William Stark Patrick

OCR transcription for search; preserved printed pages are authoritative

1
2
3
4
5
6
7
8
9

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

AUTHENTIC
U.S. GOVERN
INFORMAT

Case 1:07-bk-10312-GM Doc107 Filed 10/31/08 Entered 11/03/08 08:59:25 Desc
Main Document Page 1 of 15

FILED

OCT 3 | 2008

CLERK U.S. BaNAR JPT.
aN TRAL DISTRICT OF CA

[+ ENTERED

UNITED STATES BANKRUPTCY opi
CENTRAL DISTRICT OF CALIFORNIA el
SAN FERNANDO VALLEY DIVISION

In re: Case No. SV 07-10312-GM
WILLIAM 8S. PATRICK, Chapter 7

MEMORANDUM OF OPINION
Debtor. OVERRULING OBJECTION TO
DEBTOR’S CLAIM OF EXEMPTION

DATE: AUGUST 27, 2008

TIME: 10:00 a.m.

PLACE: COURTROOM 303
21041 BURBANK BLVD.
WOODLAND HILLS, CA 91367

This case presents an issue of first impression under the 2005 amendments to the Bankruptcy
Code: under what conditions may a debtor exempt an individual retirement arrangement (“IRA”) from
the bankruptcy estate under the federal exemptions created by 11 U.S.C. §522(b)(3)(C) and (d)(12)?!

Specifically, the issue is whether distributions from an IRA rolled over more than once
during a one-year interval are exempt from the bankruptcy estate under 11 U.S.C. §522(b)(4)(D). To
resolve this issue, the court must determine whether the Bankruptcy Code’s requirements for exempting
distributions rolled over from an IRA incorporate the requirements for exemption from taxation found in

26 U.S.C. §408(d)(3).

' The language contained in both subsections is identical.

TED
ENT
N
PO

mm Ww bt

Xo co “I oO OA

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

Case 1:07-bk-10312-GM Doc107 Filed 10/31/08 Entered 11/03/08 08:59:25 Desc
Main Document Page 2 of 15

I. STATEMENT OF RELEVANT FACTS
On January 31, 2007, William S. Patrick (“Debtor’’) filed a voluntary Chapter 7 petition. In
his original Schedule C, Debtor claimed the “whole” IRA as exempt in the amount of $175,000 under
Cal. Civ. Proc. Code §703.140(b)(10)(E). In amended schedules filed on July 18, 2007 and then again
on November 19, 2007, the Debtor claimed as exempt $172,870.95 in his First Bank IRA under both
Cal. Civ. Proc. Code §703.140(b)(10)(E) and 11 U.S.C. §522(b)(3)(C). On June 18, 2007, Walter
Prince (“Prince”), a judgment creditor owed approximately $2.4 million and the Debtor’s former
business partner, filed an objection to the Debtor’s claim of exemptions.
Debtor opened the IRA in 1975 and claims to have contributed the maximum amount
allowed every year since, except for 1995 when no contributions were made.’
On June 5, 2006, the IRA in question consisted of account number 001-805237 at First
Private Bank & Trust in Granada Hills, CA (“First Bank IRA” or “IRA”) with a balance of $172,685.05.
Beginning on that date, three cashier’s check were drawn on the First Bank IRA and each was
subsequently redeposited into that same account within a four-month period:
1. June 5, 2006 - the Debtor obtained a cashier’s check made payable to himself in the
amount of $172,000. The check was labeled as “distribution 1-805237.” On June 12,
2006, the Debtor deposited the same check back into his First Bank IRA.
2. July 14, 2006 - after making an additional $4,000 contribution to the First Bank IRA, the
Debtor obtained another cashier’s check made payable to himself in the amount of
$176,000. The check was labeled “1805237.” On July 24, 2006, the Debtor deposited
the same check back into his First Bank IRA.
3. August 30, 2006 - the Debtor obtained another cashier’s check made payable to himself
in the amount of $176,000. The check was labeled “2006 distribution.” On September
27, 2006, the Debtor deposited the same check back into his First Bank IRA.

The principal issue raised at the time that this objection was filed and for months thereafter

? Debtor initially declared that he made no contributions in 1988, 1990, 1999, and 2002; however, the account
statements later turned over by Debtor show that he actually did make contributions in all of these years and those contributions
are reflected in the charts used for the purpose of calculating the eligible amount of his exemption. Further, Debtor concedes that
he was not allowed to make contributions after he reached age 70'4 and therefore no amount is reflected in 2006.

2

Un & WwW WN

oO co MI

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

Case 1:07-bk-10312-GM Doc107 Filed 10/31/08 Entered 11/03/08 08:59:25 Desc
Main Document Page 3 of 15

was whether the Debtor had made the correct contributions so that the full amount of the funds held in
the First Bank IRA was tax deferred. Debtor asserted lack of records and the matter was continued
several times to allow him to gather evidence so that accountants for both parties could review the
records and ascertain whether all contributions qualified for tax deferred status. Eventually, the Debtor
produced substantially complete records of contributions and then, for the first time, the three 2006
transactions noted above came to light and Prince raised the issue of whether the IRA had lost its
exempt status because there had been more than one rollover in a single twelve-month period.

Since then, several issues have been put before the court: (1) whether obtaining the three
cashier’s checks within the same twelve-month period removes $176,000 (and its accrued interest from
July 14, 2006) from tax deferred status as set forth in 28 U.S.C. §408; (2) if the First Bank IRA funds no
longer have tax deferred status under 28 U.S.C. §408, does that prevent the Debtor from claiming an
exemption under 11 U.S.C. §522(b}(3)(C); (3) whether some or all of the remaining First Bank IRA
funds can be exempted under 11 U.S.C. §522(b)(3)(C) and, if so, how much is exempt; (4) whether
some or all of the First Bank IRA funds can be exempted under Cal. Civ. Proc. Code
§703.140(b)(10)(E); and (5) assuming that some portion of the funds in the First Bank IRA can be

exempted, what is that amount.

Il. WHETHER DEBTOR CAN CLAIM THE FUNDS EXEMPT UNDER FEDERAL LAW

A. Eligible amount of exemption in the First Bank IRA

The amounts and dates of the contributions are disputed, and the objection has been
continued over a period of months to allow the Debtor to obtain sufficient evidence to finalize the
calculation. On January 8, 2008, Prince filed a declaration by his expert Neil S$. Harmon concluding that
“the total deposits reveal a total balance of $70,030.16 inclusive of accrued interest as of December 31,
2006” and therefore anything above that amount should be disallowed. Then, in a pleading dated
January 14, 2008, Prince argued that, based on a review of additional documents, the above amount
should be decreased by $4,000, which was deposited post-retirement, for a new total of $66,030.16.

In a declaration dated June 4, 2008, Prince’s expert Neil Harmon discussed the interest on

$42,887.62 in disputed contributions which constitute the “beginning balance” as of 1/1/87 and for

a A wv f&

is)

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

Case 1:07-bk-10312-GM Doc107 Filed 10/31/08 Entered 11/03/08 08:59:25 Desc
Main Document Page 4of15

which the Debtor provided no supporting documents. Harmon calculated that this amount plus interest
currently accounts for $119,271.80 of the claimed exemption. In response, the Debtor provided evidence
that he sought to obtain records from the financial institution but was unable to do so because the
deposits were made too many years ago. Because the Debtor has met his burden and satisfied Federal
Rule of Evidence 1004 by presenting adequate testimony to explain the lack of records, the disputed
funds will not be subtracted from the eligible amount.

The parties also argued over a $2,000 IRA contribution on 3/5/97, a $4,000 contribution on
7/17/06, and a $15,000 contribution on 6/21/06. However, the Debtor eventually conceded that these
contributions and interest thereon should be excluded from the exempt amount (see Debtor’s Response
to Evidentiary Objections, etc. dated 6/11/08).

In sum, Prince argues that once the total disputed contributions of $140,899.79 are taken into
account, the Debtor’s exemption should be denied in full because the disputed contributions exceed
what the Debtor has already withdrawn from the IRA and the balance on hand.

Based on the evidence before the court at this time, I find that the contributions are as set
forth in the charts entitled “Summary of Actual IRA Activity from 1987" (Exhibit 3} and “Projected
IRA Analysis” (Exhibit 25) filed by Debtor on March 25, 2008 with the Declarations of Donald T. Fife,
CPA and William S. Patrick.’ In accordance with the figures reflected in those charts, the court
concludes that the full $172,870.95 constitutes an eligible amount which would qualify as exempt
deposits and proceeds in the First Bank IRA account.

However, once monies are deposited in an IRA account, they can lose their exempt status

through later acts of the Debtor.

7 As to the $4,622.21 discrepancy relating to 1975-1986 deposits by debtor’s deceased spouse (described on p.1 of the
Debtor’s Response to Evidentiary Objections, etc., dated 8/11/08), the court accepts Debtor’s explanation as reasonable and will
not subtract this amount from the eligible amount.

*T have accepted the projected deposit amounts for 1975-1986 made by both the Debtor and his deceased spouse as
reflected in Exhibit 25 based on Debtor’s uncontroverted evidence that (1} he commenced contributions when the retirement
savings system first became available in 1975, (2) he sought to but was unable to obtain complete supporting documents for the
years 1975-1986, (3) the figures are documented in part by past tax returns which comport with Debtor’s testimony, and (4)
Debtor’s expert Mr. Fife used a reasonable method to calculate the contributions and interest thereon.

4

Oe oS ee

Oo CO “I DN

10
il
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

Case 1:07-bk-10312-GM Doc107 Filed 10/31/08 Entered 11/03/08 08:59:25 Desc
Main Document Page 5of15

B. Qualifying for exemption under §522(b)(3)(C) of the Bankruptcy Code

Under 11 U.S.C. §522, debtors may exempt certain property from the claims of creditors.
Following the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act
(“BAPCPA”), Pub. L. No. 109-8, § 224, 119 Stat. 23 (2005), exempt property now includes “retirement
funds to the extent that those funds are in a fund or account that is exempt from taxation under section
401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986.” Although the
language is identical, a debtor may elect to exempt property under either §522(b)(3)(C) or §522(d)(12);
in this case, the Debtor made the §522(b)(3)(C) election, which can be used in opt-out states such as
California.

There are two ways for a retirement fund to be exempt: (1) a retirement fund is presumed to
be exempt under §522(b)(4)(A) if the fund has received a favorable determination under section 7805 of
the Internal Revenue Code of 1986 and that determination is in effect when the petition is filed or (2) if
the fund has not received a favorable determination, it may be exempt if the debtor demonstrates that (i)
no prior determination to the contrary has been made by a court or the IRS and (ii) the retirement fund is
in “substantial compliance” with the Internal Revenue Code (“IRC”) or the retirement fund fails to be in
“substantial compliance” with the IRC and the debtor is not materially responsible for that failure.°

The first question requiring resolution by this Court is whether the Debtor’s IRA should be
presumed exempt from the bankruptcy estate under §522(b)(4). Neither party contends that the IRA
received any prior favorable or contrary determination by the IRS or a court of law. Therefore, pursuant
to §522(b)(4)(B), the Court must determine whether the IRA is in “substantial compliance” with the
applicable requirements of the IRC or, if not, whether the debtor is not materially responsible for the
non-compliance.

To support his contention, the Debtor provided a declaration by Denise Wilson, Fiserv Trust

Company’s Compliance Officer, dated July 2007 and stating that the Debtor’s IRA “is in substantial

° §522(b\(3)N(C); §522(d)(12).

© §522(b)(4)(B)(i)-(ii).

oOo © © WY DH vw B&B WY NY &

BS SN BS HB BD BD OND ORD OR mm ete
Oo ~~] BD A FF WW BH KF BS Oo CO HS DH wD FF WS Hw —

Case 1:07-bk-10312-GM Doc107 Filed 10/31/08 Entered 11/03/08 08:59:25 Desc
Main Document Page 6 of 15

compliance with the applicable requirements of the Internal Revenue Code.”” Prince has not attempted
to refute Ms. Wilson’s declaration with evidence to the contrary but instead argues that the Debtor’s
multiple rollovers violate §408(d)(3)(B)* of the IRC, effectively disqualifying the IRA from exempt
status. By so doing, Prince ignores the fact that a distribution can be taxed without having any effect on
the tax exempt status of the account itself.? In other words, Prince fails to acknowledge the distinction
made in the IRC and the Bankruptcy Code between a tax exempt account and a tax exempt
distribution. "°

While it is tempting to limit the inquiry to a determination of whether the Debtor’s IRA is in
substantial compliance with the IRC, that would render the rest of §522(b)(4) superfluous. It is a
fundamental rule of statutory construction that every word, clause, and provision in a statute must be
given effect so that no part would be rendered inoperative or superfluous.'' Therefore, paragraphs
(b)(4)(C) and (D) must be given equal force in analyzing §522(b). Those subsections address direct
transfers and rollover distributions (sometimes referred to as “indirect transfers”) from retirement
accounts. Consistent with the tax treatment of direct transfers between trustees,'? subsection (b)(4)(C)
states that a direct transfer of retirement funds between tax exempt accounts does not affect the
exemption under subsections (b)(3)(C) and (d)(12).'? Similarly, a properly rolled-over distribution from

a retirement account does not affect the exemption of the distribution under subsections (b)(3)(C) and

? Although Wilson’s declaration does not attest to whether the IRA was in substantial compliance on the date of the
bankruptcy petition, which is the operative date for purposes of this analysis, the parties did not raise this as an issue.

326 U.S.C. $408(d) deals with the tax treatment of distributions and will be discussed in the next section.

’ See Michel v. C.LR., 58 T.C.M. (CCH) 1019 (T.C. 1989) (holding that the subsequent tax treatment of an IRA
contribution does not affect the validity of the IRA).

'0 The distinction can be found in the IRC in that the tax-exempt status of distributions and the tax-exempt status of an
IRA are discussed separately, Section 408(d)(3) deals specifically with the taxability of distributions, while §408(e) governs
the disqualification and taxability of the fund itself.

'! Tn re Catapult Entm’t, Inc., 165 F.3d 747, 751 (9th Cir. 1999); see also 2A Singer, SUTHERLAND STATUTORY
CONSTRUCTION § 46.6 (7th Ed. 2007).

'2 IRS Publication 590 (2007) states in part: “[a] transfer of funds in your traditional TRA from one trustee directly to
another, either at your request or at the trustee’s request, is not a rollover. Because there is no distribution te you, the transfer
is tax free.”

"? §522(b)(4)(C).

Oo CO J DB A F&F Ww WP

NM SB NB PQ Be BD BRR OR ORDO mee ee
foo a © © 2 > OS oc eos > OS es OS a)

Case 1:07-bk-10312-GM Doc107 Filed 10/31/08 Entered 11/03/08 08:59:25 Desc
Main Document Page 7 of 15

(d)(12).'* Therefore, retirement funds that are properly transferred via direct transfer or a tax-free
rollover distribution do not cease to qualify for exemption by reason of such transfer or distribution.
Conversely, this implies that if a direct transfer or rollover distribution does not comply with the
applicable IRC provisions “to the extent allowed by law,”'* the funds may cease to qualify for
exemption from the bankruptcy estate. Thus, the court must determine whether the funds that Debtor
distributed in the multiple rollovers ceased to qualify for exemption from the bankruptcy estate under

subsection (b)(4)(D) by reason of such distribution.

C. How can IRA funds qualify for exemption?
1. Rollover distributions exempt from taxation under the IRC

Section 402(c) of the IRC contains the rules applicable to rollovers from exempt trusts,’°

IT are

and provides that distributions from such trusts that are transferred to “eligible retirement plans
exempt from taxation as long as such transfers are made within 60 days of the distribution.”® If the
transfer is not “rolled over” within 60 days, the distribution is taxable.'? An individual will be treated as
receiving a distribution if a check is made payable and received by the individual, as opposed to the
funds being transferred directly from trustee of one IRA to trustee of another IRA.”” This is because the
“receipt of a check is tantamount to the receipt of cash, even if the check is not deposited or otherwise
negotiated, provided that its receipt is not subject to ‘substantial limitations’ and there is no reason to

suppose that it will be dishonored.””’

Rollover distributions from an IRA are described in §408(d) of the IRC. Such distributions

4 §522(b)(4)(D).
'S §522(b)(4)(D)(ii)(ID).

'S Pursuant to §402(c)(8)(A), “exempt trust” means an employees’ trust described in §401(a) that is tax-exempt under
§501(a) of the IRC.

" an IRA, described in §408(a) of the IRC, is an example of an “eligible retirement plan.”
'8 26 U.S.C. §402(c)(3).

'? $402(0)(3)(A).

20 Martin y. C.LR., 63 T.C.M. (CCH) 3122 (T.C. 1992), aff'd, 987 F.2d 770 (Sth Cir. 1993).

2! Td. n.5, citing Lavery v. Commissioner, 158 F.2d 859, 860 (7" Cir. 1946), affg. 5 T.C. 1283 (1945).

7

wn -& WwW Wh

Oo CO NY DD

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

Case 1:07-bk-10312-GM Doc107 Filed 10/31/08 Entered 11/03/08 08:59:25 Desc
Main Document Page 8 of 15

are exempt from taxation as long as they are “rolled over” into an IRA within 60 days.” However, such
tax exempt rollovers may only occur once per year from the time of receipt of the distribution and any
additional rollovers made during that year are taxable.”? For purposes of §408(d)(3)(B), the fact that
funds distributed from an IRA are withdrawn and redeposited on the same day is irrelevant, and such act
constitutes a rollover.”
2. Rollover distributions exempt from the bankruptcy estate under §522(b)(4\(D)
In addition to the retirement accounts described above, §522(b)(4)(D) exempts from the
bankruptcy estate two types of distributions:
(i) [A]ny distribution that qualifies as an eligible rollover distribution within the meaning of
section 402(c) of the Internal Revenue Code of 1986 or... (ii)... an amount that... has been
distributed from a fund or account that is exempt from taxation under section .. . 408 of the
Internal Revenue Code... and... to the extent allowed by law, is deposited in such a fund or
account not later than 60 days after the distribution of such amount.”
Congress inserted subsection (b)(4) as a way of qualifying or limiting the types of actions a debtor may
take with respect to his or her IRA. This is also evident by use of the phrase “[flor purposes of

9926

paragraph (3)(C) and subsection (d)(12), the following shall apply,”*” which resembles qualifying
language. As long as a distribution complies with §402(c) (and qualifies for exemption from taxation
under that subsection) or is “rolled over” into another retirement account within 60 days, it is exempt
from the bankruptcy estate. In other words, to qualify for exemption from the bankruptcy estate, a

rollover distribution must be exempt from taxation.

D. Applicability of IRC §408(d)(3)(B) to Bankruptcy Code §522(b)(4)(D)

The issue in contention here is whether the totality of the requirements and limitations for
rolling over distributions from an IRA are listed in §522(b)(4)(D) or whether the IRC rules governing
the taxability of such distributions must also be applied in the bankruptcy context. The Debtor contends

that the requirements for rolling over distributions from an IRA are conclusively laid out in

22 §408(d)(3)(A)G). Failure to comply with the rollover requirements may result in an excess contribution and the
imposition of a 6% excise tax. 26 U.S.C. §4973(a).

$408(d)(3)(B).
24 Martin, supra note 15.
2911 U.S.C. §522(b)(4)(D).

*6 11 U.S.C. §522(b)(4).

_ Ww

Co CO ~T DH wr

10
il
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

Case 1:07-bk-10312-GM Doc107 Filed 10/31/08 Entered 11/03/08 08:59:25 Desc
Main Document Page 9 of 15

§522(b)(4)(D), and that if Congress wanted to incorporate the IRC’s requirements, it would have
expressly done so. Prince argues that there are multiple instances where §522(b) refers to IRC sections
generally as a way of incorporating their respective requirements. The court agrees with Prince.

Each part or section of a statute should be construed in connection with other parts or

t.7 The general purpose and

sections of the statute in order to produce a uniform and harmonious resul
intent of the whole act controls, and all parts of the statute must be interpreted consistently with that
purpose.”® With this in mind, it is clear from the language of §522(b) that funds from an IRA are
exempt from the bankruptcy estate under federal law to the extent that they are exempt from taxation
under the applicable sections of the IRC. For example, paragraph (4)(C) states that a direct transfer of
retirement funds from one tax exempt retirement account to another does not disqualify the funds from
exemption from the bankruptcy estate. This is consistent with the fact that such direct transfers are tax
free. A close reading of subsection (b)(4)(D) renders a similar conclusion regarding the exemption of
distributions out of a retirement account: a distribution out of a tax exempt retirement account does “not
cease to qualify for exemption” from the bankruptcy estate if (1) it is rolled over in accordance with
§402(c) of the IRC or (2) to the extent allowed by law, is rolled over into a tax exempt retirement
account within 60 days. In other words, if the distribution is exempt from taxation, it is exempt from the
bankruptcy estate.

The IRC’s rule that only one tax free rollover can be made in a one-year period applies in
determining whether a rolled-over distribution is exempt from the bankruptcy estate under
§522(b)(4)(D){ii). This rule is incorporated by the phrase “to the extent allowed by law,””? which
indicates intent to include any other requirements and limitations that may exist in the IRC. Because the
IRC often contains long and complex provisions, Congress’ use of the phrase “to the extent allowed by
law” indicates an intent to incorporate these requirements for bankruptcy purposes without the hassle of

reiterating them in the Bankruptcy Code. In fact, the language of §522(b)(4)(B) contains an additional

27 Gustafson v. Alloyd Co., Inc., 513 U.S. 561 (1995).
28 BEP y, Resolution Trust Corp., 511 U.S. 531 (1994).

*° tt should be noted that this phrase does not exist anywhere else in the Bankruptcy Code. The court disagrees with the
Debtor’s interpretation that this means “[t]ransactions which are legal but taxable are ‘allowed by law’” because such
interpretation omits the qualifying language “to the extent allowed by law” (emphasis added). And for purposes of tax exempt
rollovers, the law does not allow distributions to take place more often than once a year.

9

CoC fo SD DO UO FF Ww

10
iat
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

Case 1:07-bk-10312-GM Doc107 Filed 10/31/08 Entered 11/03/08 08:59:25 Desc
Main Document Page 10 of 15

provision to support this, namely that “the retirement fund is in substantial compliance with the
applicable requirements of the Internal Revenue Code....’"°

In addition, the conclusion that Congress intended to incorporate the IRC requirements for
rolling over distributions into the Bankruptcy Code is supported by the “fundamental canon of statutory
construction that the words of a statute must be read in their context and with a view to their place in the
overall statutory scheme.’ Viewing §522(b)(4)(D)(ii) in context and in its place in the overall
statutory scheme, it is apparent that under federal law, Congress intended to exempt retirement accounts
and/or distributions from the bankruptcy estate only to the extent that the accounts and/or distributions
are exempt from taxation under the applicable sections of the IRC.

In sum, this Court concludes that the language of §522(b) indicates that the IRC’s
requirements and procedures for rolling over distributions from an IRA apply in determining whether

any improperly rolled over distributions cease to qualify for exemption from the bankruptcy estate.

E, The Debtor’s multiple rollovers are not exempt from the bankruptcy estate because

they would not qualify for exemption from taxation under IRC §408(d)(3)(B)

It is undisputed that the Debtor’s withdrawals and subsequent deposits of the money from his
IRA in 2006 constitute rollovers. As required by law, all three rollovers were reported as distributions
by First Private Bank & Trust on a 2006 Form 1099-R in the total sum of $362,019.72. Although the
Debtor’s first rollover on June 12, 2006 was proper, the second and third rollovers occurred within one
year of the first, in violation of the limitation set out in §408(d)(3)(B). Consequently, the $176,000
distributions involved in the second and third rollovers within the same year cannot be exempt from the
bankruptcy estate under §522(b)(4)(D) because they did not occur “to the extent allowed by law.”

Without providing any case law in support, the Debtor argues that the §408(d)(3)(B)
limitation does not apply because the language of the section refers to receipt by the taxpayer of “any
other amount” within the same year, and here the Debtor withdrew and redeposited exactly the same
funds three times. Whether ‘‘amount” means an identical sum or a prior distribution is irrelevant

because in this case there was a prior distribution and it was for a lesser sum ($172,000 was first

911 U.S.C. §522(b)(4)(B)Gi)(D (emphasis added).

3] EDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120, 133 (2000) (quoting Davis v. Mich. Dept. of Treasury,
489 U.S. 803, 809 (1989)).

10

ee eS ee)

oO o8O8F “I

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

Case 1:07-bk-10312-GM Doc107 Filed 10/31/08 Entered 11/03/08 08:59:25 Desc
Main Document Page 11 of 15

received and the second distribution was for $176,000). For all the above reasons, Prince’s objection to

the Debtor’s exemption under federal law must be sustained.”

III. WHETHER DEBTOR CAN CLAIM THE FUNDS EXEMPT UNDER CALIFORNIA LAW
However, the Debtor may still pursue the exemption as claimed under state law pursuant to

Cal. Civ. Proc. Code §703.140(b)(10)(E). For purposes of meeting the exemption under California law,
the issue is to what extent the funds in Debtor’s IRA are “reasonably necessary” for his support (debtor
claims no dependants), given that he is a widower, 73 years old, and has no future employment
prospects. In the Ninth Circuit, the “reasonably necessary” standard of §704.115(b) has been applied to
cases in which a §703.140(b)(10)(E) exemption has been claimed.*? Although the court has wide
discretion in determining the amount necessary to support the debtor,” it is instructed to consider the
Moffat factors when making findings on support: (1) the debtor’s present and anticipated living
expenses and income; (2) the age and health of the debtor; (3) the debtor’s ability to work and make a
living, including his/her training, skills and education; (4) the debtor’s other assets and their liquidity;
(5) the debtor’s ability to save for retirement; and (6) any special needs of the debtor and his/her
dependants.** Under Fed. R. Bankr. P. 4003(c), the objecting party has the burden of proving that the

exemptions are not properly claimed, but there is no requirement that evidence must be provided on

32 In their supplemental briefs filed after this matter was submitted, the parties did an excellent job briefing the legislative
history which has confirmed the court’s result in this case, with the following additional noteworthy comments not contained in
the discussion above: (1) although waivers of the 60-day rule can be granted by the IRS under specific conditions including
natural disasters and other unusual situations (which do not exist in this case), no such waivers appear to be allowed for the one-
year rule; (2) any such waiver authority would have to be exercised by the IRS, not the courts; (3) both the 2006 Form 1099-R
and 2006 tax return Form 1040 show distributions of $362,000; (4) Private Letter Ruling 9010007 cited by Prince confirms that
temporarily withdrawn funds which are redeposited into same account within 60 days can qualify for tax-free treatment, but the
taxpayer is limited to only one such tax-free event per year; (5) it appears that Debtor was aware of the one-year mle because he
checked the box reflecting this limitation each time he took out the funds; and (6) the public policy reason clearly implicated in
this case is the legislature’s intent to prevent shifting of investments more than once a year (previously more than once every three
years). As to Prince’s evidentiary objection to Debtor’s declaration dated 10/6/08 (filed in support of the Debtor’s Brief Re
Legislative History), that objection is sustained. In the brief dated 10/10/08, debtor blames First Private for not providing him
with correct information regarding the effect of his withdrawals. However, assuming this is true, it would not absolve the Debtor
from being materially responsible for compliance and would not change the court’s analysis.

33 See In re Davis, 323 B.R. 732, 736 (9" Cir. BAP 2005).

34 See In re Spenler, M.D., 212 B.R. 625, 631 (9" Cir. BAP 1997).

3° Davis, 323 B.R. at 736, quoting In re Moffat, 119 B.R. 261, 206 (9" Cir, BAP 1990), aff'd, 959 F.2d 740 (9" Cir.
1992),

11

wn & Ww bk

Oo CO “SI DH

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

Case 1:07-bk-10312-GM Doc107 Filed 10/31/08 Entered 11/03/08 08:59:25 Desc
Main Document Page 12 of 15

each element “if there is other evidence from which it can be determined that the retirement funds at
issue are not necessary for debtor’s support upon retirement.”**®

The factors most relevant in this case are the Debtor’s age, lack of future employment
prospects and limited income potential. Debtor is 73 years old and there is no dispute that he will not be
meaningfully employed and able to add to his savings for retirement. In addition, due to his age, he’s not
allowed to make any more IRA contributions. In a declaration filed on July 19, 2008 as part of his
opposition to the motion objecting to his claim of exemption, the Debtor disclosed his only sources of
income as social security ($928 per month) and a U.S. Army pension ($1,392.83 per month), totaling
$2,320.83 in monthly income. This amount is also reflected on Debtor’s most current amended
schedules filed on November 19, 2007, which also show that Debtor requires $3,256.69 in monthly
living expenses. Since Debtor’s expenses are not met with his regular monthly income from social
security and pension (the difference being $935.86), he has been supplementing his income with
distributions from his IRA. To wit, in 2005 Debtor received $21,000 in net IRA distributions and in
2006, Debtor received $14,020. Based on his most recently filed schedules, Debtor has been
withdrawing $1,000/month from his IRA, for a 2007 estimated total of $12,000.

As discussed above, the court finds that on the date of bankruptcy the account contained
$172,870.95, which would be subject to Cal. Civ. Proc. §703.140(b)(10)(E). Debtor’s expenses do not
appear extravagant and Prince does not question their validity. Aside from increasing living expenses
(due to inflation) which are discussed in Donald T. Fife’s declaration dated June 11, 2008, the Debtor
estimates an additional $18,450 in attorncy’s fees if this case goes to trial, and perhaps $25,000-30,000
if additional discovery and appeals are taken into account. As a starting point, Debtor’s current expenses
amount to $39,080.28 a year.

It is difficult to ascertain what standard should be used to determine reasonable expenses.
Although Prince alludes to the poverty level, that is not a proper guide. But neither is it appropriate to
merely rubberstamp the lifestyle that the Debtor has been used to. The IRS Standards have become the
darlings of Congress in recent years, so that might be a good place to start, keeping in mind that the

Debtor is on a fixed income, but can expect an increase in health-related costs as he ages such as the

3° Davis, 323 B.R. at 736, 739. Interestingly, in Davis, the trustee/objecting party presented the declaration and testimony
of Donald Fife, the Debtor’s expert in this case.

12

wn FS Ww Nh

Oo CO sE N

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

Case 1:07-bk-10312-GM Doc107 Filed 10/31/08 Entered 11/03/08 08:59:25 Desc
Main Document Page 13 0f 15

need for a companion, a driver, and/or nursing care. And as far as income goes, it might be worthwhile
to look at median income for this geographic area.*?

The January 31, 2007 median family income for California for a single earner was $3,592.25
per month, which is well in excess of that received by Patrick exclusive of his TRA. To meet the
median, he would have to draw about $1,200 per month from the IRA. The IRS standards for a single
person living in Los Angeles County for 2008 allow $3,149 per month in expenses.** The expenses set
forth by Debtor on Schedule J are very close to these totals. Assuming that he is allowed $3,149 per
month to live on, he would be required to draw $828 per month from his IRA. Next, the court should
look at how much must be in that IRA account to assure that it will last for Patrick’s life expectancy.”

The experts disagree over which life expectancy table to use: Debtor’s expert Mr. Fife is
using a 2003 expectancy table, while Prince’s expert Mr. Ahuja is relying on 1983 Group Annuity
Mortality Tables. Since it is almost the end of 2008, the court believes that the 2003 table reflects a
more accurate picture of today’s mortality rates and thus adopts Mr. Fife’s analysis as more convincing.
Under Mr. Fife’s analysis, the Debtor requires a minimum of $197,199 of current funds to pay his
expenses over the next 12 years. Under Mr. Ahuja’s analysis which uses the 2008 HHS Poverty
Guidelines, the Debtor would require the maximum sum of $120,158 to survive over the next 14 years.
As noted above, the HHS poverty guidelines are not the correct standard to use.

Assuming that income and expenses both rise at the inflation rate, the court can easily
calculate the drawdown of the IRA account. If the debtor were to withdraw $828 per month from the
IRA account for the 14 years of Patrick’s life expectancy, this would require $139,104 in the account as

of this time. However, it is very likely that, given the current technological advances in the health

7 All figures come from the websites of the U.S. Census Bureau and Internal Revenue Standards for 2008. Because
the national IRS standards for food and clothing in effect when debtor filed were based on income, I am using the current
standards, which no longer include this variable. In ascertaining the debtor’s “income,” the court notes that at the time of filing
it included an IRA withdrawal of $1,G00 per month. This is deducted for purposes of these calculations. Therefore the gross
income as of the date of filing (January 31, 2007) would be $2,320.83 per month (Social Security of $928 and pension of
$1,392.83). Because of the short time frame from filing to the present, “mixing apples and oranges” by using income in 2007

and charts from 2008 should not have a meaningful impact on the outcome of this analysis.
38 Food, clothing, etc. = $507; transportation of one car = $750; housing = $1,748, and health care for age 65+ = $144.

3° Given the fluctuations of the stock market, it is extremely difficult to know how much will be in the account at any
given time unless it is in cash, For this analysis, it is assumed that the money is in cash and will remain that way, drawing interest
at about the inflation rate.

13

ee no ee

Oo Cfo sy DH

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

Case 1:07-bk-10312-GM Doc107 Filed 10/31/08 Entered 11/03/08 08:59:25 Desc
Main Document Page 140f15

industry, Debtor may outlive his life expectancy, but not without having to meet an unknown higher cost
of health care. In addition, Debtor presented uncontroverted evidence that he will likely incur a total of
$18,450 of legal expenses in the next two years and will be liable for a total of $18,000 in taxes in the
next two years and $2,500 per year thereafter (or $30,000 over the remaining years), amounting to an
additional $66,450 needed in the next 14 years. This would require over $200,000 in the account as of
this time, which exceeds the $172,870.95 exemption.

Thus, the court concludes that the whole amount of the exemption is reasonably necessary for

Debtor’s support and should be allowed as claimed under California law.

DATED: /2/3:/28 OA
GERALDINE MUND, BANKRUPTCY JUDGE

4° See p.3 of Mr. Fife’s declaration dated June 11, 2008 filed in support of Debtor’s reply re the June 18, 2008 hearing.
The court is not taking into account the $100,000 projected cushion referred to in Mr. Fife’s declaration in case Debtor exceeds
the 12 year life expectancy used by Mr. Fife.

14

Oo fF ~S4 HD A +

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

Case 1:07-bk-10312-GM Doc107 Filed 10/31/08 Entered 11/03/08 08:59:25 Desc
Main Document Page 15 o0f15

CERTIFICATE OF MAILING

I, ia , aregularly appointed and qualified clerk of the United States
Bankruptcy Court for flie att Nine ste Etiomia, do hereby certify that in the performance of my duties as such clerk, 1
personally mailed to each of the parties listed below, at the addresses set opposite their respective names, a copy of the
MEMORANDUM OF OPINION OVERRULING OBJECTION TO DEBTOR’S CLAIM OF EXEMPTION in the within

matter. That said envelope containing said copy was deposited by me in a regular United States mailbox in the City of Los

Angeles, in said District, on INV . 9 9nna
IVY v ZUU0

Mark M. Sharf

Sharf Law Firm

15821 Venture Blvd,, Suite 245
Encino, CA 91436

Allan D. Sarver
16633 Ventura Blvd., Suite 800
Encino, CA 91436

David Seror
2029 Century Park East, 21 Floor
Los Angeles, CA 90067

Daniel Gill

Ezra Brutzkus Gubner

21650 Oxnard Str, Suite 500
Woodland Hills, CA 91367

Office of the United States Trustee

15