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Court Allows Rollover IRA Exemption

A Richmond U.S. Bankruptcy Court allows a chapter 11 debtor to claim an exemption in a rollover IRA account, despite an objection from MT Technology Enterprises LLC.

The court took under advisement whether a “prohibited transaction” as defined by 26 U.S.C. § 4975 had occurred with respect to the IRA account that transformed it into property of the estate and caused the IRA account to no longer be subject to exemption under 11 U.S.C. § 522(b)(3)(C).

Debtor opened the IRA account as a rollover account with Davenport Trust Company in October 2005. The account was a “managed account” giving Davenport discretion to invest the assets held in the IRA account. In 2007, debtor requested that Davenport invest a portion of the holdings in the IRA in an entity known as Cristol LLC. Davenport invested $100,000 in Cristol, which gave the IRA a five percent ownership interest in Cristol as of the end of Cristol’s first round of equity financing. The account ownership of Cristol never exceeded five percent. Debtor was added as a member of the board of directors in 2008, for no compensation. Cristol ceased operations in 2009. In May 2014, debtor rolled over the Davenport IRA account to Middleburg Trust Company, where it remains.

Ronald Trice, president of MT Technology, testified that he had served as corporate secretary of Cristol. Trice testified that he believed debtor had used the IRA account to engage in various prohibited transactions.

The court finds debtor’s purchase of a five percent membership interest in Cristol through his IRA account is not a prohibited transaction under the Tax Code. The IRC, § 4975(e)(2), provides a definition of “disqualified person,” which includes a fiduciary of the IRA. While not directly included in the definition of “disqualified person” the IRS has taken the position that the owner of the IRA is also a disqualified person. Subsections A, B, C and F, of IRC § 4975(c)(1) do not apply to the case at bar. The only issue is whether debtor transferred, used or acted in his capacity as a fiduciary for his own benefit, in his own interests, or for his own account. There are no facts that establish evidence that this occurred. There is simply no suggestion that debtor used the assets of the IRA account for his own benefit other than as the IRA account beneficiary.

Because the use of IRA assets by a director to purchase a minority ownership interest in a corporation does not, by itself, constituted a prohibited transaction, the court finds the Cristol transaction does not constitute a prohibited transaction under 26 U.S.C. § 4975(c)(1).

At no time since debtor opened his IRA account as a rollover account has the IRS disqualified the IRA account or made any other determination that the account is not in substantial compliance with applicable law. Congress has expressed a preference favoring deference to retirement accounts that comply with IRC requirements. As the IRA account is in substantial compliance, with the relevant Tax Code provisions that render it immune from taxation, due deference dictates that it be treated as exempt under 11 U.S.C. § 522(b)(3)(C).

Exemption in IRA account is allowed.

In re Bruce B. Nolte (Huennekens) No. 14-36676, May 5, 2015; USDC at Richmond, Va. VLW 014-4-031, 7 pp.

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