2016 (collectively, the "Prospectus Supplements")).¹

Debtor purchased the Annuity from Prudential Financial for the price of $150,000 with her own funds, in a single transaction. The Annuity was issued by Pruco Life Insurance Company ("Pruco") on June 22, 2012. See Trustee's Exhibit A, p. 3. In response to requests from Trustee, Debtor admitted (and the Court so finds) the following: (1) the Annuity is not a qualified annuity; (2) the Annuity is a non-qualified annuity; (3) the Annuity is not tax-qualified under Section 401(a) of the Internal Revenue Code ("IRC"); (4) the Annuity is not subject to ERISA; (5) the Annuity is not a Roth retirement account as described in section 408A of the IRC ; and (6) the amount paid to purchase the Annuity was not a rollover from a qualified retirement plan.

DISCUSSION

Exemptions should be liberally construed in favor of the Debtor. In re Grubbs , 325 B.R. 151, 154 (Bankr. M.D.N.C. 2005). As the objecting party, the burden of proof in this case is on Trustee. See Fed. R. Bankr. P. 4003(c). Trustee's burden must be established by a preponderance of the evidence. In re Man , 428 B.R. 644, 653 (Bankr. M.D.N.C. 2010). In carrying his burden of proof in this case, Trustee offered copies of the Annuity Contract and the Prospectus and Prospectus Supplements.

North Carolina has opted out of the federal exemptions provided in 11 U.S.C. § 522(d). N.C. Gen. Stat. § 1C–1601(f) (2009) ("The exemptions provided in The Bankruptcy Act, 11 U.S.C. § 522(d), are not applicable to residents of this State."). Therefore, Debtor is entitled to claim her exemptions only pursuant to 11 U.S.C. § 522(b)(3). Specifically, Debtor asserts that the Annuity is an exempt retirement account under § 522(b)(3)(A) and North Carolina's exemption statute.² North Carolina law provides an exemption for:

[i]ndividual retirement plans as defined in the Internal Revenue Code and any plan treated in the same manner as an individual retirement plan under the Internal Revenue Code , including individual retirement accounts and Roth retirement accounts as described in section 408(a) and section 408A of the Internal Revenue Code, individual retirement annuities as described in section 408(b) of the Internal Revenue Code, and accounts established as part of a trust described in section 408(c) of the Internal Revenue Code.

N.C. Gen. Stat. § 1C–1601(a)(9) (2009) (emphasis added).

Debtor concedes that the Annuity does not meet the definitions of a plan under sections 408(a), 408A, 408(b), or 408(c). Instead, Debtor argues that it qualifies for exemption under N.C. Gen. Stat. § 1C–1601(a)(9) because it is a "plan treated in the same manner as an individual retirement plan under the Internal Revenue Code." An "individual retirement plan" is defined in the IRC as an individual retirement account described in section 408(a) or an individual retirement annuity described in section 408(b). 26 U.S.C. § 7701(37). The Court must therefore determine whether the Annuity is treated in the same manner under the IRC as a section 408(a) IRA or section 408(b) retirement annuity.

On two separate occasions, this Court previously has considered whether an annuity created pursuant to Section 403(b) of the IRC is afforded sufficiently similar treatment to "an individual retirement plan" under the IRC to qualify under the North Carolina exemptions. See In re Grubbs , 325 B.R. 151 (Bankr. M.D.N.C. 2005) ; and In re Garner , Case No. 04-13618C-7G, 2005 WL 1288335 (Bankr. M.D.N.C. April 29, 2005). Since tax sheltered annuities created under § 403(b) of the IRC are not IRA's or annuities created under § 408(b) of the IRC, they do not fall within the definition of "an individual retirement plan" under the IRC. Despite not meeting the definition of "an individual retirement plan" under the IRC, this Court found in both Grubbs and Garner that an annuity pursuant to section 403(b) of the IRC was a "plan treated in the same manner as an individual retirement plan," and therefore is exempt under North Carolina law.³ In Grubbs and Garner , the Court identified the key characteristics of the tax treatments afforded by IRA's, Roth IRA's, and retirement annuities under § 403(b) of the IRC. See Grubbs , 325 B.R. at 155 ; and Garner , 2005 WL 1288335, at *3. As observed in Garner , contributions to a tax sheltered annuity under either § 408(b) or § 403(b)"have the effect of reducing the plan participant's taxable income for the year." Garner , 2005 WL 1288335, at *3. Similarly, contributions to an IRA are excluded from taxable income. Grubbs , 325 B.R. at 155. In order to be excluded from taxable income, contributions to tax sheltered annuities and IRA's must fall under a certain annual limit. Garner , 2005 WL 1288335, *3 (citing 26 U.S.C. § 403(b) (non-profit annuities); and 26 U.S.C. § 219(a) (individual retirement plans)). The Court in Grubbs enumerated at least thirteen similarities between § 403(b) annuities and individual retirement plans under the IRC:

(1) principal contributions and accrued interest are either excluded or exempted from gross income for purposes of taxation; (2) both allow for salary reduction agreements;⁴ (3) both have caps on the maximum amount that may be contributed during a single year; (4) rollover contributions are accepted not only from other plans, but from an IRA to a Section 403(b) annuity and visa [sic] versa; (5) penalties apply for early withdrawal of funds; (6) excess contributions are taxed; (7) a participant's interest in both are not forfeitable; (8) both provide incidental death benefits; (9) neither is directly administered by the employee; (10) both have the same minimum and maximum ages at which funds may, and then must be withdrawn; (11) distributions are taxed when received; (12) interest earned on the annuity or IRA itself is exempt from taxation until distributed; and (13) either the employee or the employer may contribute money."

Grubbs , 325 B.R. at 155–57 (footnote omitted). The most important similarity this Court noted in Grubbs was that rollovers are permitted between section 403(b) annuities and section 408(a) IRAs. Id. at 157. Therefore, the Court held that these similarities were sufficient to make annuities created under § 403(b) of the IRC fall within the North Carolina exemption. Id. ; and Garner , 2005 WL 1288335 at *4.

In this case, as a non-qualified annuity, the Annuity lacks sufficient similarities in treatment to fall under the exemption for plans treated in the same way as retirement plans under the IRC, and any incidental similarities are far outweighed by dissimilarities. The Prospectus itself specifically recognizes that the Annuity is not subject to the same tax-favored status as retirement plans, stating, "[i]n general, as used in this prospectus, a Nonqualified Annuity ... is not associated with a tax-favored retirement plan." Prospectus, p. 97. As a non-qualified annuity, the Annuity does not share many of the favorable tax treatments of individual retirement plans under the IRC, nor does it have the same limitations. For example, unlike either type of IRA, Debtor's contributions to the Annuity were unlimited, and, in fact, occurred in a single $150,000 payment.⁵ Unlike a traditional IRA, this contribution was made from after-tax dollars. Unlike a Roth IRA, earnings on the Annuity are taxed upon withdrawal. See Prospectus, p. 97.

Unlike an IRA, withdrawals from the Annuity could begin at Debtor's election only three years from the date the Annuity was issued. Also dissimilar to individual retirement plans, Debtor could elect to begin receiving annuity payments at any time, and there is no age at which her failure to take minimum distributions would result in the 50% excise tax that applies for early withdrawals from IRA's and tax sheltered annuities. See Garner , 2005 WL 1288335, at *3 (citing 26 U.S.C. § 4974(a) ).⁶ Instead, the Annuity Contract provides that the Debtor "may choose an Annuity Date, an annuity option, and the frequency of annuity payments. [Debtor's] choice of Annuity Date and annuity option may be limited, depending upon your use of the Annuity. The...