538 B.R. 776
E.D. Ark.2015Background
- Barry Kellerman controlled a self-directed IRA administered by Entrust Mid South and claimed it as exempt in a 2009 bankruptcy (value claimed $180,000; earlier statement showed ~$252,113).
- In 2007 the IRA and Panther Mountain Land Development, LLC (50% owned by Barry and Dana Kellerman) formed a partnership to acquire and develop a four-acre tract; Barry signed for Panther Mountain and was the sole signatory on partnership checks.
- The IRA financed the purchase price ($122,830.56) and later paid $40,523.93 for development costs; the warranty deed conveyed undivided one-half interests to the IRA and Panther Mountain.
- Panther Mountain later listed debts owed to the IRA (including approx. $163,000) in its Chapter 11 schedules; the bankruptcy court found this and other evidence showed the transactions benefitted disqualified persons.
- The bankruptcy court held the IRA engaged in prohibited transactions under 26 U.S.C. § 4975(c)(1), causing the IRA to lose its tax-exempt status as of January 1, 2007, so the Kellermans could not claim the exemption under 11 U.S.C. § 522(d)(12).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether IRA engaged in prohibited transactions with disqualified persons | Kellermans: purchase and contributions were legitimate partnership investments, not loans; administrator approved; IRS never revoked exempt status | Trustee/Arvest: transactions were loans/extensions of credit and transfers benefitting disqualified persons (Panther Mountain/Kellermans) | Court: IRA engaged in prohibited transactions — loan/benefit to disqualified persons established |
| Whether IRA lost tax-exempt status before bankruptcy filing | Kellermans: no IRS determination; transaction prudence and valuation show no prohibited conduct | Trustee/Arvest: loss occurs under §408(e)(2) when prohibited transactions occurred, regardless of IRS action | Court: IRA lost exempt status as of Jan 1, 2007, prior to bankruptcy filing |
| Effect of administrator/custodian disclaimers and approvals | Kellermans: custodian/administrator signed buy/sell directions, implying acceptance | Trustee/Arvest: letters disclaimed custody/approval of tax compliance and placed decision responsibility on Kellerman | Court: disclaimers negate reliance; custodian’s role insufficient to validate transactions |
| Relevance of property valuation/transaction prudence | Kellermans: property was worth much more than price paid, so transaction was not a disguised loan | Trustee/Arvest: prudence/valuation irrelevant to prohibited-transaction analysis | Court: valuation/prudence irrelevant; credibility of Kellerman’s valuation rejected |
Key Cases Cited
- Fix v. First State Bank of Roscoe, 559 F.3d 803 (8th Cir. 2009) (standard of review for bankruptcy findings and conclusions)
- Danduran v. Kaler (In re Danduran), 657 F.3d 749 (8th Cir. 2011) (presumptively valid exemptions; burden-shifting on exemption objections)
- Williamson v. Fireman’s Fund Ins. Co., 828 F.2d 249 (4th Cir. 1987) (credibility and deference to factfinder on intent issues)
- Plunk v. Yaquinto (In re Plunk), 481 F.3d 302 (5th Cir. 2007) (bankruptcy courts may determine tax status independent of IRS determinations)
- Grogan v. Garner, 498 U.S. 279 (1991) (preponderance of the evidence standard in bankruptcy contexts)
- Leib v. Commissioner, 88 T.C. 1474 (Tax Ct. 1987) (sound investment does not cure a prohibited transaction)