In Re Merri Simpson Tabor

• Decision Date: 30 July 2010
• Docket Number: No. 1:09-bk-05277MDF.,1:09-bk-05277MDF.
• Citation: 433 B.R. 469
• Parties: In re Merri Simpson TABOR, a/k/a Jamie Simpson Tabor, DebtorCharles A. Bierbach, Ch. 7 Trustee, Objectantv.Merri Simpson Tabor, Respondent.
• Court: U.S. Bankruptcy Court — Middle District of Pennsylvania

433 B.R. 469

In re Merri Simpson TABOR, a/k/a Jamie Simpson Tabor, Debtor

Charles A. Bierbach, Ch. 7 Trustee, Objectant

v.Merri Simpson Tabor, Respondent.

No. 1:09-bk-05277MDF.

United States Bankruptcy Court,

M.D. Pennsylvania.

June 18, 2010.

As Amended July 30, 2010.

Leon P. Haller, Purcell Krug and Haller, Harrisburg, PA, for Plaintiff.

John W. Frey, Dick Stein Schemel Wine and Frey, LLP, Waynesboro, PA, for Defendant.

OPINION

MARY D. FRANCE, Bankruptcy Judge.

Merri Simpson Tabor, also known as Jamie Simpson Tabor, (“Debtor”) filed a claim of exemption in an Individual Retirement Account (“IRA”) that she inherited from her mother. The Chapter 7 trustee, Charles A. Bierbach, Esquire (the “Trustee”) objected, alleging that an inherited IRA may not be exempted under either Pennsylvania law or the Bankruptcy Code. The parties have stipulated to the relevant facts, and the only issue is whether Debtor's inherited IRA may be claimed as exempt under 11 U.S.C. § 522(b)(3). For the reasons set forth below, the Trustee's Objection will be overruled.¹

I. Factual and Procedural History

Debtor filed her Chapter 7 petition on July 9, 2009. She elected the exemptions available under 11 U.S.C. § 522(b)(3), which includes property exempt under state law. One asset she claimed as exempt was an IRA account valued at $105,102.15. On Schedule C, she specified that the law authorizing the exemption was 11 U.S.C. § 522(b)(3)(A) and 42 Pa.C.S. § 8124(b)(1)(viii).²

The IRA in dispute was funded by Debtor's mother, Bernice Simpson (“Mrs. Simpson”). At her death on June 27, 2004, at the age of 79, Mrs. Simpson was the owner of four IRA accounts. Each account named Debtor and her brother as co-beneficiaries. Following her death, the four accounts were divided between the surviving beneficiaries. The funds being held for Debtor's benefit were transferred by the custodian to an inherited IRA account that listed Debtor as the beneficiary.³ Between September 15, 2004 and May 3, 2007, Debtor took eleven distributions totaling $132,300 from the account. On the date of the petition, her inherited IRA was valued at $105,102.15. Debtor has not taken any post-petition distributions from this account.

The Trustee filed an objection, observing that Debtor was asserting an exemption in an IRA under Pennsylvania law, 42 Pa.C.S. § 8124(b)(1)(ix), and “11 USC § 522(b)(3)(A) or presumably 11 USC § 522(b)(3)(C).” Because the account was an inherited IRA, the Trustee asserted that the funds were not exempt under either the Bankruptcy Code or under Pennsylvania law. Debtor responded in her answer that the language of the Pennsylvania exemption was broader than the applicable federal exemption, but alleged, alternatively, that the account was exempt under § 522(b)(3)(C). The parties have filed briefs, and the matter is now ready for decision.⁴

II. Discussion

On the date that a case is commenced under the Bankruptcy Code, an estate is created consisting of all assets listed in the debtor's schedules. 11 U.S.C. § 541(a). “The debtor then may remove some of the property by claiming exemptions under 11 U.S.C. § 522(b). Anything properly exempted passes through bankruptcy; the rest goes to the creditors.” In re Brooks, 393 B.R. 80, 84 (Bankr.M.D.Pa.2008) (citing Payne v. Wood, 775 F.2d 202, 204 (7th Cir.1985)). Bankruptcy exemptions are to be liberally construed in favor of the debtor. In re Reschick, 343 B.R. 151, 156 (Bankr.W.D.Pa.2006). Unless a party in interest objects to the claim, the exemption is presumed to be valid. See 11 U.S.C. § 522( l ). Under Fed. R. Bankr.P. 4003(c), a party objecting to a debtor's claim of exemptions “has the burden of proving that the exemptions are not properly claimed.” Fed. R. Bankr.P. 4003(c).

A. Exemptions Available Under 11 U.S.C. § 522(b)(3)

In most situations, a Pennsylvania debtor may claim property as exempt under either § 522(b)(2) or § 522(b)(3). Although the reference is not completely accurate, exemptions under § 522(b)(2) are referred to as “federal exemptions” and exemptions available under § 522(b)(3) are referred to as “state exemptions.” By selecting exemptions under § 522(b)(3), Debtor was entitled to exempt property under three categories: (1) property exempt under non-bankruptcy federal law and state law, § 522(b)(3)(A); (2) property held as a tenant by the entireties or as a joint tenant if the property was exempt from process under non-bankruptcy law, § 522(b)(3)(B); and (3) retirement funds exempt from taxation under sections 401, 403, 408, 408A, 414, 457, and 501(a) of the Internal Revenue Code of 1986 (“IRS Code”), § 522(b)(3)(C).⁵

In her answer to the Trustee's objection, Debtor bases the claim of exemption on both 11 U.S.C. § 522(b)(3)(C) and 42 Pa.C.S.A. § 8124(b)(1)(ix). The Pennsylvania statute provides, in relevant part, as follows:

(b) Retirement funds and accounts.

(1) ... the following money or other property of the judgment debtor shall be exempt from attachment or execution on a judgment:

....

(ix) Any retirement or annuity fund provided for under section 401(a), 403(a) and (b), 408, 408A, 409 or 530 of the Internal Revenue Code of 1986 (Public Law 99-514, 26 U.S.C. § 401(a), 403(a) and (b), 408, 408A, 409 or 530), the appreciation thereon, the income therefrom, the benefits or annuity payable thereunder and transfers and rollovers between such funds.

42 Pa.C.S.A. § 8124(b)(1)(ix). The state statute exempts “any retirement or annuity fund” from process if it is “provided for” in specified sections of the IRS Code.

The parties have stipulated that the only section of the IRS Code relevant to the issue in this case that is referenced in both the Pennsylvania exemption statute and in § 522(b)(3)(C) is § 408. Section 408(d)(1) provides that “any amount paid or distributed out of an individual retirement plan shall be included in gross income by the payee or distributee....” 26 U.S.C. § 408(d)(1). Section 408(d)(3) provides that a distribution is not included in gross income if the distribution received is paid into a qualified IRA (or “rolled over”) within sixty days of the date the funds are received by the taxpayer. 26 U.S.C. § 408(d)(3). A “rollover” is a tax-free distribution of cash or other assets by the account owner from one qualified retirement plan to another plan. See Individual Retirement Arrangements, (IRAs), Department of the Treasury, Internal Revenue Service, Publication 590 (“IRS Publication 590”), at 20. Rollover contributions are entitled to favorable tax treatment under the IRS Code because they are treated as if they were original contributions by the employee, i.e., they are not taxed until distribution. 26 U.S.C. § 402(c).

In certain respects, inherited accounts are treated differently by the IRS Code than accounts that were established and funded by an individual with her employment earnings (“an ordinary IRA”). An inherited IRA is one in which the account beneficiary acquired the account because of the death of another person who was not the beneficiary's spouse. 26 U.S.C. § 408(d)(3)(C). An IRA acquired by reason of the death of a non-spouse owner cannot be treated as the account of the beneficiary. See IRS Publication 590, at 20. But like the original owner of the IRA, a non-spouse beneficiary is not taxed on the assets in the IRA until the beneficiary begins to take distributions from the account. Id. The beneficiary is not treated as having received a taxable distribution if the funds in the decedent's IRA are transferred from the account trustee directly to another account trustee without the IRA beneficiary exercising control over the funds. Jankelovits. v. C.I.R., 2008 WL 5330811 (U.S. Tax Court 2008).

Unlike the spouse of a decedent, a non-spouse beneficiary cannot make contributions to an inherited IRA, and the funds cannot be “rolled over” into or out of the account. 26 U.S.C. § 408(d)(3)(C). A beneficiary who is not a surviving spouse may make withdrawals at any time, without penalty, and must take distributions from the IRA within one year under a specified actuarial table or withdraw 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 IRS Publication 590, at 37.

In the case before me, the parties agree that Debtor acquired the asset in question as a result of the death of her mother and that it is an “inherited IRA” under the IRS Code.⁶ Thus, Debtor may not make contributions to the IRA, nor may she roll over funds from a qualified plan into the inherited IRA. Debtor argues that, nevertheless, she may exempt her inherited IRA because 42 Pa.C.S. § 8124(b)(1)(ix) only requires that an IRA be provided for under § 408, not that it be entitled to the same tax treatment as an ordinary IRA. Under Debtor's reasoning, the mere reference to § 408 is sufficient to create an exemption from process under Pennsylvania law.

As the language of 42 Pa.C.S. § 8124(b)(1) clearly states, Pennsylvania exemption statutes are applicable in situations outside of bankruptcy, such as state court proceedings for attachment or execution on a judgement. Considerations of comity dictate that I defer to state courts for the interpretation of Pennsylvania law. See In re Granoff, 242 B.R. 216, 220 (Bankr.D.Conn.1999). However, I was unable to locate any state court decision on the issue of whether inherited IRAs are exempt from process under Pennsylvania law. Although I may construe state law, I am reluctant to do so if this case can be resolved on other grounds. Because I have determined that Debtor's inherited IRA is exempt under § 522(b)(3)(C), I need not determine whether Debtor's inherited IRA is exempt under 42 Pa.C.S. § 8124(b)(1)(ix).

B. Uniform Treatment of IRAs Under § 522(b)(2) and (b)(3)

A number of courts have wrestled mightily with the language of the IRS Code and its interplay with various state exemption statutes. Compare In re Jarboe, 365 B.R. 717 (Bankr.S.D.Tex.2007) (inherited IRA “is not a retirement plan”...