574 B.R. 422
Bankr. D. Mass.2017Background
- Debtor purchased an IRA annuity (Annuity Policy) from Allianz in 2005 with rollover funds; policy paid six annual payments of $7,204.07 and otherwise qualified under 26 U.S.C. § 408.
- In 2014 Debtor signed a Purchase Agreement with Wentworth to receive $27,000 in exchange for a purported sale/assignment of six annuity payments (aggregate $43,224.42); an Addendum clarified Debtor intended to sell only the six payments, not the entire policy.
- Debtor executed forms directing Allianz to make R.C. Henderson Trust (Henderson) the payee for those six payments and submitted a Service Request that purported to change ownership (despite IRS guidance against non‑annuitant ownership of an IRA); Allianz never changed the owner in its records.
- A UCC filing was made for "notice only" reflecting a lien in favor of Henderson; at least three payments were made to Henderson and Debtor reported them as income.
- Chapter 7 trustee objected to Debtor's exemption claim, arguing (1) the policy was sold prepetition and thus not estate property, and (2) Debtor engaged in prohibited transactions under IRC §§ 408(e)/4975 (sale or use as collateral), causing loss of tax‑qualified status and exemption.
- After trial, the court found the transfer effected only the six payments (not the policy), the prohibited‑transaction theory was not proven as to the remaining policy rights, and overruled the trustee's objection as to Debtor's retained rights (the challenge to the already‑transferred payments was premature/moot).
Issues
| Issue | Trustee's Argument | Debtor's Argument | Held |
|---|---|---|---|
| Whether Debtor sold or otherwise transferred the Annuity Policy prepetition (thus removing it from the estate) | The documents and UCC indicate a sale/assignment of the policy to Wentworth/Henderson; sale occurred for $27,000 so policy is not estate property | Transaction was only an assignment of six payments; Addendum and Allianz's continued record of Debtor as owner show policy was not transferred | The sale of the policy was not effectuated; only six payments were assigned; policy remained estate property to the extent not transferred |
| Whether Debtor engaged in a prohibited transaction under IRC §§ 408(e)/4975 (sale or use as collateral) causing loss of tax‑qualified status and exemption | The transfer/assignment and UCC constituted a prohibited sale or use as collateral, so the IRA ceased to be tax‑qualified and lost exemption | No prohibited transaction occurred with respect to the retained policy rights; any pledge/financing was a nullity because the economic transfer was only of payments | Trustee failed to rebut presumption of exemption; no prohibited transaction shown as to remaining policy rights |
| Whether any loss of exemption, if proven, would extend to entire annuity or only to transferred payments | Trustee: prohibited transaction would void tax qualification of the account, affecting the whole policy | Debtor: at most loss of exemption as to the specific transferred payments | Court: transferred six payments are not before it (premature); on merits, loss did not extend to the retained policy rights |
| Whether trustee's objection to exemption of transferred payments is ripe | Trustee: he may recover transferred rights for estate and then challenge exemption | Debtor: transferred payments already assigned; exemption challenge should be limited to retained rights | Objection as to transferred payments is premature/moot; only retained rights adjudicated |
Key Cases Cited
- Daley v. Mostoller, 717 F.3d 506 (6th Cir. 2013) (mere contractual possibility of a prohibited transaction does not overcome exemption presumption where no actual prohibited use occurred)
- Agin v. Daniels, 736 F.3d 70 (1st Cir. 2013) (affirming bankruptcy court finding of multiple prohibited transactions where record showed substantive disqualifying transfers)