Case Update (16 July 2024): Green v. Leibowitz; retirement account organized under Canadian law not a tax-qualified retirement plan under IRC, and therefore not exempt
On May 11, 2021, the Debtor/Appellant filed for Chapter 7 bankruptcy. On his bankruptcy petition, he listed the “Sun Life: Life Income Fund” which is a registered retirement savings plan organized under the laws of Canada. He sought to exempt the entire balance of this account in his bankruptcy proceedings, pursuant to 735 ILCS 5/12-1006 (Illinois law), which exempts assets “intended in good faith to qualify as a retirement plan under applicable provisions of the Internal Revenue Code of 1986.” The Trustee objected to the exemption because the Sun Life Fund was organized under the laws of Canada, saying it was “ineligible for the exemption even if it was intended to be a retirement plan.” The bankruptcy court sustained the objection, saying that a retirement plan must be organized under 26 USC 401(a). The Debtor appealed. The District Court rejected the bankruptcy court’s holding that there is a “country-of-origin” requirement for the retirement plan, but nonetheless found that the Sun Life Fund was not a tax-qualified retirement plan under the Internal Revenue Code. The Debtor appealed again.
The U.S. Court of Appeals for the 7th Circuit analyzed the applicable provisions of Illinois law, and focused on the phrase that would exempt a retirement plan: that the plan “is intended in good faith to qualify as a retirement plan under applicable provisions of the Internal Revenue Code of 1986, as now or hereafter amended”. Therefore, the 7th Circuit framed its question as whether the Sun Life Fund is a “tax-qualified retirement plan” under “applicable provisions of the Internal Revenue Code.” Ultimately, it determined that even if “a given account may receive favorable tax treatment generally does not mean that it ‘qualifies’ as a retirement plan under the Internal Revenue Code.” Here, the issue was whether the Sun Life Fund was “tax-qualified” not whether it was a retirement account.
The 7th Circuit affirmed, and the retirement plan, organized under Canadian law, was not exempt. This means that the retirement plan may be sold by the trustee to pay creditors.
