Wittman v. Koenig

Summarized by Kurt Carlson , Carlson Dash LLC
9 years 7 months ago

Citation:

Wittman v. Koenig, No. 15-2798 (7th Cir. July 26, 2016) (unpublished opinion).

Tag(s):

Ruling:

Annuities complying with §72 of the Internal Revenue Code satisfy Wis. Stat. §815.18(3)(j)’s compliance requirement, and thus may be claimed as bankruptcy exemptions if they meet additional conditions imposed by the statute.

Procedural context:

The bankruptcy trustee challenged the Debtors’ claimed exemptions for annuity contracts they owned, arguing that an annuity, to qualify for an exemption, must comply with 26 U.S.C. §§401-09, which deals with tax-deferred qualified retirement plans. The Debtors argued instead that the annuity is exempt as long as it qualifies for favorable tax treatment under 26 U.S.C. §72, which deals with annuities more generally. The trustee, Debtors, and the Seventh Circuit all agreed it was appropriate to bypass the district court pursuant to 28 U.S.C. §158(d)(2)(A) and to resolve the issue of law on direct appeal to the circuit court. The debtors argued that their annuities met the requirements for full exemption under Wis. Stat. §815.18(3)(j), which applies to assets that (1) provide “benefits by reason of age, illness, disability, death or length of service and payments made to the debtor therefrom”; and (2) are “employer-sponsored or debtor-owned and comply with the provisions of the internal revenue code.” The parties agreed that the Debtors’ annuities met the first requirement, and that they are debtor-owned. Thus, the crux of the issue was whether the (3)(j) exemption requires an annuity that complies with §72 of the internal revenue code (IRC) must also comply with §§401-09 of the same. The Seventh Circuit affirmed the judgment of the bankruptcy court and ruled in favor of the Debtors. The Seventh Circuit noted that Wisconsin’s federal bankruptcy courts have consistently held that annuities complying with §72 satisfy (3)(j), though no other reported cases have construed which IRC provisions satisfy the “complies with” requirement. Delving into its statutory interpretation analysis, the court first observed that the language of the statute does not specify which provisions of the IRC must be complied with; however, because the IRC taxes most income in one way or another, the court found that the critical question is whether the tax is deferred in accordance with the code, not whether the annuity is taxable in accordance with the code. The court further rejected the trustee’s argument that the plural word “provisions” requires annuities to comply with multiple provisions of the IRC, offering as one example an individual retirement annuity which clearly must only comply with one singular provision of the IRC. Next, the court looked to the statute’s purpose and structure, and ultimately rejected the trustee’s argument that (3)(j) reaches only retirement assets. Specifically, the court reasoned that (3)(j) applies to any contract or plan similar to those listed, so long as it meets the requirements. The court disagreed with the trustee’s assertion that a broad interpretation of (3)(j) would render the alternative (3)(f) exemption inoperative, noting that not every annuity meets paragraph (3)(j)’s requirements or complies with §72. Thus, (3)(j) would continue to apply only to a subset of annuities, and those to which it did not apply may be covered by (3(f). Finally, the court perceived a legislative intent to apply the exemption to a broader swath of annuities than just those qualifying under §§401-409, as comments from legislators reveal that revisions (including (3)(j)) were intended to broaden the areas and items now exempt.

Facts:

Timothy and Jill Koenig (the “Debtors”) filed for Chapter 7 bankruptcy in 2014, claiming exemptions under Wisconsin’s bankruptcy exemption statute for annuities worth a total of $292,185.97 which they had purchased in the year and a half before they filed for bankruptcy.

Judge(s):

Posner, Williams, and Hamilton

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