Rousey v. Jacoway
Decision Date | 04 April 2005 |
Docket Number | No. 03-1407.,03-1407. |
Citation | 544 U.S. 320 |
Parties | ROUSEY ET UX. v. JACOWAY. |
Court | U.S. Supreme Court |
Several years after petitioners deposited distributions from their pension plans into Individual Retirement Accounts (IRAs), they filed a joint petition under Chapter 7 of the Bankruptcy Code. They sought to shield portions of their IRAs from their creditors by claiming them as exempt from the bankruptcy estate under 11 U. S. C. § 522(d)(10)(E), which provides, inter alia, that a debtor may withdraw from the estate his "right to receive ... a payment under a stock bonus, pension, profitsharing, annuity, or similar plan or contract on account of ... age." Respondent Jacoway, the Bankruptcy Trustee, objected to the Rouseys' exemption and moved for turnover of the IRAs to her. The Bankruptcy Court sustained her objection and granted her motion, and the Bankruptcy Appellate Panel agreed. The Eighth Circuit affirmed, concluding that, even if the Rouseys' IRAs were "similar plans or contracts" to the plans specified in § 522(d)(10)(E), their IRAs gave them no right to receive payment "on account of age," but were instead savings accounts readily accessible at any time for any purpose.
Held: The Rouseys can exempt IRA assets from the bankruptcy estate because the IRAs fulfill both of the § 522(d)(10)(E) requirements at issue here — they confer a right to receive payment on account of age and they are similar plans or contracts to those enumerated in § 522(d)(10)(E). Pp. 325-335.
(a) The Court reaffirms its suggestion in Patterson v. Shumate, 504 U. S. 753, 762-763, that IRAs like the Rouseys' can be exempted from the bankruptcy estate pursuant to § 522(d)(10)(E). Pp. 325-326.
(b) The Rouseys' IRAs provide a right to payment "on account of ... age" within § 522(d)(10)(E)'s meaning. The quoted phrase requires that the right to receive payment be "because of" age. Bank of America Nat. Trust and Sav. Assn. v. 203 North LaSalle Street Partnership, 526 U. S. 434, 450-451. This meaning comports with the common, dictionary understanding of "on account of," and § 522(d)(10)(E)'s context does not suggest another meaning. The statutes governing IRAs persuade the Court that Jacoway is mistaken in arguing that there is no causal connection between that right and age or any other factor because the Rouseys' IRAs provide a right to payment on demand. Their right to receive payment of the entire balance is not in dispute. Because their accounts qualify as IRAs under 26 U. S. C. § 408(a), they have a nonforfeitable right to the balance held in those accounts, § 408(a)(4). That right is restricted by a 10-percent tax penalty on any withdrawal made before age 59½, § 72(t). Contrary to Jacoway's contention, this 10-percent penalty is substantial. It applies proportionally to any amounts withdrawn and prevents access to the 10 percent that the Rouseys would forfeit should they withdraw early. It therefore effectively prevents access to the entire balance in their IRAs and limits their right to "payment" of the balance. And because this condition is removed when the accountholder turns age 59½, the Rouseys' right to the balance of their IRAs is a right to payment "on account of" age. Pp. 326-329.
(c) The Rouseys' IRAs are "similar plan[s] or contract[s]" to the "stock bonus, pension, profitsharing, [or] annuity ... plan[s]" listed in § 522(d)(10)(E). To be "similar," an IRA must be like, though not identical to, the listed plans or contracts, and consequently must share characteristics common to them. Because the Bankruptcy Code does not define the listed plans, the Court looks to their ordinary meaning. E. g., United States v. LaBonte, 520 U. S. 751, 757. Dictionary definitions reveal that, although the listed plans are dissimilar to each other in some respects, their common feature is that they provide income that substitutes for wages earned as salary or hourly compensation. That the income the Rouseys will derive from their IRAs is likewise income that substitutes for wages lost upon retirement is demonstrated by the facts that (1) regulations require distribution to begin no later than the calendar year after the year the accountholder turns 70½ (2) taxation of IRA money is deferred until the year in which it is distributed; (3) withdrawals before age 59½ are subject to the 10-percent penalty; and (4) failure to take the requisite minimum distributions results in a 50-percent tax penalty on funds improperly remaining in the account. The Court rejects Jacoway's argument that IRAs cannot be similar plans or contracts because the Rouseys have complete access to them. This argument is premised on her view that the 10-percent penalty is modest, a premise with which the Court does not agree. The Court also rejects Jacoway's contention that the availability of IRA withdrawals exempt from the early withdrawal penalty renders the Rouseys' IRAs more like savings accounts. Sections 522(d)(10)(E)(i) through (iii) — which preclude the debtor from using the § 522(d)(10)(E) exemption if an insider established his plan or contract; the right to receive payment is on account of age or length of service; and the plan does not qualify under specified Internal Revenue Code sections, including the section governing IRAs — not only suggest generally that the Rouseys' IRAs are exempt, but also support the Court's conclusion that they are "similar plan[s] or contract[s]" under § 522(d)(10)(E). Pp. 329-335.
347 F. 3d 689, reversed and remanded.
CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE EIGHTH CIRCUIT.
Pamela S. Karlan argued the cause for petitioners. With her on the briefs were Thomas C. Goldstein, Amy Howe, Claude R. Jones, and G. Eric Brunstad, Jr.
Colli C. McKiever argued the cause for respondent. With her on the brief were Jill R. Jacoway, pro se, Seth P. Waxman, Craig Goldblatt, and Jorian Rose.*
The Bankruptcy Code permits debtors to exempt certain property from the bankruptcy estate, allowing them to retain those assets rather than divide them among their creditors. 11 U.S.C. § 522. The question in this case is whether debtors can exempt assets in their Individual Retirement Accounts (IRAs) from the bankruptcy estate pursuant to § 522(d)(10)(E). We hold that IRAs can be so exempted.
Petitioners Richard and Betty Jo Rousey were formerly employed at Northrup Grumman Corp. At the termination of their employment, Northrup Grumman required them to take lump-sum distributions from their employer-sponsored pension plans. In re Rousey, 283 B. R. 265, 268 (Bkrtcy. App. Panel CA8 2002); Brief for Petitioners 2. The Rouseys deposited the lump sums into two IRAs, one in each of their names. 283 B. R., at 268.
The Rouseys' accounts qualify as IRAs under a number of requirements imposed by the Internal Revenue Code. Each account is "a trust created or organized in the United States for the exclusive benefit of an individual or his beneficiaries." 26 U. S. C. § 408(a) (2000 ed. and Supp. II). The Internal Revenue Code limits the types of assets in which IRA-holders may invest their accounts, §§ 408(a)(3), (a)(5), and provides that the balance in IRAs is nonforfeitable, § 408(a)(4). It also caps yearly contributions to IRAs. § 408(o)(2). Withdrawals made before the accountholder turns 59½ are, with limited exceptions, subject to a 10-percent tax penalty. § 72(t).
IRA contributions receive favorable tax treatment. In particular, the Internal Revenue Code generally defers taxation of the money placed in IRAs and the income earned from those sums until the assets are withdrawn. See § 219(a) ( ); § 408(e)(1) ( ). Moreover, within a certain timeframe accountholders can, as the Rouseys did here, roll over distributions received from other retirement plans. § 408(a)(1). The Internal Revenue Code encourages such rollovers by making them nontaxable. §§ 408(d)(3), 402(c)(1), 403(b)(8), and 457(e)(16).
The Rouseys' IRA agreements, as well as relevant regulations, provide that their "entire interest in the custodial account must be, or begin to be, distributed by" April 1 following the calendar yearend in which they reach age 70½. In re Rousey, 275 B. R. 307, 310 (Bkrtcy. Ct. WD Ark. 2002). The IRA agreements permit withdrawal prior to age 59½, but note the federal tax penalties applicable to such distributions. Id., at 311.
Several years after establishing their IRAs, the Rouseys filed a joint Chapter 7 bankruptcy petition in the United States Bankruptcy Court for the Western District of Arkansas. In the schedules and statements accompanying their petition, the Rouseys sought to shield portions of their IRAs from their creditors by claiming them as exempt from the bankruptcy estate pursuant to 11 U. S. C. § 522(d)(10)(E). This exemption provides that a debtor may withdraw from the bankruptcy estate his "right to receive —
. . . . .
"(E) a payment under a stock bonus, pension, profitsharing, annuity, or similar plan or contract on account of illness, disability, death, age, or length of service, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor. . . ."
The Bankruptcy Court appointed respondent Jill R. Jacoway as the Chapter 7 Trustee. As Trustee, Jacoway is responsible for overseeing the liquidation of the bankruptcy estate and the distribution of the proceeds. She objected to the Rouseys' claim for the exemption of their IRAs and moved for turnover of those sums to her. The Bankruptcy Court sustained Jacoway's objection and granted her motion. 275 B. R., at 309.
The Rouseys appealed. The Bankruptcy Appellate Panel (BAP) agreed with the Bankruptcy Court that the Rouseys could not exempt their IRAs under § 522(d)(10)(E). It concluded that the IRAs were not "`similar plan[s] or contract[s]'" to stock...
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