570 B.R. 844
Bankr. D. Idaho2017Background
- Debtors Elvin and Linda Smith filed Chapter 7 on July 29, 2016, listing $60,656.26 in a U.S. Bank IRA and claiming it exempt under Idaho Code § 11-604A (relying on IRC § 408 qualification).
- Smith previously held a Provident Trust Group IRA invested in Life Partners policies; he requested closure and opened a U.S. Bank IRA in late 2013.
- Provident re-registered the Provident IRA assets in Smith’s individual name in early 2014; Smith received some distributions and filed a personal proof of claim in the Life Partners bankruptcy.
- In June 2016 Smith sold his claim in the Life Partners bankruptcy to ASM Capital and received $60,655.62, which he deposited into the U.S. Bank IRA on June 27, 2016, shortly before filing bankruptcy.
- Trustee objected, arguing the June 2016 deposit was not a qualified IRA contribution: Debtors had no earned income in 2016 and the deposit was not a proper rollover (wrong source and outside the 60-day window).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the June 2016 deposit was an allowable IRA contribution under IRC § 408 given Debtors’ 2016 lack of earned income | Smith: the deposit should be treated substantively as a rollover from the Provident IRA and thus exempt; Provident’s actions caused any defect | Trustee: Debtors had no earned income in 2016, so they were ineligible to make IRA contributions that year | Court: Debtors had no earned income in 2016; contribution limits made qualified contributions $0, so deposit was not an allowable contribution |
| Whether the deposit qualified as a rollover under IRC § 408(d)(3) (source and timing) | Smith: the June 2016 deposit completed a rollover of the Provident IRA into the U.S. Bank IRA despite timing quirks and custodial actions | Trustee: the funds actually came from ASM (sale of claim), not a distribution from an IRA; alternatively, any distribution to Smith occurred in 2014 and the 60-day rollover period expired long before 2016 | Court: deposit was not a rollover—funds originated from ASM, not an IRA, and any distribution to Smith occurred in 2014 so no timely 60-day rollover occurred in 2016 |
| Whether equitable considerations or custodian error should preserve IRA status | Smith: Provident’s re-registration and paperwork errors justify looking to substance over form and allow exemption | Trustee: facts show transfer was at Smith’s request and not a bookkeeping error; equity cannot override IRC requirements for exemption under Idaho law | Court: declines equitable cure; transfer was not a custodial bookkeeping error, so equity does not save the exemption |
| Whether Debtors should be permitted to seek an IRS determination (VCP) to cure defects and preserve exemption | Smith: seek leave to pursue IRS determination that funds qualify under IRC § 408 (citing Richey) | Trustee: unnecessary and would not change statutory IRC § 408 requirements for exemption under Idaho law | Court: declines to allow pursuit of IRS determination here; even an IRS ruling would not control the exemption outcome on these facts |
Key Cases Cited
- Schwab v. Reilly, 560 U.S. 770 (recognizing limits on allowing exemptions not properly claimed under bankruptcy rules)
- Gebhart v. Gaughan, 621 F.3d 1206 (noting courts allow exemptions only to the extent properly claimed)
- In re Susan Sutton-Robinson, 472 B.R. 77 (Bankr. D. Ariz. 2012) (permitting IRS cure of defective rollover where facts showed custodial bookkeeping error and prompt correction)