In re Sims
| Citation | 241 BR 467 |
| Decision Date | 23 November 1999 |
| Docket Number | Bankruptcy No. 98-02382-M. |
| Parties | In re Jerry A. SIMS, Debtor. |
| Court | United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — Northern District of Oklahoma |
Sidney K. Swinson, Tulsa, OK, for debtor.
Leonard W. Pataki, Tulsa, OK, for Vickye Madewell.
Steven W. Soule, Tulsa, OK, trustee.
THIS MATTER comes before the Court pursuant to the Objection to Claim of Exemption filed by Steven W. Soulé, Trustee herein ("Soulé" or "Trustee"), and the Objection to Exemptions filed by Vickye Madewell ("Madewell"), a creditor and party-in-interest. By agreement of the parties, this matter was submitted to the Court on stipulated facts and briefs. This memorandum opinion constitutes the Court's findings of fact and conclusions of law pursuant to Bankruptcy Rules 7052 and 9014 and Federal Rule of Civil Procedure 52.
The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334(b),1 and venue is proper pursuant to 28 U.S.C. § 1409. Reference to the Court of this matter is proper pursuant to 28 U.S.C. § 157(a), and it is a core procedure as contemplated by 28 U.S.C. § 157(b)(2)(A) and (O).
The burden of proof is upon the objecting parties, Soulé and Madewell, to show by a preponderance of the evidence that the exemptions were not properly claimed. See Fed.R.Bankr.P. 4003 (West 1998); see also In re Simpson, 206 B.R. 230, 232 (Bankr.E.D.Okla.1997).
On or about March 26, 1990, Hugh A. Sims established an Individual Retirement Account at the Trust Company of Oklahoma of Tulsa, designated as Account No. XXXX-XX-XX (the "IRA"). At the time the IRA was established, the Hugh A. and Virginia M. Sims Trust was designated as the beneficiary of the IRA. On October 9, 1995, Hugh A. Sims executed a Change of Beneficiary for the IRA, which designated Dr. Jerry A. Sims ("Dr. Sims" or "Debtor") as a beneficiary entitled to receive one-third of the proceeds of the IRA upon the death of Hugh A. Sims. Two other children of Hugh A. Sims were also named as beneficiaries.
Hugh A. Sims passed away on October 11, 1995, and his interest in the IRA passed to the named beneficiaries, including Debtor. In 1997, exercising his rights as a beneficiary, Dr. Sims withdrew $32,150.00 from the IRA. In 1998, once again exercising those rights, Dr. Sims withdrew $1,998.00 from the IRA. Dr. Sims has never made any contributions to the IRA, nor has he claimed any income tax deductions for contributions made to the IRA.
Dr. Sims filed a Voluntary Petition for Relief under Chapter 7 of the United States Bankruptcy Code with this Court on June 17, 1998. He has claimed his interest in the IRA as exempt. As of the date this bankruptcy case was filed, the value of Dr. Sims' interest in the IRA was approximately $57,868.57. The Trustee and Madewell have filed timely objections to the claimed exemption.
To the extent the "Conclusions of Law" contain any items which should more appropriately be considered "Findings of Fact," they are incorporated herein by this reference.
Pursuant to § 522 of the Bankruptcy Code a Chapter 7 debtor may exempt certain property from the bankruptcy estate and place it beyond the reach of creditors, while non-exempt property becomes part of the bankruptcy estate. Oklahoma has chosen to opt-out of the federal exemption scheme, limiting the exemptions available in bankruptcy cases to those allowed under state law. See § 522(b)(1), and see Okla.Stat.Ann. tit. 31, § 1 et seq. (West 1991 & Supp.1998), respectively. In claiming his interest in the IRA as exempt, Dr. Sims has relied upon certain Oklahoma statutory provisions allowing certain interests in individual retirement accounts to be claimed as exempt.2
Individual retirement accounts are investment vehicles which allow for deferral of taxation upon monies set aside for retirement. An individual establishing an individual retirement account may make annual contributions to the account in an amount of not more than $2,000.00. See 26 U.S.C. § 408(a)(1) (1999). The amount so contributed together with any income generated thereby, is not taxed until the person begins to take distributions from it. See 26 U.S.C. § 408(d)(1) (1999). Such distributions may begin as early as age 59½, and must begin no later than age 70½. See 28 U.S.C. § 401(a)(9)(C) (1999). If the individual who established the account takes funds from the account prior to age 59½, not only must that individual pay income tax on the money so received, the monies so received are subject to a 10% penalty. See 26 U.S.C. § 72(t)(1) (West 1999). The purpose of the penalty is to deter attempts to obtain premature access to the funds. The penalty does not apply when the distribution is "made to a beneficiary (or to the estate of the employee) on or after the death of the employee." See 28 U.S.C. § 72(t)(2) (West 1999).
The parties concede that the IRA was an "individual retirement account" for purposes of the Oklahoma exemption statute.3 There is little doubt that if Hugh A. Sims were the debtor in this case, he could properly claim the IRA as exempt. However, Dr. Sims acquired his interest in the IRA upon the death of his father. As such, his interest in the IRA constitutes an "inherited individual retirement account" for purposes of the Internal Revenue Code. See 26 U.S.C. § 408(d)(3)(C)(ii) (1999).4 The issue of whether one holding a beneficial interest in an individual retirement account by virtue of inheritance may claim the same as exempt appears to be a case of first impression. Dr. Sims argues that the Oklahoma exemption statute is sufficiently broad as to exempt his interest in the IRA. The Trustee and Madewell argue that an "inherited individual retirement account" is not exempt under Oklahoma law.
Once classified as an "inherited individual retirement account," the Internal Revenue Code places an entirely different set of rules upon the use, distribution and taxation of the funds in the individual retirement account. Once the account has been "inherited," the beneficiary may make no contributions to the account, nor may he or she "roll over" the inherited individual retirement account into another retirement plan. See 26 U.S.C. § 408(d)(3) (West 1999).5 He or she is required to take distributions from the account over a relatively limited period of time, in most cases five years.6 Upon receipt, those distributions are fully taxable. See 26 U.S.C. § 408(d)(1) (1999). These restrictions are not applicable where the beneficiary is the spouse of the person who established the individual retirement account. See 26 U.S.C. § 408(d)(3)(C)(ii)(II) (1999).
Under these provisions, fundamental changes in the nature of the IRA occurred upon the death of Hugh A. Sims. Prior to his death, all taxes on the funds in the IRA were deferred. Hugh A. Sims was not required to withdraw (and pay taxes upon) any of the funds in the IRA until he reached the age of 70½. Indeed, if he desired to obtain any of the funds in the IRA prior to age 59½, he faced the prospect of paying a penalty equal to 10% of the amount withdrawn. On the other hand, Debtor is required to withdraw his entire interest in the IRA within five years of the death of Hugh A. Sims, i.e., on or before October 11, 2000. Said withdrawal carries with it no penalty, although the distributions are subject to ordinary income tax. Once in the hands of Dr. Sims, the IRA is no longer a tool to defer taxation on income in order to provide for retirement; instead, the IRA is a liquid asset which may be accessed by Dr. Sims at his discretion without penalty, and which he must take as income within a relatively short period of time without regard for his retirement needs. The Court concludes that the interest of Dr. Sims in the IRA is not an "interest in a retirement plan or arrangement qualified for tax exemption purposes" under Oklahoma law. As such, Dr. Sims is not entitled to claim his interest in the IRA as exempt.
As this Court issues its ruling, it is mindful of the purpose of all exemption statutes as set forth by the Oklahoma Supreme Court:
The purposes of the exemption statute are to prevent improvident debtors from becoming subjects of charity by preserving to them sufficient definitely classified property that they maintain a home for themselves, and to prevent inconsiderate creditors from depriving them of the necessities of life. It is the duty of the court to so apply these exemption statutes to accomplish these purposes.
See Security Building & Loan Ass'n v. Ward, 174 Okla. 238, 50 P.2d 651, 657
(1935), cited with approval in In re Payne, 215 B.R. 889, 891-892 (Bankr.N.D.Okla. 1997). The Court believes that its decision today is consistent with the oft-cited maxim that the Oklahoma exemption laws are to be liberally construed in favor of the exemption. See, e.g., Nelson v. Fightmaster, 4 Okla. 38, 41, 44 P. 213, 214 (1896); Phelan v. Lacey, 51 Okla. 393, 394, 151 P. 1070, 1071 (1915); In re Fisher, 11 B.R. 666, 668 (Bankr.W.D.Okla.1981). This Court agrees with the concept of "liberal construction" as illuminated by the Honorable Mickey D. Wilson:
Oklahoma\'s exemption statutes are to be liberally construed . . . all Oklahoma statutes are to be "liberally construed," 12 O.S. § 2, 25 O.S. § 29, which surely does not mean that all Oklahoma statutes are to be stretched as far as they will go. The rule of "liberal construction" merely means that statutes shall be interpreted and applied sensibly rather than literally, with due regard for legislative purpose. Liberal construction reads and applies a statute in furtherance of the legislative purpose, whether that purpose be generous or restrictive. It is often said that, in determining whether property should be exempt, any doubt should be resolved in favor of exemption; see e.g. In re Fisher, 11 B.R. 666 (Bkrtcy.W.D.Okl.1981) at p. 668, citing Nelson v. Fightmaster, supra, and Phelan v. Lacey, 51 Okl....
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