459 B.R. 270
Bankr. E.D. Tenn.2011Background
- Debtor filed Chapter 7 bankruptcy on August 25, 2010, and owned a Merrill Lynch IRA valued at $61,646, claimed exempt on Schedule C.
- IRS favorable determination letter regarding the IRA under 26 U.S.C. § 408 existed as of filing, dated September 23, 2003.
- Trustee objected to the exemption, alleging a prohibited transaction under 26 U.S.C. § 4975 due to lien and margin lending provisions in Merrill Lynch agreements.
- Debtor contends the IRA remains a qualified retirement fund and exempt under Tennessee § 26-2-105(b) and 11 U.S.C. § 522(b)(3)(C).
- Parties entered stipulations and documents; no evidentiary hearing was held; issues framed for resolution by the court in briefs and argument.
- Court consistently notes the presumption of exemption under § 522(b)(4)(A) created by the favorable determination, which the Trustee bears the burden to rebut.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Is the Merrill Lynch IRA qualified under IRC § 408 as of petition date? | Trustee argues the IRA was disqualified due to a prohibited transaction. | Daley argues the favorable determination letter means it was qualified at filing. | Daley granted exemption; qualified status not sustained because of subsequent prohibited-transaction evidence. |
| If not qualified, is Daley entitled to exemption under Tennessee § 26-2-105(b) and 11 U.S.C. § 522(b)(3)(C)? | Trustee contends no exemption under state or federal provisions due to nonqualification. | Daley relies on the § 522(b)(3)(C) exemption for retirement funds and the § 522(b)(4) presumption. | Daley not entitled to exemption under § 26-2-105(b) or § 522(b)(3)(C) due to prohibited-transaction finding. |
| If the IRA is qualified, does exemption apply under § 522(b)(3)(C) notwithstanding the prohibited-transaction findings? | Trustee argues the prohibited transaction voids exemption. | Daley argues the determination letter and lack of actual borrowing protect exemption. | Exemption not allowed; the prohibited-transaction analysis defeats exemption under § 522(b)(3)(C). |
Key Cases Cited
- Janpol v. Commissioner, 101 T.C. 518 (T.C. 1993) (prohibited transactions and extensions of credit under § 4975 described)
- In re Garbett, 410 B.R. 280 (Bankr.E.D. Tenn. 2009) (trustee may rebut § 522(b)(4) presumption when IRA operated improperly)
- In re Lawrence, 219 B.R. 786 (E.D. Tenn. 1998) (exemptions construed liberally and as of petition date)
- Lebovitz v. Hagemeyer (In re Lebovitz), 360 B.R. 612 (6th Cir. BAP 2007) (exemption scope and application under § 522(b)(3)(C))