531 B.R. 219
Bankr. E.D. Ark.2015Background
- Debtors Barry and Dana Kellerman filed Chapter 11 in 2009; case converted to Chapter 7 in 2014 and trustee M. Randy Rice was appointed.
- Barry Kellerman owned a self-directed IRA administered by Entrust; IRA reported value ~$252,000 in 2008 and debtors claimed it exempt under 11 U.S.C. § 522(d)(12).
- In 2007 the IRA and Panther Mountain Land Development, LLC (50% owned by the Kellermans) formed a partnership; IRA contributed a four-acre parcel (noncash) and later cash for development.
- Barry, as IRA beneficiary/fiduciary, directed Entrust to sell and buy assets and signed buy/sell direction letters disclaiming Entrust responsibility; the deed conveyed the tract as undivided one-half interests to the IRA and Panther Mountain.
- Panther Mountain later listed the IRA as an unsecured creditor for about $163,000 on its bankruptcy schedules; debtors conceded the involved parties were "disqualified persons" under 26 U.S.C. § 4975(e).
- Trustee and creditor Arvest objected that the IRA engaged in prohibited transactions under 26 U.S.C. § 4975(c), causing loss of tax-exempt status under 26 U.S.C. § 408(e) and making the § 522(d)(12) exemption inapplicable.
Issues
| Issue | Plaintiff's Argument (Trustee/Arvest) | Defendant's Argument (Kellerman) | Held |
|---|---|---|---|
| Whether IRA engaged in prohibited transactions under 26 U.S.C. § 4975(c) | Transactions (property contribution and cash payments) were uses/extensions of IRA assets benefiting disqualified persons and thus prohibited | Transactions were permissible investments/partnership contributions, not loans or self-dealing | Court held transactions violated § 4975(c)(1)(B),(D),(E); prohibited transactions occurred |
| Whether IRA lost tax-exempt status under 26 U.S.C. § 408(e) as a result | Prohibited transactions caused the IRA to cease being an IRA as of taxable year start (Jan 1, 2007) | IRA remained an exempt retirement account and thus protected by § 522(d)(12) | Court held IRA lost tax-exempt status as of Jan 1, 2007, so § 522(d)(12) exemption unavailable |
| Whether debtors may claim § 522(d)(12) exemption for the IRA | Exemption invalid because account was not tax-exempt at petition | Exemption valid because account was structured as an IRA and investments prudent | Court sustained objections; exemption disallowed |
| Characterization of the partnership transactions (loan vs. investment) | Facts support that Panther Mountain treated IRA as creditor (schedules list IRA as creditor) and Panther Mountain never made its promised cash contribution | Transactions were partnership contributions/ investments, not loans | Court treated the arrangements as effectively providing financing to disqualified persons (lending/benefit) and relied on that in finding prohibited transactions |
Key Cases Cited
- In re Danduran, 657 F.3d 749 (8th Cir. 2011) (debtor's claimed exemptions are presumptively valid; objector bears burden to prove otherwise)
- Grogan v. Garner, 498 U.S. 279 (1991) (standard of proof in bankruptcy adversary contexts is preponderance of the evidence)
- Walters v. Bank of the West (In re Walters), 450 B.R. 109 (B.A.P. 8th Cir. 2011) (burden-shifting when objector produces evidence against claimed exemption)
- Res-Ga Gold, LLC v. Cherwenka (In re Cherwenka), 508 B.R. 228 (Bankr. N.D. Ga. 2014) (distinguishing permissible self-directed IRA investments from prohibited transactions when the IRA's assets do not confer off-plan benefit to disqualified persons)