Lead Opinion
opinion of the Court:
INTRODUCTION
T1 Utah Code section 78B-5-505
BACKGROUND
12 In December 1992, Dr. Douglas James Reinhart, in his capacity as a sole proprietor, established a Keogh plan
3 On January 1, 1996, Dr. Reinhart incorporated his business as Douglas Reinhart, M.D., P.C. Upon incorporation, Dr. Reinhart ceased to be self-employed and became an employee of the P.C. However, Dr. Reinhart caused the P.C. to continue making contributions to his combination plan. Under the plan, Dr. Reinhart was required to make all eligible employees participants in the plan and to make contributions to the Keogh plan equaling 10 percent of each participant's annual compensation. Although Dr. Reinhart's wife, Janet Reinhart, was his only eligible employee, Dr. Reinhart failed to make Janet a participant under the plan.
{ 4 On January 28, 2000, Dr. Reinhart filed a voluntary chapter 7 bankruptcy petition in the United States Bankruptcy Court for the District of Utah. On May 16, 2000, Dr. Rein-hart filed amended schedules claiming that the funds in his Keogh plan were exempt from bankruptcy proceedings pursuant to Utah Code section 78B-5-505(1)(a)(xiv). At that time, Dr. Reinhart's Keogh plan was valued at $306,000. Subsequently, Dr. Rein-hart filed an amended schedule showing an increase in the market value of the exemption to $333,885.65. The trustee of Dr. Rein-hart's bankruptey estate, David Cadwell (the Trustee), objected to Dr. Reinhart's claimed exemption, arguing that the exemption statute did not cover the plan because the plan was not technically tax qualified under IRC section 401(a). Both parties relied on Utah Code section 78B-5-505(1)(a)(xiv), which provides that "[aln individual is entitled to exemption of ... a retirement plan ... that is described in Section 401(a)" of the IRC.
T 6 On May 15, 2008, the bankruptey court entered oral findings and conclusions determining that the alleged Keogh plan was operationally in default. Despite this operational default, the bankruptey court found that the plan was "nonetheless, described in Section 401(2)," and thus, the funds in the plan were exempt under Utah Code section 78B-5-505(1)(a)(x)(xiv). On June 8, 2008, the bank-ruptey court entered an Exemption Order and the Trustee appealed to the U.S. District Court for the District of Utah. On February 6, 2009, the district court affirmed the Exemption Order. The Trustee subsequently appealed the district court's decision to the Tenth Cireuit Court of Appeals. After hearing oral argument, the Tenth Cireuit entered an order certifying to this court the state law question presented in the appeal. We have Jurisdiction to answer a question of law certified by the Tenth Circuit pursuant to Utah Code section 78A-3-102(1).
STANDARD OF REVIEW
17 When a federal court certifies a question of state law to this court, "we answer the legal questions presented without resolv[ing] the underlying dispute." In re Kunz,
ANALYSIS
18 The question presented for our review is whether a Keogh plan is "described in Section 401(a)" of the IRC when that plan fails to fulfill the section's requirements for tax qualification. Dr. Reinhart argues that the plain language of the exemption statute does not require a plan to be tax qualified. Specifically, he argues that the legislature's use of the term "described in" rather than the term "qualified under" indicates its intent to exempt Keogh plans that are not technically tax qualified under section 401(a) of the IRC. Additionally, Dr. Reinhart argues that the statute should be construed in his favor because state bankruptcy exemption statutes are liberally construed to protect debtors and their families from hardship.
T9 In contrast, the Trustee argues that the exemption statute only exempts tax qualified plans because the only plans "described in Section 401(a)" are qualified plans. In support of his argument, he points to the headings in section 401 and subsection (a), which are titled "[qlualified pension, profit-sharing, and stock bonus plans," and "[rle-quirements for qualification." L.R.C. § 401(a) (2006 & Supp.2010).
¶10 "Pursuant to general principles of statutory interpretation, 'Iwle look first to the ... plain language,' recognizing that 'our primary goal is to give effect to the legislature's intent in light of the purpose the statute was meant to achieve'" In re Kunz,
{11 The exemption statute provides that: (1)(a) An individual is entitled to exemption of the following property:
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(xiv) except as provided in Subsection (1)(b), any money or other assets held for or payable to the individual as a participant or beneficiary from or an interest of the individual as a participant or beneficiary in a retirement plan or arrangement that is described in Section 401(a), 401(h), 401(k), 408(a), 408(b), 408, 408A, 409, 414(d), or 414(e), [of the] Internal Revenue Code....
Utah Code Ann. § 78B-5-505(1)(a)(xiv) (2008) (emphasis added).
112 On its face, the exemption statute does not require that a retirement plan be tax qualified. Rather, it requires only that a retirement plan be "described in Section 401(a)" Id. The "described in" language could reasonably be interpreted to mean that the exemption statute incorporates the tax qualification requirements specified by IRC Section 401(a) As the Trustee correctly notes, the only plans "described in Section 401(a)" are qualified plans. See LRC. § 401(a) But the "described in" language could also be reasonably interpreted to exempt plans that are not technically tax qualified. Indeed, we assume the legislature used each word advisedly, John Holmes Constr., Inc.,
{13 The phrase "described in" is broader than the phrase "qualified under." The term "described" is used to provide a general characterization and means "picture in words," Webster's New Conner Dictionary 390 (2007), whereas the term "qualified" means "having met conditions or requirements set." Id. at 1173. Additionally, the legislature's use of the term "described in" is consistent with the IRC, which makes it clear that a retirement plan does not necessarily lose its tax exempt status as a result of technical defects in the plan. For instance, retirement plans that are not in compliance with section 401(a) may be amended to qualify with retroactive effect. L.R.C. § 401(b) (2006). In fact, the IRS has created a program, known as the Employee Plans Compliance Resolution System (EPCRS), by which an employer can correct operational defects. Under this program, a retirement plan that is not technically tax qualified because of operational defects may retain its tax exempt status while the employer cures the defects. See Rev. Proc.2008-50; 2008-85 L.R.B. 464. Because the IRS provides employers the opportunity to cure operational defects without imposing the extreme sanction of disqualifi-eation, it would be inconsistent to construe the statute in such a manner that a debtor would forfeit his entire exemption as a result of an operational defect that is curable under the EPCRS. We conclude that both Dr. Reinhart's and the Trustee's interpretation of the "described in" language is reasonably supported by the language of the exemption statute. We therefore turn to legislative his
{14 The bankruptcy code's overarching purpose is to help a debtor "obtain a fresh start." Cf. Rousey v. Jacoway,
T 15 We are mindful of the competing policy interest that a debtor not use his retirement plan as a means of hiding assets from creditors. See id. ¶ 11. Indeed, section 401(a) of the IRC limits the amount of money that a taxpayer can contribute to a Keogh plan and still maintain its tax favored status. L.R.C. § 401(a)(16) (2006). By requiring that a plan be "described in" section 401(a), the legislature has explicitly recognized a creditor's interest by limiting the amount of assets that a debtor can convert into exempt retirement accounts. It is therefore unlikely that the legislature intended to exempt retirement plans that violate the very purpose of 401(a), ie. a retirement plan that is being used as a means of tax avoidance would not be "described in Section 401(a)" But it is equally unlikely that the legislature intended to take away a debtor's entire retirement savings exemption merely because the plan did not strictly comply with section 401(a) by, for example, exceeding the section's maximum contribution limit by ten dollars. Even the IRS does not prescribe such a harsh result and will allow a taxpayer to amend technical plan defects under the EPCRS with retroactive effect if the defect is not associated with tax avoidance transactions. Rev. Proc.2008-50 §§ 1.03 & 4.13; 2008-
116 Because we believe that the legislature did not intend for a debtor to lose his entire retirement exemption because of technical violations of 401(a), we hold that a retirement plan is "described in" section 401(a) if it substantially complies with the requirements of that section. And an unqualified plan is in substantial compliance with the provisions of 401(a) if the defect does not violate the underlying purpose of 401(a). Cf. Aaron and Morey Bonds and Bail v. Third Dist. Court,
117 The dissent argues that there is no basis for the substantial compliance standard we propose. We disagree. Looking at seetion 401(a) in context of the IRC as a whole, and the treasury regulations underlying this section, reveals that section 401(a) does in fact espouse a substantial compliance standard. See I.R.C. § 401(b) (allowing a taxpayer to amend a retirement plan that does not comply with section 401(a) with retroactive effect); Treas. Reg. § 1.401(b)-1(a) (as amended in 2000). Consistent with this standard, the IRS has developed the EPCRS, which allows a taxpayer to correct technical errors in his retirement plan so long as the error is not related to a tax avoidance transaction. Rev. Proc.2008-50 §§ 1.03 & 4.13, 2008-
1 18 The dissent also seems to make much of the fact that the debtor in this case never amended his retirement plan under the EPCRS. Infro ¶30. But the fact that a debtor's retirement plan fails to meet the requirements of section 401(a) at the time he files for bankruptcy does not necessarily mean that the debtor never intends to amend his plan to comply with those requirements. More likely, the debtor is unaware that his plan failed to meet the requirements of seetion 401(a) and did not realize the error until it was uncovered by his creditors during the bankruptey proceeding. Were we to adopt the dissent's position and require strict compliance with section 401(a), a debtor would never be able to correct an error he discovered in his plan after his bankruptcy petition was filed because the debtor's estate and exemptions are determined at the time the bankruptey petition is filed. 11 U.S.C § 54l1(a). But such a position is inconsistent with the exemption statute, which provides that retirement plans "deseribed in" section 401(a) of the IRC are exempt from the bank-ruptey estate. This section, when read in context of the IRC, allows a taxpayer an opportunity to cure defects in his retirement plan as long as the plan is in substantial compliance with its provisions. See supra ¶ 17; see also In re Copulos,
CONCLUSION
{19 The "described in" language of Utah Code section 7T8B-5-505(1)(a)(x)(xiv) includes retirement plans that are not technically tax qualified under IRC section 401(a). Accordingly, we hold that a retirement plan is "de-seribed in" the exemption statute when it is in substantial compliance with IRC section 401(a).
Notes
. Because there have been no substantive changes to the relevant statutes that would affect this opinion, we cite to the current versions unless otherwise indicated.
. A Keogh plan is a retirement plan in which a self-employed taxpayer can deduct from the taxpayer's annual income tax returns certain contributions made to the plan. State Farm Life Ins. Co. v. Swift (In re Swift),
. See 11 U.S.C. § 522(d)(10)(E)(iii) (2006); Alaska Stat § 09.38.017(e)(3) (West 2010); Idaho Code Ann. § 55-1011(1) (2007); Kan Stat. Ann. § 60-2308(b) (2005) Me.Rev.Stat. Ann. tit. 14, § 4422(13)(E)(3) (Supp.2010); Md.Code Ann, Cts. & Jud. Proc. § 11-504(h)(1) (LexisNexis Supp. 2011); Miss.Code Ann. § 85-3-1(e)(i) (2011); Mo Rev.Stat. § 513.430(1)(10)(e)(c) (West Supp.2011); Mont.Code Ann. § 31-2-106(3)(c) (2011); Nes.Rev.Stat. Ann. § 25-1563.01(2) (LexisNexis 2004); Nev.Rev Stat Ann. § 21.090(r)(4) (LexisNexis Supp. 2009) N.J. Stat Ann. § 25:2-1 (West Supp. 2011); N.Y. Debt. & Cred. Law § 282(2)(e)(i) (McKinney 2011); N.D. Cent.Code § 28-22-03.1(8)(e)(3) (Supp.2011); S.C.Code Ann § 15-41-30(A)(11)(e)(iii) (Supp.2010); Tenn. Code Ann. § 26-2-111(1)(D)(iii) (Supp.2011); Vt Stat. Ann. tit. 12, § 2740(16) (2002); W. Va.Code Ann. § 38-10-4(j)(5)(C) (LexisNexis 2011).
Dissenting Opinion
dissenting:
T{21 Douglas Reinhart's retirement plan failed on several grounds to meet the statutory requirements for a tax-deferred Keogh plan under section 401(a) of the Internal Revenue Code. And although the IRS has established mechanisms for taxpayers to seek to correct plan defects to avoid adverse tax consequences, Reinhart never employed such mechanisms to try to bring his plan into IRS compliance. Despite these problems, the court today concludes that Reinhart's plan may be exempt from bankruptcy proceedings on the ground that it is nonetheless a plan "described in" section 401(a) for purposes of the Utah exemption statute, Utah Code Ann. § 78B-5-505(1)(a)(xiv). The court bases its conclusion on the notion that a plan that fails to qualify under section 401(a) is still deemed to be "described in" that section if it is in "substantial compliance" with its provisions.
22 I respectfully dissent. First, I see no basis in the Utah exemption statute for the "substantial compliance" standard adopted by the majority. The exemption statute speaks of plans "described in section 401(a)," id., and lacks reference to "substantial," "material," or any other limitation of the sort embraced by the court.
4 23 Second, I see no basis in the text or structure of the federal statute for distinguishing "substantial" Keogh plan requirements from insubstantial ones. Section 401(a) describes Keogh plans by setting forth their "[rlequirements for qualification," I.R.C. § 401(a) (2006 & Supp.2010). I see no non-arbitrary way for us to designate some federal requirements as "substantial" or to denigrate others as insignificant. Instead, I would read the Utah exemption provision's reference to plans "described in section 401(a)" to refer to all of the requirements of
[ 24 I would resolve the interpretive question presented here on that basis, without resort to the canon of construction cited by the majority, much less the "policy considerations" that it deems instructive. Supra ¶13. The canon of interpreting exemption provisions liberally in the debtor's favor strikes me as problematic, as it states not a linguistic principle reflecting common usage or understanding, but a substantive preference for debtors over creditors.
25 Some substantive canons are defensible on the ground that they reflect a longstanding, unequivocal policy preference that the legislature can be presumed to have legislated against.
T26 Even if the majority's canon were defensible, this would not be an appropriate case to invoke it. Substantive canons are properly implicated at the last stage of statutory construction, to resolve a virtual "tie" between the opposing constructions introduced by the parties.
127 The court also roots its approach in the notion that both parties' constructions find plausible support in the "language of the exemption statute," supra ¶13, which it takes as a license to consider "relevant policy considerations" to inform its decision, supra ¶ 14. Both steps in that analysis are problematic. First, the fact that opposing parties proffer facially plausible constructions of the words of a statute can never be enough to abandon the quest for statutory meaning in favor of a subjective policy decision.
T28 The court's invocation of "relevant policy considerations," supra ¶ 13, is also troubling. I see no way to attribute to either the bankruptey code or the Utah exemption statute an unqualified "overarching purpose" of giving a "fresh start" to debtors. Supra ¶ 14. (internal quotation marks omitted) Surely both statutes have a more nuanced purpose, one that balances both the interests of debtors in starting over and the interests of creditors in protecting their property. The majority acknowledges as much in conceding a countervailing "policy interest that a debtor not use his retirement plan as a means of hiding assets from creditors." Su-pro 115. Yet once that more complex picture is acknowledged, it becomes difficult to divine any "overarching purpose" that can guide our interpretive task beyond the purpose as expressed in the precise terms of the statutory text. It is that text that should guide us, not a one-sided generalization of the statute's "purpose" contrived by the judi-clary.
129 The majority's holding is ultimately derived from its preference for the debtor's side of this policy balance at the expense of creditors. That decision is problematic for all of the reasons noted above. But even assuming a one-sided statutory purpose of preserving a debtor's fresh start, I still see no basis for the "substantial compliance" standard adopted by the majority. That standard is not at all necessary to protect the debtor from "los[ing] his entire retirement exemption because of technical violations of [section] 401(a)." Supra ¶ 16. As the majority recognizes, the IRS has set up an administrative mechanism to allow taxpayers to seek to correct operational defects in a 401(a) plan. This mechanism, the Employee Plans Compliance Resolution System (EPCRS), is the exclusive method under federal law for addressing the policy problem that motivates the court's majority in this case. As the majority acknowledges, the EPCRS allows "a retirement plan that is not technically tax qualified because of operational defects" to "retain its tax exempt status while the employer cures the defects." Supra ¶ 13. The EPCRS system is thus the answer to the majority's policy concern. Debtors like Reinhart are not consigned to the whims of technical default. They can cure such defaults through EPCRS, and by properly doing so retain their exempt status despite operational defects.
T30 It does not follow, however, that a plan whose defects are never cured under EPCRS procedures is still entitled to the benefit of the IRS's intent to allow taxpayers to avoid losing their "entire retirement savings exemption" under section 401(a). Supra ¶ 15. In fact, where a taxpayer fails to utilize the IRS's established mechanism for maintaining a tax exemption by curing statutory defects in a plan, the opposite conclusion seems evident: The plan's uncured defects are fatal under the IRS's regulatory scheme, and thus sufficient to sustain the conclusion that it is not a plan "described under 401(3)" according to federal law.
T31 Put another way, we may assume it "unlikely that the Legislature intended to take away a debtor's entire retirement savings exemption merely because the plan did
1 32 The courts are in no position to adopt our own standards dictating which federal requirements are substantial and which ones are not. If a plan fails to meet the federal requirements described in section 401(a) (as modified by the administrative mechanism of the EPCRS), that plan is not described in section 401(a) and it should be deemed not to sustain an exemption under Utah law.
1 33 The majority seeks to tie its "substan-tiality" standard to the "underlying purpose" it sees in section 401(a), supra ¶ 16, but the purpose the court identifies strikes me as incompatible with the federal 401(a) regime. I don't see how we can conclude that the IRS would endorse a plan that fails to comply with section 401(a) and is never brought into compliance under EPCRS. In such cireum-stances it seems apparent that the IRS does prescribe the result (disclaimed by the court) of "tak[ing] away" a taxpayer's 401(a) exemption. Supra ¶ 15. Such a result is not "harsh." -It is the inevitable implication of a framework of legal requirements (including an administrative mechanism for curing initial defects) that are prerequisites for a tax exemption. At some point, the failure to abide by those requirements must result in the loss of the tax exemption. Otherwise the IRS's Keogh plan "requirements" would be nothing more than gentle suggestions.
[ 34 The problems with the majority's sub-stantiality standard are not resolved by the notion that "a plan substantially complies with 401(a) if the defect is not the result of an attempt to avoid tax." Supra ¶ 16. First, the majority's subjective-intent standard is incompatible with the Internal Revenue Code, which makes 401(a) qualification turn on compliance with the standards set forth in the Internal Revenue Code, not on whether a taxpayer subjectively intends to "avoid tax." Second, the tax-avoidance question is more than a little puzzling in this context. Presumably, anyone who establishes a 401(a) Keogh plan is engaged in an "attempt to avoid tax," and thus most any adaptation or change to the plan can be deemed to have a similar purpose. Such a purpose, moreover, is entirely lawful if it complies with federal law and unlawful only if it doesn't. All of which brings us back to the key legal question, which is whether the plan is one "described in" section 401(a). It seems to me that the answer to that question has to come back to the requirements set forth by statute and informed by the EPCRS mechanism, not to the subjective question of intent to avoid taxation.
35 The court seems to acknowledge the force of this analysis in seeking to moor its "substantial compliance" standard in the EPCRS "treasury regulations underlying" section 401(a). Supra ¶ 17. But fulfillment of the EPCRS regulations cannot literally be the majority's standard unless its concession on this point is really an agreement with my dissenting view. A Keogh plan satisfies the cited EPCRS regulations if and only if the plan is actually corrected in compliance with those regulations. Unless and until a plan administrator complies with the terms and conditions prescribed in EPCRS proceedings for curing plan defects, the plan is not in compliance (substantial or otherwise) under the treasury regulations cited by the majority.
T 36 Thus, I agree that a Keogh plan that is actually corrected through the EPCRS process would be exempt as "described in" section 401(a). Supra ¶ 17. Such a plan would, at that point, be cured of any defects from the IRS's perspective and thus presumably would "be considered as satisfying the requirements" of section 401(a) nune pro
137 The proceedings in the bankruptcy court could easily accommodate such a resolution. When a debtor's claimed 401(a) exemption is met with an objection identifying an operational defect in the plan, the debtor can then pursue an EPCRS correction under applicable regulations.
T38 Instead of deeming an EPCRS-cor-rected plan as exempt, the majority adopts a standard that requires courts to speculate about whether any Keogh-plan defects at the time of a bankruptcy filing could have been cured through EPCRS procedures. I have no idea how a court is supposed to perform that speculative analysis, particularly where EPCRS corrections require compliance with remedial measures and we have no idea what those measures would be absent an actual EPCRS proceeding.
. See Marion Energy, Inc. v. KFJ Ranch P'ship,
. Id. 141
. See id. ¶ 46 (decrying a different substantive canon as being "precisely at odds" with another and raising concerns about arbitrariness in the face of "self-canceling 'thrust-and-parry' rules").
. See Ivory Homes v. Utah State Tax Comm'n,
. See id. at ¶ 31 (majority opinion) (invoking the canon of narrow construction of tax credits "in favor of the taxing entity" only "where legislative intent is not clear"); Marion Energy,
. See Olsen v. Eagle Mountain City,
. See I.R.C. § 401(b) (2006) (providing that a plan is "considered as satisfying the requirements of subsection (a)" for any period "beginning with the earlier of the date on which there was adopted or put into effect any amendment which caused the plan to fail to satisfy such requirements" if "all provisions of the plan which are necessary to satisfy such requirements are in effect" within the prescribed time "as the Secretary may designate" and "have been made effective for all purposes for the whole of such period").
. The majority suggests that a debtor may be "unaware that his plan failed to meet the requirements of section 401(a)" at the time of a bankruptcy filing, supra ¶ 18, but any such claim of ignorance dissipates upon the assertion of an objection (as in this case). Reinhart surely knew of the operational defects in his 401(a) plan when the trustee asserted his objection, yet he still to this date has failed to seek any correction through EPCRS procedures. To me that is telling, and it thoroughly undermines the concerns of surprise trumpeted by the majority.
. Rev. Proc.2006-27 § 6.02(2), 2006-
. I do not envy the task of the federal courts in resolving this case in the wake of our decision. The defects in Reinhart's plan include his failure to cover one of his employees despite the statutory requirement of coverage for all eligible employees, I.R.C. § 401(a)(3); and Reinhart's unauthorized use of the plan to make a $10,400 contribution to fund an automobile loan for Colleen Parker, in contravention of the requirement that plan contributions be made exclusively through Charles Schwab & Co. as the Keogh plan custodian. The majority opinion gives no manageable yardstick for measuring the substan-tiality of these defects, and on the face of them I see no basis for dismissing them as insignificant. Instead of sending this case to the federal courts for a subjective evaluation of that question, I