On June 28th, Ardelean & Dunne argued in front of the Bankruptcy Court for the Eastern District of Michigan, Detroit Division, on the issue of exemptions (protection from liquidation under the bankruptcy code) claimed to protect an Individual Retirement Account that was inherited from the bankruptcy filer’s father. The bankruptcy Trustee brought an action forth to exclude the exemptions allowed under § 522(d)(12) of the bankruptcy code so the IRA could be liquidated for the benefit of the filer’s creditors. Ardelean & Dunne represented the filer and appeared on his behalf.
The Bankruptcy Court heard lengthy oral arguments on the matter. The bankruptcy Trustee argued that the inherited IRA was not retirement funds as they were not contributed by the bankruptcy filer, acted differently than an IRA that would be created by the bankruptcy filer, and would not be used for the filer’s retirement.
Ardelean & Dunne argued for a plain language reading of “retirement funds” from § 522(d)(12) of the bankruptcy code The argument was that retirement funds means “an account or money set aside for the specific purpose of retirement or designed for a retired person.” Those funds remain the same money set aside specifically for retirement and the bankruptcy code makes no distinction as to who must contribute the funds or the person who retirement the funds must be set aside. To hold otherwise would be to read additional language into the bankruptcy code.
After hearing the arguments, the Bankruptcy Court announced that the taken bankruptcy exemptions would stand and that the inherited IRA was protected from liquidation by the bankruptcy Trustee. In its reasoning, the Bankruptcy Court employed the opinion in an identical case of In re Stephenson, Case No. 11-cv-10848, U.S. District Court for the Eastern District of Michigan, written by Judge Mark A. Goldsmith.
In Stephenson, a bankruptcy Trustee had similarly argued that an inherited individual retirement account did not qualify for bankruptcy exemptions under § 522(d)(12). Section 522(d)(12) allows for an exemption to be used on “retirement funds 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.”
The bankruptcy Trustee argued that: (1.) the inherited IRA was not proper retirement funds because they were not for the bankruptcy filer’s retirement, and (2.) the funds are not exempt from taxation under the listed sections of the bankruptcy code.
On the first issue, the Stephenson Court found that “Limiting the exemption to funds the debtor herself contributed for retirement would ‘impermissibly limit the statue beyond its plain language.'” Therefore, just because the funds were not contributed for the purposes of the debtor’s retirement, it maintains its character as “retirement funds.”
Regarding the second issue, the Stephenson Court ruled that § 408(e) of the Internal Revenue Code provides the tax exempt status for inherited IRA’s. Section 408(e) exempts “any individual retirement account” from taxation and does not distinguish between IRA’s. The Stephenson Court reasoned that inherited IRA’s were tax exempt under § 408, one of the enumerated sections in § 522(d)(12).
