Clark v. Rameker

573 U.S. 122

134 S.Ct. 2242

189 L.Ed.2d 157

Brandon C. CLARK et ux., Petitioners

v.William J. RAMEKER, Trustee, et al.

No. 13–299.

Supreme Court of the United States

Argued March 24, 2014.

Decided June 12, 2014.

Kannon K. Shanmugam, Washington, DC, for Petitioners.

Danielle Spinelli, Washington, DC, for Respondents.

Denis P. Bartell, S. Michael Murphy, DeWitt Ross & Stevens S.C., Madison, WI, Kannon K. Shanmugam, Counsel of Record, Thomas G. Ward, Allison B. Jones, Julia H. Pudlin, Matthew C. Monahan, Williams & Connolly LLP, Washington, DC, for Petitioners.

William J. Rameker, Stephen L. Morgan, Jane F. Zimmerman, Jennifer M. Krueger, Erin A. West, Murphy Desmond S.C., Madison, WI, Danielle Spinelli, Counsel of Record, Craig Goldblatt, Kelly P. Dunbar, Daniel T. Deacon, Wilmer Cutler Pickering Hale and Dorr LLP, Washington, DC, Counsel for Respondent William J. Rameker.

Roger Sage, Madison, WI, Counsel for Respondents Resul and Zinije Adili.

Justice SOTOMAYOR delivered the opinion of the Court.

When an individual files for bankruptcy, she may exempt particular categories of assets from the bankruptcy estate. One such category includes certain "retirement funds." 11 U.S.C. § 522(b)(3)(C). The question presented is whether funds contained in an inherited individual retirement account (IRA) qualify as "retirement funds" within the meaning of this bankruptcy exemption. We hold that they do not.

I

A

When an individual debtor files a bankruptcy petition, her "legal or equitable interests ... in property" become part of the bankruptcy estate. § 541(a)(1). "To help the debtor obtain a fresh start," however, the Bankruptcy Code allows debtors to exempt from the estate limited interests in certain kinds of property. Rousey v. Jacoway, 544 U.S. 320, 325, 125 S.Ct. 1561, 161 L.Ed.2d 563 (2005). The exemption at issue in this case allows debtors to protect "retirement funds to the extent 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." §§ 522(b)(3)(C), (d)(12).¹ The enumerated sections of the Internal Revenue Code cover many types of accounts, three of which are relevant here.

The first two are traditional and Roth IRAs, which are created by 26 U.S.C. § 408 and § 408A, respectively. Both types of accounts offer tax advantages to encourage individuals to save for retirement. Qualified contributions to traditional IRAs, for example, are tax-deductible. § 219(a). Roth IRAs offer the opposite benefit: Although contributions are not tax-deductible, qualified distributions are tax-free.

§§ 408A(c)(1), (d)(1). To ensure that both types of IRAs are used for retirement purposes and not as general tax-advantaged savings vehicles, Congress made certain withdrawals from both types of accounts subject to a 10 percent penalty if taken before an accountholder reaches the age of 59 ½. See §§ 72(t)(1)-(2); see also n. 4, infra .

The third type of account relevant here is an inherited IRA. An inherited IRA is a traditional or Roth IRA that has been inherited after its owner's death. See §§ 408(d)(3)(C)(ii), 408A(a). If the heir is the owner's spouse, as is often the case, the spouse has a choice: He or she may "roll over" the IRA funds into his or her own IRA, or he or she may keep the IRA as an inherited IRA (subject to the rules discussed below). See Internal Revenue Service, Publication 590: Individual Retirement Arrangements (IRAs), p. 18 (Jan. 5, 2014). When anyone other than the owner's spouse inherits the IRA, he or she may not roll over the funds; the only option is to hold the IRA as an inherited account.

Inherited IRAs do not operate like ordinary IRAs. Unlike with a traditional or Roth IRA, an individual may withdraw funds from an inherited IRA at any time, without paying a tax penalty. § 72(t)(2)(A)(ii). Indeed, the owner of an inherited IRA not only may but must withdraw its funds: The owner must either withdraw the entire balance in the account within five years of the original owner's death or take minimum distributions on an annual basis. See §§ 408(a)(6), 401(a)(9)(B) ; 26 CFR § 1.408–8 (2013) (Q–1 and A–1(a) incorporating § 1.401(a)(9)–3 (Q–1 and A–1(a))); see generally D. Cartano, Taxation of Individual Retirement Accounts § 32.02[A] (2013). And unlike with a traditional or Roth IRA, the owner of an inherited IRA may never make contributions to the account. 26 U.S.C. § 219(d)(4).

B

In 2000, Ruth Heffron established a traditional IRA and named her daughter, Heidi Heffron–Clark, as the sole beneficiary of the account. When Ms. Heffron died in 2001, her IRA—which was then worth just over $450,000—passed to her daughter and became an inherited IRA. Ms. Heffron–Clark elected to take monthly distributions from the account.

In October 2010, Ms. Heffron–Clark and her husband, petitioners in this Court, filed a Chapter 7 bankruptcy petition. They identified the inherited IRA, by then worth roughly $300,000, as exempt from the bankruptcy estate under 11 U.S.C. § 522(b)(3)(C). Respondents, the bankruptcy trustee and unsecured creditors of the estate, objected to the claimed exemption on the ground that the funds in the inherited IRA were not "retirement funds" within the meaning of the statute.

The Bankruptcy Court agreed, disallowing the exemption. In re Clark, 450 B.R. 858, 866 (W.D.Wisc.2011). Relying on the "plain language of § 522(b)(3)(C)," the court concluded that an inherited IRA "does not contain anyone's ‘retirement funds,’ " because unlike with a traditional IRA, the funds are not "segregated to meet the needs of, nor distributed on the occasion of, any person's retirement." Id., at 863.² The District Court reversed, explaining that the exemption covers any account containing funds "originally" "accumulated for retirement purposes." In re Clark, 466 B.R. 135, 139 (W.D.Wisc.2012). The Seventh Circuit reversed the District Court's judgment. In re Clark, 714 F.3d 559 (2013). Pointing to the "[d]ifferent rules govern[ing] inherited" and noninherited IRAs, the court concluded that "inherited IRAs represent an opportunity for current consumption, not a fund of retirement savings." Id., at 560, 562.

We granted certiorari to resolve a conflict between the Seventh Circuit's ruling and the Fifth Circuit's decision in In re Chilton,

674 F.3d 486 (2012). 571 U.S. ––––, 134 S.Ct. 678, 187 L.Ed.2d 544 (2013). We now affirm.

II

The text and purpose of the Bankruptcy Code make clear that funds held in inherited IRAs are not "retirement funds" within the meaning of § 522(b)(3)(C)'s bankruptcy exemption.

A

The Bankruptcy Code does not define "retirement funds," so we give the term its ordinary meaning. See Octane Fitness, LLC v. ICON Health & Fitness, Inc., 572 U.S. ––––, ––––, 134 S.Ct. 1749, 1755–1756, 188L.Ed.2d 816 (2014). The ordinary meaning of "fund[s]" is "sum[s] of money ... set aside for a specific purpose." American Heritage Dictionary 712 (4th ed. 2000). And "retirement" means "[w]ithdrawal from one's occupation, business, or office." Id., at 1489. Section 522(b)(3)(C)'s reference to "retirement funds" is therefore properly understood to mean sums of money set aside for the day an individual stops working.

The parties agree that, in deciding whether a given set of funds falls within this definition, the inquiry must be an objective one, not one that "turns on the debtor's subjective purpose." Brief for Petitioners 43–44; see also Brief for Respondents 26. In other words, to determine whether funds in an account qualify as "retirement funds," courts should not engage in a case-by-case, fact-intensive examination into whether the debtor actually planned to use the funds for retirement purposes as opposed to current consumption. Instead, we look to the legal characteristics of the account in which the funds are held, asking whether, as an objective matter, the account is one set aside for the day when an individual stops working. Cf. Rousey, 544 U.S., at 332, 125 S.Ct. 1561 (holding that traditional IRAs are included within § 522(d)(10)(E)'s exemption for "a payment under a stock bonus, pension, profitsharing, annuity, or similar plan or contract on account of ... age" based on the legal characteristics of traditional IRAs).

Three legal characteristics of inherited IRAs lead us to conclude that funds held in such accounts are not objectively set aside for the purpose of retirement. First, the holder of an inherited IRA may never invest additional money in the account. 26 U.S.C. § 219(d)(4). Inherited IRAs are thus unlike traditional and Roth IRAs, both of which are quintessential "retirement funds." For where inherited IRAs categorically prohibit contributions, the entire purpose of traditional and Roth IRAs is to provide tax incentives for accountholders to contribute regularly and over time to their retirement savings.

Second, holders of inherited IRAs are required to withdraw money from such accounts, no matter how many years they may be from retirement. Under the Tax Code, the beneficiary of an inherited IRA must either withdraw all of the funds in the IRA within five years after the year of the owner's death or take minimum annual distributions every year. See § 408(a)(6) ; § 401(a)(9)(B) ; 26 CFR § 1.408–8 (Q–1 and A–1(a) incorporating § 1.401(a)(9)–3 (Q–1 and A–1(a))). Here, for example, petitioners elected to take yearly distributions from the inherited IRA; as a result, the account decreased in value from roughly $450,000 to less than $300,000 within 10 years. That the tax rules governing inherited IRAs routinely lead to their diminution over time, regardless of their holders' proximity to retirement, is hardly a feature one would expect of an account set aside for retirement.

Finally, the holder of an inherited IRA may withdraw the entire balance of the account at any time—and for any purpose—without penalty. Whereas a withdrawal from a traditional or Roth IRA prior to the age of 59 ½ triggers a 10 percent tax penalty subject to...