60-Day Rollover Does Not Disqualify IRA Funds from Exemption

Posted by NCBRC - October 16, 2013

The Fourth Circuit is poised to review the bankruptcy court’s decision that a debtor may rely on the 60-day rollover rule to withdraw funds from his IRA, use them for living expenses, and redeposit them within 60 days without their losing their exempt status in bankruptcy. In re Rudd, 2013 WL 2684541 (Bankr. E.D. N.C., June 12, 2013). The trustee objected to the debtor’s IRA exemption to the extent it included funds he had withdrawn and redeposited, arguing that the rollover was a prohibited transaction under 26 U.S.C. § 4975. IRC section 4975(c)(1)(D) defines “prohibited transaction” as including any “transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan.”

Noting that even in states that have opted out of the federal exemptions, section 522(b)(3)(C) governs IRA exemptions, the bankruptcy court began with that provision. Under section 522, IRA funds are exempt if they have received a favorable determination by the IRS under IRC section 7805, or “to the extent that those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986.” Relying on section 522(b)(4)(A), the court treated the statement in the IRA “Custodial Agreement and Disclosure Statement” that the IRS had approved the IRA as to form, as a predetermination of exempt status under section7805, thereby placing the burden of proving otherwise on the trustee.

With respect to rollover, section 522(b)(4) provides:

(D)(i) Any distribution that qualifies as an eligible rollover distribution within the meaning of section 402(c) of the Internal Revenue Code of 1986 or that is described in clause (ii) shall not cease to qualify for exemption under paragraph (3)(C) or subsection (d)(12) by reason of such distribution.

(ii) A distribution described in this clause is an amount that–

(I) has been distributed from a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986; and

(II) to the extent allowed by law, is deposited in such a fund or account not later than 60 days after the distribution of such amount

IRC section 408(d)(3) also specifically permits this 60-day rollover. The bankruptcy court thus concluded generally, that “distributions made pursuant to the 60-day rollover rule retain their status as exempt from the bankruptcy estate under federal and state law.”

The trustee argued, however, that the funds lost their exempt status because the debtor’s personal use of the funds constituted a prohibited transaction under IRC section 4975(c)(1)(D). The trustee relied on In re Willis, 2009 Bankr. LEXIS 2160 (Bankr. S.D. Fla. 2009) in which the debtor used retirement funds to engage in a number of “self-dealing” “check-swapping” transactions which the court determined were likely to injure the pension plan and were, therefore, prohibited under section 4975(c)(1)(D). The bankruptcy court in Rudd rejected this comparison finding that the debtor’s conduct was distinguishable from that of the debtor in Willis because there was no “indicia of self dealing” and the debtor’s conduct was not of the type Congress intended to prohibit. To read section 4975 so broadly, the court opined, would do away with the 60-day rollover rule altogether.

The court concluded that “The 60-day rollover rule applies to maintain the exempt status of the entire retirement account. Because this type of transaction was specifically contemplated in the Internal Revenue Code and the Bankruptcy Code, the court finds that the exemption claimed by the debtor in his retirement account was proper. The trustee has failed to rebut the presumption that the funds are no longer exempt under the Internal Revenue Code or the Bankruptcy Code.”

The Fourth Circuit has granted the trustee’s petition for direct appeal. Oliver v. Rudd (In re Rudd), No. 13-2132.

Rudd opinion

Thank you to www.CBAR.pro for alerting NCBRC to this appeal.


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