by A retirement annuity account funded by a rolled-over IRA in the debtor’s name which was in turn funded by a contribution in excess of that allowed for tax exempt status, may not be exempted from the debtor’s bankruptcy estate. In re Farber, No. 21-12147 (Bankr. E.D. Pa. April 26, 2022).
The chapter 7 debtor sought to exempt her Allianz retirement annuity account in the amount of $27,102.57 from her bankruptcy estate. The trustee objected on the basis that the IRA was not subject to exemption under section 522(d)(12), because the debtor inherited the account from her father.
In her initial response to the trustee’s objection, the debtor admitted that the IRA was inherited. However, in her brief and reply brief, the debtor argued that the IRA was, in fact, not inherited but that she established it herself using funds she inherited from her father. At the hearing, the debtor testified that when her father died in 2017, he left her an interest in his Prudential Life Insurance account for which she received a check for $41,000.00. She used that money to set up an IRA in her own name at Wells Fargo. She then rolled over that account to the Allianz annuity account.
In support of this assertion, the debtor presented testimony of the insurance broker who sold her the retirement annuity at Allianz. The broker, however, testified that he did not know what funds made up the Wells Fargo account and, so far as he knew, the Allianz account was not funded by an inherited IRA because that would not have been permitted. Ultimately, the court gave no credence to the broker’s testimony finding that he simply did not know how the debtor funded the Allianz IRA.
The trustee countered with testimony of a CPA, Charles Persing, who testified that Allianz’s 2018 Annual Summary of Tax Information of the Debtor IRA contributions, stated that “the Debtor made a rollover contribution in the amount of $41,447.41 for that year.” He further testified that the most the debtor would have been permitted to contribute to an IRA in that year would have been $7,000. Furthermore, he was unaware of any IRA solely in the debtor’s name as required for rollover. He concluded that the 2018 contribution would be illegal for tax exemption purposes and that it was a result of a paperwork error by Allianz.
At the end of the hearing, the court concluded that the IRA the debtor sought to exempt was not an inherited IRA but was rolled over from the Wells Fargo IRA which the debtor funded with her inheritance money. This finding did not end the question, however, as the court went on to explain that if the Wells Fargo IRA was not tax exempt, the Allianz IRA would not be tax exempt either.
The court turned its attention to the tax status of the Wells Fargo IRA. Section 408(a)(1) creates parameters for tax exemption for IRAs including limits on the amount of yearly contributions the account-holder may make. Under that provision, the maximum contribution the debtor was entitled to make in 2018 was $6,500. But she opened the Wells Fargo account using $41,000.00 she received from her late father’s Prudential account. The debtor then rolled over the Wells Fargo account to open her retirement annuity at Allianz. That account was subject to the same contribution limit of $6,500.
The debtor argued that even if her initial contribution exceeded the allowable amount, over the four years she held the account, she would have been entitled to contribute an amount slightly over the total of $27,102.57 that she sought to exempt. Specifically, the debtor stated that “Although it appears the Debtor did withdraw the funds from the inherited IRA and contributed $44,000 [sic] to the new IRA, had the Debtor cashed same, she could have contributed $6,500 in 2018, $7,000 in 2019, and $7,000 in 2020 thereby creating an exemptible IRA in the amount of $27,500.” The debtor also argued that the passage of the four-year period rendered the trustee’s objection barred by the statute of limitations on fraudulent transfers.
The trustee countered that her Wells Fargo account was the result of a “prohibited transaction,” and was therefore disqualified from tax exemption. IRC section 4975 prohibits a “disqualified person” from engaging in self-dealing with respect to IRAs. Disqualified persons include fiduciaries. Owners of IRAs are considered fiduciaries if they manage the accounts. Here, the court found the debtor had control over the Wells Fargo account such that she was a fiduciary. But, the court went on, excessive contributions, while subject to additional tax consequences and penalties, are not among the types of self-dealing that qualify as “prohibited transactions.”
To the extent the debtor argued that the trustee’s objection was time-barred by the fact that she opened the Allianz account four years earlier, the court rejected the argument finding essentially that it was not clearly stated and its basis not evident from the record.
The court next addressed the debtor’s argument that she should be permitted to exempt the amount from the Allianz account equal to the amount of contributions she would have been entitled to make over the years.
The court disagreed. It found that to the extent the current annuity balance reflects the total of contributions the debtor would have been entitled to make over the four years, it was only because the debtor had made periodic withdrawals from the account. The court concluded that the initial excess contribution gave rise to tax liability and precluded tax-exempt status. Neither the passage of time nor the rollover from Wells Fargo to the Allianz account altered that fact. For that reason, the court found the debtor could not exempt any of the Allianz retirement annuity account. It sustained the trustee’s objection in its entirety.
The debtor filed a notice of appeal to the district court on May 9, 2022, case no. 22-1817.