In re James Allen HOWARD, Debtor., United States Bankruptcy Court, M.D. Georgia, Albany Division., 312 B.R. 713, No. 04-10131-JDW., May 19, 2004

In re James Allen HOWARD, Debtor.

United States Bankruptcy Court, M.D. Georgia, Albany Division.

312 B.R. 713

No. 04-10131-JDW.

May 19, 2004.

W. Thomas Smith, Albany, GA, for Debtor.

Paul L. Cames, Pruett W. Burge, War╜ner Robins, GA, for Trustee.

MEMORANDUM OPINION

JAMES D. WALKER, JR., Bankruptcy Judge.

This matter comes before the Court on the Chapter 7 Trustee's Objection to Debt╜or's Exemptions. This is a core matter within the meaning of 28 U.S.C. ╖ 157(b)(2)(B). After considering the pleadings, the evidence, and the applicable authorities, the Court overrules the objec╜tion and enters the following findings of fact and conclusions of law in conformance with Federal Rule of Bankruptcy Proce╜dure 7052.

Findings of Fact

Debtor Ja mes Howard filed a Chapter 7 petition on January 22, 2004. He listed an individual retirement account ("IRA") held at the Bank of Early with a value of $1 as an asset on Schedule B. On Schedule C, he claimed the IRA as exempt, again valuing it at $1. On his Statement of Financial Affairs, Debtor listed three withdrawals from the IRA: $20,000 in 2002, $5,000 in 2003, and $5,000 in 2004. He used the money to pay bills. Trustee objected to the exemption on the ground that the with╜drawals were prohibited transactions un╜der the Internal Revenue Code ("I.R.C.") that caused the account to cease being an IRA.

Conclusions of Law

In Georgia, a debtor may exempt from the bankruptcy estate "[a]n individual re╜tirement account within the meaning of Title 26 U.S.C. Section 408." O.C.G.A. ╖ 44-13-100(a)(2.1)(D) (2002). ¹ Title 26 of the United States Code, the I.R.C., defines an IRA as "a trust created or organized in the United States for the exclusive benefit of an individual or his beneficiaries" that meets a number of listed requirements I.R.C. ╖ 408(a) (West Supp.2003). An IRA is tax-exempt. Id . ╖ 408(e)(1). Ac╜count owners may withdraw funds from the account without penalty after reaching the age of 59-1/2, among other things. Id . ╖╖ 408(d), 72(t)(2)(A) (West 2002); howev╜er, money withdrawn early loses its tax-exempt status and is treated as gross in╜come with an additional 10 percent tax imposed on the amount withdrawn. Id . ╖ 72(t)(1). Only the amount withdrawn is affected. Id .

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^1. ═ Debtor in this case claimed the exemption pursuant to O.C.G.A. ╖ 44-13-100(a)(6), the "wildcard" exemption. However, both parties have limited their arguments to the validi╜ty of Debtor's IRA. The Court will address the issue as framed by the parties.

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Under certain circumstances the entire account may lose its tax-exempt status and cease being an IRA.

If, during any taxable year of the indi╜vidual for whose benefit any individual retirement account is established, that individual or his beneficiary engages in any transaction prohibited by section 4975 with respect to such account, such account ceases to be an individual retire╜ment account as of the first day of such taxable year.

Id. ╖ 408(e)(2)(A).

Section 4975 defines a prohibited trans╜action as follows:

(1) General rule.-For purposes of this section, the term "prohibited transac╜tion" means any direct or indirect-

(A) sale or exchange, or leasing, of any property between a plan and a dis╜qualified person;

(B) lending of money or other exten╜sion of credit between a plan and a disqualified person;

(C) furnishing of goods, services, or facilities between a plan and a disquali╜fied person;

(D) transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan;

(E) act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interest or for his own account; or

(F) receipt of any consideration for his own personal account by any disqual╜ified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan.

Id. ╖ 4975(c)(1) (West 2002).

The common thread among all the pro╜hibited transactions is that a "disqualified person" receives the benefit of the transac╜tion. Section 4975(e)(2) defines a disquali╜fied person as follows:

(A) a fiduciary;

(B) a person providing services to the plan;

(C) an employer any of whose em╜ployees are covered by the plan;

(D) an employee organization any of whose members are covered by the plan;

(E) an owner, direct or indirect, of 50 percent or more of-

(i) the combined voting power of all classes of stock entitled to vote or the total value of shares of all classes of stock of a corporation,

(ii) the capital interest or the profits interest of a partnership, or

(iii) the beneficial interest of a trust or unincorporated enterprise,

which is an employer or an employee organization described in subparagraph (C) or (D);

(F) a member of the family (as de╜fined in paragraph (6)) of any individual described in subparagraph (A), (B), (C), or (E);

(G) a corporation, partnership, or trust or estate of which (or in which) 50 percent or more of-

(i) the combined voting power of all classes of stock entitled to vote or the total value of shares of all classes of stock of such corporation,

(ii) the capital interest or profits interest of such partnership, or

(iii) the beneficial interest of such trust or estate, is owned directly or indirectly, or held by persons

described in subparagraph (A), (B), (C), (D), or (E);

(H) an officer, director (or an individ╜ual having powers or responsibilities similar to those of officers or directors), a 10 percent or more shareholder, or a highly compensated employee (earning 10 percent or more of the yearly wages of an employer) of a person described in subparagraph (C), (D), (E), or (G); or

(I) a 10 percent or more (in capital or profits) partner or joint venturer of a person described in subparagraph (C), (D), (E), or (G)[.]

Id. ╖ 4975(e)(2).

The withdrawals made by Debtor can only be prohibited transactions if a dis╜qualified person was involved. Trustee ar╜gues that Debtor is a disqualified person pursuant to subsection (E), which the Sev╜enth Circuit Court of Appeals has de╜scribed as "an owner of 50 percent or more of the stock of a corporation whose em╜ployees are covered by the plan." Eyler v. CIR , 88 F.3d 445, 448 (7th Cir.1996) (citing I.R.C. ╖ 4975(e)(2)(E)). In order to be a disqualified person, the debtor must have a majority ownership interest in the corpo╜ration sponsoring the plan. Trustee has not explained how Debtor fits into this category, other than to assert that an indi╜vidual who sets up an IRA for his own benefit is the equivalent to an employer who sets up a 401(k) plan for the benefit of his employees. The Court disagrees. A debtor who opens an IRA is more like an employee who participates in his compa╜ny's 401(k), while the financial institution that offers the IRA is more like the em╜ployer. The Court could find nothing in the I.R.C. to suggest otherwise.

Trustee cites In re Hughes, 293 B.R. 528 (Bankr.M.D.F1a.2003), to support his argu╜ment. In Hughes, the debtor withdrew money from an IRA and lent that money to a corporation he owned. The corpora╜tion later repaid Hughes, and the money was returned to the IRA account. Id. at 529. The court held that the account had lost its status as an IRA and that the repayment of the money did not reinstate the IRA status. Id. at 530. The case contained no discussion about a disquali╜fied person. See id. However, the money was used to benefit a corporation owned by the debtor. Id. at 529. The corporation received the benefit of the transaction and, thus, was likely the disqualified per╜son. See id.

In the case at bar, Debtor used the money to pay his creditors. Trustee has made no allegation that any of those credi╜tors has an insider- or fiduciary-type rela╜tionship to the IRA, such that they would fall under the definition of a disqualified person. See Chapman v. CIR, T.C. Memo. 1997-147, n. 6, 1997 WL 125770 (U.S. Tax Court 1997) ("Disqualified persons are de╜fined in terms of certain relationships a person has with a plan.") As explained above, Debtor is not a disqualified person either. Because of the absence of a dis╜qualified person, Debtor's withdrawals were not prohibited transactions. Conse╜quently, the account has not lost its status as an IRA, and Debtor is entitled to ex╜empt any funds that remained in the ac╜count at the time he filed his petition. Therefore, Trustee's objection will be over╜ruled.

An Order in accordance with this Opin╜ion will be entered on this date.

ORDER

In accordance with the Memorandum Opinion entered on this date, the Court hereby OVERRULES the Chapter 7 Trus╜tee's Objection to Debtor's Exemptions.

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