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Individual Retirement Annuities Not Exempt From Bankruptcy Estate, Panel Rules

Individual retirement annuities are not synonymous with individual retirement accounts, and thus a debtor's individual retirement annuity was not exempt from his bankruptcy estate

7/26/00

Individual retirement annuities are not synonymous with individual retirement accounts, and thus a debtor's individual retirement annuity was not exempt from his bankruptcy estate under an Iowa law that exempts IRAs, the U.S. Bankruptcy Appellate Panel for the Eighth Circuit ruled July 26 in a 2-1 decision (In re Kemmerer (Huisinga v. Kemmerer), B.A.P. 8th Cir., No. 00-6016, 7/26/00).

When Jon Arthur Kemmerer left his employment with Midland Press Corp. in 1996, he deposited his balance in Midland's tax code Section 401(k) plan into a newly established individual retirement annuity. Kemmerer and his wife filed a joint petition for bankruptcy in 1999 and listed the annuity as exempt under Iowa Code Section 627.6(8)(f).

States may opt out of Section 522(d) of the Bankruptcy Code's list of exempt property. Iowa opted out of Section 522(d)'s exemptions and, in Iowa Code Section 627.6(8)(f), provided for certain exemptions. Under Iowa Code Section 627.6(8)(f), transfers from Employee Retirement Income Security Act-qualified retirement plans to certain ERISA-qualified plans are exempt from the bankruptcy estate.

The types of plan transfers that are recognized as exempt from the bankruptcy estate under Iowa Code Section 627.6(8)(f) include IRAs and Roth IRAs. However, the Iowa statute does not specifically include individual retirement annuities.

Iowa Statute is 'Clear.'

Bankruptcy Judge Barry S. Schermer, writing for the appellate panel, found that Iowa Code Section 627.6(8)(f) was "clear" and did not exempt individual retirement annuities from the bankruptcy estate. Bankruptcy Judge Mary D. Scott joined in the opinion.

In so ruling, the panel rejected Kemmerer's contention that the term "individual retirement account" in Iowa Code Section 627.6(8)(f) included both IRAs and individual retirement annuities because the term "individual retirement account" was a general term used to identify both IRAs and annuities.

The panel rejected Kemmerer's argument that the terms IRA and individual retirement annuity were synonymous because Internal Revenue Code Section 408 was captioned "individual retirement accounts," but pertained to both IRAs and annuities. "A statutory caption does not supersede the actual statutory language," the panel said.

"In enacting Section 408 of the Internal Revenue Code, the United States Congress separately defined the term 'individual retirement account' and the term 'individual retirement annuity.' Congress neither used the terms interchangeably, nor used the term 'individual retirement annuity' as a subset of 'individual retirement accounts,'" the panel said.

The panel added that throughout the Iowa Code, the Iowa legislature had separately identified IRAs and individual retirement annuities. "The Iowa legislature thus clearly knew how to include individual retirement annuities within the gambit of a specific provision. The lack of a reference to individual retirement annuities in Section 627.6(8)(f) is therefore a clear indication that such retirement investment vehicles do not fall within its gambit," the panel said.

Dissenting Opinion

In a dissenting opinion, Bankruptcy Judge Nancy C. Dreher took issue with the majority's conclusion that Iowa Code Section 627.6(8)(f) was "clear." Noting that she found that statute ambiguous, Dreher argued that "in ordinary parlance, it is common to equate individual retirement annuities and individual retirement accounts."

Dreher also noted that Iowa Code Section 627.6(8)(f) referenced IRC Section 408. IRC Section 408 "is entitled 'Individual Retirement Accounts' and includes a definition of both an individual retirement account ([Section] 408(a)) and an 'individual retirement annuity' ([Section] 408(b))," Dreher said. Dreher argued that in referencing IR C Section 408, the Iowa legislature was unclear as to whether it intended to refer only to IRAs or to both IRAs and individual retirement annuities.

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