Opinion
Case No. 20-32587
2022-05-09
IN RE: John MOORE & Janet Martin, Debtors.
Eric A. Stamps, Stamps & Stamps, Dayton, OH, for Debtors.
Eric A. Stamps, Stamps & Stamps, Dayton, OH, for Debtors.
DECISION GRANTING DEBTOR JOHN MOORE'S CROSS-MOTION FOR SUMMARY JUDGMENT (DOC. 71) AND DENYING CHAPTER 7 TRUSTEE'S MOTION FOR SUMMARY JUDGMENT (DOC. 69)
Guy R. Humphrey, United States Bankruptcy Judge
I. Factual and Procedural Background
John Moore ("Moore"), 68, filed a joint petition under Chapter 7 of the Bankruptcy Code together with his wife, Janet Martin ("Martin"). Doc. 64 at 1. Paul Spaeth ("Trustee") was appointed as the Chapter 7 Trustee in the case. In his initial Schedule C, Moore claimed an exemption in a self-directed individual retirement account (the "IRA") under Ohio Revised Code § 2329.66(A)(10)(b). Doc. 1 at 18. The Trustee objected to Moore's claimed exemption on the basis that the account lost its tax-qualified IRA status when Moore engaged in a number of prohibited transactions with disqualified persons in violation of ERISA and IRS rules. Doc. 25 at 2-3. Moore, through his attorney, filed a response and reiterated his claim of an exemption in the account. Doc. 44 at 1. After completing discovery, the parties filed joint stipulations and exhibits and, contemporaneously, the Trustee filed his motion for summary judgment. Doc. 64; Doc. 69. Moore filed a response and cross-motion for summary judgement to which the Trustee filed a reply brief. Docs. 71, 72. The court subsequently held a post-briefing status conference and allowed the parties to file supplemental briefs clarifying the applicable subsection of the Ohio exemption statute. Docs. 74, 75. Both parties submitted such briefs. Docs. 77, 81. In addition, Moore amended his Schedule C to claim exemptions in the IRA under Ohio Revised Code § 2329.66(A)(10)(c) and (e) in addition to (b). Docs. 79, ¶ 2. The Trustee objected to the claimed exemptions, and Moore filed a response. Docs. 80, 82.
On April 14, 2016, after attending a promotional conference in Las Vegas, Moore opened a self-directed IRA under the custodianship of American Estate and Trust LCC (the "Custodian") and administered by Accuplan. Doc. 64, ¶ 10, 11. He planned to use the IRA as a vehicle for investments in non-traditional assets. Id. at ¶ 11. Initially, Moore funded the IRA with funds rolled over from other existing IRAs he owned. Id. at ¶ 18. Moore exercised discretionary authority over the IRA's investment and asset liquidation activity, making all investment decisions personally and providing instructions to the Custodian. Id . at ¶ 12. In 2016 Moore directed the Custodian to invest IRA funds in vacant real estate properties located in Florida. Id. at ¶ 30. The IRA funds were also invested in an options trading account held by R.J. O'Brien, a corporate entity. Id . at ¶ 19. Option IQ, another entity, acted as the introducing broker. Id. All proceeds from the invested funds were deposited in the IRA. Id. Nothing in the record suggests that Moore had any relationship to either company.
Moore also holds an ownership interest in Louisiana Oil and Gas LLC ("Louisiana Oil"), incorporated in Utah. Id. at ¶ 6. The company's March 1, 2017 Certificate of Organization listed Moore as the sole owner of the company. Id . Shortly thereafter, on March 3, 2017, Moore added Martin as a co-owner but retained fifty percent or more of Louisiana Oil's shares. Id. Until 2018, Louisiana Oil held a twenty percent ownership interest, purchased for approximately $30,000, in the Harry O'Neal oil well located in Mississippi and received regular revenue dividends from oil sales. Id. at ¶¶ 7,8. Louisiana Oil in turn made regular transfers to Moore. Id. at ¶ 8. The IRA Account Terms and Conditions ("Terms") included an explanation of statutorily prohibited transactions between the account and disqualified persons under ERISA and IRS rules. Id . at ¶ 3, The parties agree that Moore, Martin, and Louisiana Oil were disqualified persons under the ERISA and IRS rules. Id. at ¶¶ 14-16.
On February 15, 2017 Moore transferred $40,000 from the IRA to his personal bank account at Wright-Patt Credit Union. Id. at ¶ 22; Joint Ex. E. Subsequently, on March 6, 2017, he transferred $135,000, including the earlier transferred $40,000, from his personal account to an account held by Louisiana Oil. Id . at ¶ 23; Joint Ex. E; Joint Ex. F. On August 8, 2017 Louisiana Oil loaned $40,000 to a Mr. Steven Ford. Id. at ¶ 24; Joint. Ex. G. Later in 2017, Moore transferred an additional $54,000 from the IRA to his personal bank account. Id. at ¶ 25; Joint Ex. C; Joint Ex. H. The Form 1099-R issued by the Custodian to Moore for the 2017 tax year showed a total of $94,000 in gross distributions from the IRA to Moore. Id. at ¶ 25; Joint Ex. I. The custodian classified using distribution code "7" on the tax form, the code for regular distributions. Id. (Joint Ex. I).
In January 2018 Moore loaned approximately $28,059.15 to "PPU," the oil well operator for the Harry O'Neal well in which Louisiana Oil held an ownership stake, from his personal account. Id. at ¶ 28. The loans were used to pay Louisiana Oil's share of the expenditure obligations and treated as investment credits. Id at ¶ 29. In May and June of 2021 the IRA liquidated the Florida properties at Moore's direction and deposited the proceeds into the IRA. Id. at ¶ 31. As of August 1, 2021, the IRA's value equaled $96,256.42. Id. at ¶ 32; Joint Ex. D.
II. Legal Standard and Analysis
A. Jurisdiction
This court exercises jurisdiction pursuant to 28 U.S.C. § 1334(b) and the standing order of reference in the District Court for the Southern District of Ohio, Amended General Order 05-02. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(B). This court has constitutional authority to enter final orders in this contested matter. Stern v. Marshall , 564 U.S. 462, 499, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011).
B. Summary Judgment Standard
A court "shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a) (made applicable in this adversary proceeding by Federal Rule of Bankruptcy Procedure 7056 ). A factual disagreement is genuine if "a rational trier of fact could find in favor of either party on the issue." SPC Plastics Corp. v. Griffith (In re Structurlite Plastics Corp. ), 224 B.R. 27, 30 (B.A.P. 6th Cir. 1998) (citing Schaffer v. A.O. Smith Harvestore Prods., Inc. , 74 F.3d 722, 727 (6th Cir. 1996) ). A fact is material if it might affect the outcome of the suit under substantive law. Niecko v. Emro Mktg. Co. , 973 F.2d 1296, 1304 (6th Cir. 1992) (quoting Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986) ). When reviewing a motion for summary judgment, a court views all evidence and draws all inferences in the light most favorable to the nonmoving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp. , 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986).
C. Exemptions in Bankruptcy
When a debtor files a bankruptcy petition under Chapter 7 of the Bankruptcy Code, all of his assets and property interests become part of the bankruptcy estate, and thus available to the Chapter 7 Trustee to administer for the benefit of creditors. 11 U.S.C. § 541(a)(1) ; Daley v. Mostoller (In re Daley ), 717 F.3d 506, 508 (6th Cir. 2013) ("The bankruptcy trustee obtains control of the debtor's non-exempt property and distributes it to creditors."). However, debtors in bankruptcy may claim portions of their property as exempt from the bankruptcy estate. 11 U.S.C. § 522(d) ; Holland v. Star Bank, N.A. (In re Holland ), 151 F.3d 547, 548 (6th Cir. 1998) ("The Bankruptcy Code allows debtors to exempt certain property from the bankruptcy estate."). Because Ohio chose to withdraw from the federal exemptions in § 522(d), debtors domiciled in Ohio must look to the state statute to determine and claim applicable exemptions. In re Weatherspoon , 605 B.R. 472, 482 (Bankr. S.D. Ohio 2019) ; see 11 U.S.C. § 522(b)(2) (providing the exemptions in § 522(d) apply unless "the State law ... does not so authorize."); Owen v. Owen , 500 U.S. 305, 308, 111 S.Ct. 1833, 114 L.Ed.2d 350 (1991) (discussing state opt-outs from the federal exemption system).
The Trustee holds the burden to show by a preponderance of the evidence "that the [debtor's] exemptions are not properly claimed." Fed. R. Bankr. P. 4003(c) ; Baumgart v. Alam (In re Alam ), 359 B.R. 142, 147 (B.A.P. 6th Cir. 2006). Further, "Ohio exemption provisions are to be construed liberally in favor of the debtor and a debtor's dependents and any doubt in interpretation should be in favor of granting the exemption." Id. at 148 (quoting In re Oglesby , 333 B.R. 788, 791 (Bankr. S.D. Ohio 2005) ); In re Cook , 406 B.R. 770, 772 (Bankr. S.D. Ohio 2009) (similar). The Ohio exemption statute states in relevant part:
After the post-briefing status conference, Moore amended his Schedule C to claim an exemption in the IRA under subsections (c) and (e) of § 2329.66(A)(10) in addition to subsection (b). Doc. 79 at 2. In his supplemental brief, Moore states that subsection (c) is the applicable exemption and admits that subsection (e) is not applicable because he did not inherit the IRA. See Doc. 81 at 1, 3. In the alternative, Moore suggests that subsection (b) might apply. See Id. at 3-4. Subsection (b) does not appear applicable because it concerns an exemption, with certain enumerated exceptions and limitations, in a "pension, annuity, or similar plan or contract[.]" Ohio Rev. Code § 2329.66(A)(10)(b). Nevertheless, the court will not address the question of whether subsection (b) would exempt Moore's IRA because the Trustee does not contest the applicability of subsection (c) to this type of IRA. Instead, while he objects to the claimed exemptions for the reasons discussed, the Trustee appears to agree that subsections (c) and (e) would in fact be applicable if the IRA had not, as he asserts, lost its tax exempt status as a result of Moore's activities. See Docs. 77 at 2-3; 80 at 3.
(A) Every person who is domiciled in this state may hold property exempt from execution, garnishment, attachment, or sale to satisfy a judgment or order, as follows:
* * *
(10) (c) ... [T]he person's rights or interests in the assets held in, or to directly or indirectly receive any payment or benefit under, any individual retirement account, individual retirement annuity, "Roth IRA," account opened pursuant to a program administered by a state under section 529 or 529A of the "Internal Revenue Code of 1986," 100 Stat. 2085, 26 U.S.C. 1, as amended ... to the extent that the assets, payments, or benefits described in division (A)(10)(c) of this section are attributable to or derived from any of the following or from any earnings, dividends, interest, appreciation, or gains on any of the following:
(i) Contributions of the person that were less than or equal to the applicable limits on deductible contributions to an individual retirement account or individual retirement annuity in the year that the contributions were made, whether or not the person was eligible to deduct the contributions on the person's federal tax return for the year in which the contributions were made;
(ii) Contributions of the person that were less than or equal to the applicable limits on contributions to a Roth IRA or education individual retirement account in the year that the contributions were made;
(iii) Contributions of the person that are within the applicable limits on rollover contributions under subsections 219, 402(c), 403(a)(4), 403(b)(8), 408(b), 408(d)(3), 408A(c)(3)(B), 408A(d)(3), and 530(d)(5) of the "Internal Revenue Code of 1986," 100 Stat. 2085, 26 U.S.C.A. 1, as amended;
(iv) Contributions by any person into any plan, fund, or account that is formed, created, or administered pursuant to, or is otherwise subject to, section 529 or 529A of the "Internal Revenue Code of 1986," 100 Stat. 2085, 26 U.S.C. 1, as amended.
Ohio Rev. Code § 2399.66(A)(10)(c). See also In re Villavicencio , 635 B.R. 486, 494-98 (Bankr. S.D. Ohio 2022) (discussing retirement account exemptions under the Ohio statute). Accordingly, an Ohio debtor may claim an IRA as exempt only if the account meets the Internal Revenue Code (the "Code") qualifications for tax-exempt status. See In re Roberts , 326 B.R. 424, 427 (Bankr. S.D. Ohio 2004) (noting that individual retirement accounts exists solely because of their status under the Internal Revenue Code); In re Chaudury , 581 B.R. 279, 285 (Bankr. M.D. Tenn. 2018) ("The Bankruptcy Code does not independently define what is properly exempt as a retirement fund. It simply defaults to the Internal Revenue Code."). The court must therefore evaluate Moore's IRA under the Code to determine whether the account qualifies and may be claimed as exempt property. Willis v. Menotte , No. 09-82303, 2010 U.S. Dist. LEXIS 44773 at *18, 2010 WL 1408343 at *6 (S.D. Fla. Apr. 6, 2010) (quoting 11 U.S.C. § 522(b)(3)(C) ) ("The bankruptcy court is obligated to determine whether the funds are in ‘a fund or account that is exempt from taxation’ and is directed to specific sections of the Internal Revenue Code, which define those tax-exempt accounts.").
D. Qualified Account Status Under the Internal Revenue Code
The term IRA refers to "a trust created or organized in the United States for the exclusive benefit of an individual or his beneficiaries, but only if the written governing instrument creating the trust meets [certain enumerated requirements.]" 26 U.S.C. § 408(a). Section 408(a) sets out six initial requirements that a trust account must meet to qualify for IRA status. Id .; Daley , 717 F.3d at 508. Qualifying accounts are then treated as tax exempt under § 408(e)(1). See Rousey v. Jacoway , 544 U.S. 320, 322-23, 125 S.Ct. 1561, 161 L.Ed.2d 563 (2005). Because the parties do not dispute that Moore's IRA initially met the qualification requirements in § 408(a), the court will not review the individual requirements here. Instead, the court turns to the Trustee's contention that the IRA lost its tax-exempt status in 2017 when Moore made prohibited indirect transfers to Louisiana Oil and to a third party for Louisiana Oil's benefit.
1. Prohibited Transactions and Loss of Tax-Exempt Status Under § 4975
An IRA loses its tax-exempt status if the "individual for whose benefit [the] individual retirement account is established ... engages in any transaction prohibited by section 4975 with respect to such account[.]" Villavicencio , 635 B.R. at 494 (quoting 26 U.S.C. § 408(e)(2)(A) ) (internal quotation marks omitted); see also Yerian v. Webber (In re Yerian ), 927 F.3d 1223, 1228 (11th Cir. 2019) (stating that an IRA loses its tax-exempt status if the IRA owner engages in self-dealing). Such prohibited transactions include any "transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan[.]" 26 U.S.C. § 4975(c)(1)(D) ; see Ellis v. Comm'r , 787 F.3d 1213, 1216 (8th Cir. 2015) (discussing prohibited transactions). In turn, disqualified persons include any fiduciary, a "person who exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets." 26 U.S.C. § 4975(e)(3)(A). In the Joint Stipulations, Moore admits that he, his wife, and Louisiana Oil are all disqualified persons under ERISA and IRS rules. doc. 64, ¶¶ 14-16. Thus, the inquiry hinges on whether Moore made a prohibited transfer from the IRA to Louisiana Oil, his wife, or himself.
The record does not evidence any direct transfer from the IRA to Louisiana Oil, and the trustee has not argued that such a transfer occurred. The transactions at issue are apparent two-step transfers from the IRA to Moore's personal accounts and then to Louisiana Oil or to third parties in fulfillment of Louisiana Oil's obligations. The Trustee argues that Moore engaged in a prohibited transaction when he indirectly transferred funds to and for the benefit of a disqualified person, Louisiana Oil. The Trustee suggests that by funneling the money through his own personal account before transferring it to the intended recipient, Moore attempted to circumvent the restrictions set out in the IRS rules. The Trustee points to the timing of the transactions as evidence of Moore's intent that the money should benefit Louisiana Oil rather than be used by him for retirement purposes as intended by the IRS rules and IRA plan. This argument raises two questions that the court will address in turn – whether, as an initial matter, Moore engaged in a prohibited transaction by transferring funds to himself, a disqualified person, and if not, whether Moore tainted an otherwise lawful transaction by then transferring at least a portion of these funds for use by or for the benefit of Louisiana Oil, a disqualified person.
2. Moore's Distributions to Himself
While Moore is certainly a fiduciary and thus a disqualified person under § 4975, this status does not disqualify him from receiving the benefits to which he is entitled under the IRA plan. Section 4975 explains that "the prohibitions provided in subsection (c) shall not apply to receipt by a disqualified person of any benefit to which he may be entitled as a participant or beneficiary in the plan, so long as the benefit is computed and paid on a basis which is consistent with the terms of the plan as applied to all other participants and beneficiaries[.]" 26 U.S.C. § 4975(d)(9). Owners of self-directed IRAs necessarily play dual roles in that they exercise control and direct IRA investments as account fiduciaries while also receiving benefits under the plan as beneficiaries. See Advisory Opinion, Seymour Goldberg, Esq., Opinion No. 2009-02A at *3 (Dep't of Labor 2009) ("an IRA owner's decision to make an otherwise permissible benefit distribution to himself or herself in accordance with the terms of the IRA is not an act by the IRA owner as a fiduciary within the meaning of the prohibitions in Code sections 4975(c)(1)(D) and (E)"); see also McNulty v. Comm'r , No. 1377-19, 2021 U.S. Tax Ct. LEXIS 70, at *12, 2021 WL 5371215, at *5 (T.C. Nov. 18, 2021) (noting that owner control over IRA asset investments does not result in a loss of the IRA's tax-exempt status). In considering this apparent dichotomy, it is useful to recall that § 4975 came into being as part of ERISA, "a comprehensive remedial scheme designed to protect the pensions and benefits of employees" and exists to "prevent people with a close relationship to a plan (disqualified persons) from using the relationship to the detriment of plan beneficiaries." O'Malley v. Comm'r , 972 F.2d 150, 153 (7th Cir. 1992) (quoting Wood v. Comm'r. , 955 F.2d 908, 910 (4th Cir. 1992) ). Because of this, while § 4975 equally applies to self-directed IRAs, the language reflects and is written to encompass the complex situations and roles that arise in the management of a large employer-sponsored 401k or pension plan.
Moore was approximately 64 years old when the withdrawals from the IRA were made and was, therefore, entitled to take regular distributions without tax penalties as a plan beneficiary. See 26 U.S.C. § 72 (t)(1)-(2) ("[The additional ten percent tax] shall not apply to ... (A) distributions which are – (i) made on or after the date on which the employee attains age 59 1/2 ...."); see also Chaudury , 581 B.R. at 286 (noting that a debtor over the age of 59 1/2 was entitled to IRA distributions without penalty). In fact, the Code requires the distribution of funds in an IRA when the individual reaches the age of 70 1/2. See I.R.C. § 408(a)(6) ; 26 C.F.R. § 1.408-2(b)(6) ; see also Solomon v. Crosby (In re Solomon ), 67 F.3d 1128, 1133 (4th Cir. 1995) (noting that distributions are not required until a taxpayer reaches the age of 70 1/2); Estate of Hung-Liang Lynn Lin v. Comm'r , No. 211-15, 2017 Tax Ct. Memo LEXIS 76, at *P4, 2017 WL 1861797, at *4 (T.C. May 8, 2017) (similar). "Failure to make the required distributions at that time subjects the individual to a severe excise tax in the amount of 50% of the difference between the required minimum distribution and the actual distribution." Jordan v. Sears, Roebuck & Co. , 651 A.2d 358, 361 (Me. 1994). In accordance with the tax deferred nature of IRAs, distributions, whether periodic or lump sum, constitute taxable income to be reported on the beneficiary's income tax returns. See McGaugh v. Comm'r , No. 13665-14, 2016 Tax. Ct. Memo LEXIS 28, at *7, 2016 WL 736015, at *3 (T.C. Feb. 24, 2016), aff'd , 860 F.3d 1014 (7th Cir. 2017) ("Generally, under section 72, amounts distributed to the taxpayer from an IRA are includible in the taxpayer's gross income ..."). Thus, § 408(d)(1) states, "Except as otherwise provided in this subsection, any amount paid or distributed out of an individual retirement plan shall be included in gross income by the payee or distribute, as the case may be, in the manner provided under section 72." 26 U.S.C. § 408(d)(1). Moore and the Trustee agree that Moore received a 1099-R tax form from the Custodian. doc. 64, ¶ 33; Joint Ex. I. In his response brief, Moore notes that the account custodian coded the withdrawals as regular distributions, indicating code number "7," and that he reported the withdrawals as income on his personal tax returns as required. Nothing in the record suggests that the IRS disputed this characterization, assessed any tax penalty against Moore, or otherwise subjected him or the IRA to a negative tax determination. Accordingly, the court concludes that Moore took allowed distributions and paid taxes on the withdrawals as required.
3. Moore's Use of the Distributed Funds
The second question – that of whether Moore's use of the funds to benefit a disqualified person fouled an otherwise lawful withdrawal – must also be resolved in Moore's favor. The Trustee points to the term "indirect" in § 4975(c)(1) and argues that the inclusion of this term in the statute operates to bar the indirect transfer of funds to or for the benefit of a disqualified person, even if the first step of the transaction would otherwise qualify as a regular distribution. The Trustee's proffered interpretation is misguided. While the term "indirect" is certainly broad, its meaning is limited by the context in which it is placed. See Parker v. Metro. Life Ins. Co. , 121 F.3d 1006, 1014 (6th Cir. 1997) (quoting Kurinsky v. United States , 33 F.3d 594, 597 (6th Cir. 1994), abrogated on other grounds by Ali v. Fed. Bureau of Prisons , 552 U.S. 214, 128 S.Ct. 831, 169 L.Ed.2d 680 (2008) ) ("The doctrine of noscitur a sociis instructs that a ... term is interpreted within the context of the accompanying words to avoid the giving of unintended breadth to the Acts of Congress.") (internal quotation marks omitted). As the Sixth Circuit explained in Daley , "Any and direct or indirect are roomy terms .... But this breadth of phrasing still demands the ... [transfer] between a plan [the IRA] and a disqualified person." 717 F.3d at 508-09 (cleaned up). For the reasons discussed earlier, in taking an allowed distribution, Moore acted as a beneficiary, not as a plan fiduciary or disqualified person. Therefore, no transfer between the IRA and a disqualified person occurred. After an allowed withdrawal occurs, § 4975(c)(1)(D) is no longer applicable to the distribution because "[f]unds withdrawn from the plan no longer constitute income or assets of a plan .... The Court cannot make the leap that ... withdrawals are akin to transactions where the interested party sits on both sides of a deal."). Res-Ga Gold, LLC v. Cherwenka (In re Cherwenka ), 508 B.R. 228, 237 (Bankr. N.D. Ga. Mar. 6, 2014) (discussing allowed early withdrawals of IRA funds) (internal quotation marks omitted).
The Trustee's stated position would logically require § 4975 to operate as a limit on the use of funds withdrawn from an IRA. But there is no statutory basis for this interpretation. The IRS rules permit (and at times require) owners to take allowed distributions from an IRA, regardless of whether the funds will be used for a wise or ill-advised purpose. Whether used for a grocery bill or gambling spree, the IRS makes no inquiry as to the use of the funds and demands only that the owner remit any owed taxes on the distribution, now regarded as taxable income, to the IRS. The IRS rules limit how plan assets can be used and when they can be withdrawn but do not regulate the purpose for which the funds are used after they are withdrawn by the beneficiary and cease to be plan assets. An examination of the purpose and benefit of the IRA as an investment vehicle renders this self-evident. As discussed above, IRAs organized in accordance with § 408(a) are eligible for special tax treatment, subject to certain restrictions outlined in § 408 and § 4975, as a means to allow taxpayers to save for retirement. The Tax Court, noting the benefits of this tax treatment, explained, "As long as the account qualifies as an IRA, the taxpayer-investor is not liable for income tax on the gains, so that the undiminished investment account can earn maximum returns until the time comes for payout, when the taxpayer will finally owe income tax on those greater gains.... the benefit of the traditional IRA is thus deferral of income tax liability on retirement investment gains." Peek v. Comm'r , 140 T.C. 216, 223 (2013). Thus, the taxpayer benefits by retaining and reinvesting profit earnings without paying taxes on those gains, instead paying only income tax, often at a lower tax rate, when taking retirement age distributions years later. Accordingly, § 4975 serves to preserve plan funds for use at retirement age and limit the tax benefit to its intended purpose. As another bankruptcy court in the Sixth Circuit noted, the rule "prevent[s] taxpayers involved in a qualified retirement plan from using the plan to engage in transactions for their own account that could place plan assets and income at risk of loss before retirement." Chaudury , 581 B.R. at 286 (quoting Ellis v. Comm'r , No. 12960-11, 2013 Tax. Ct. Memo LEXIS 245, at *15, 2013 WL 5807593, at *15 (T.C. Oct. 29, 2013), aff'd , 787 F.3d 1213 (8th Cir. 2015) ); see also Leib v. Commissioner , 88 T.C. 1474, 1481 (1987) (stating that the purpose of enumerating prohibited transactions was to "make illegal per se the types of transaction that experience had shown to entail a high potential for abuse."). IRA owners run afoul of § 4975 when they attempt to circumvent taxes or otherwise engage in some form of self-dealing, whether through a direct or indirect transfer. See Ellis , 2013 Tax. Ct. Memo LEXIS 245, at *24, 2013 WL 5807593, at *22 (finding that an IRA owner engaged in prohibited self-dealing when he directed his IRA to fund his own start-up business and pay his day-to-day expenses and salary).
In re Willis , cited by the Trustee, illustrates the sort of indirect transfer that § 4975 does prohibit. No. 07-11010, 2009 Bankr. LEXIS 2160, 2009 WL 2424548 (Bankr. S.D. Fla. Aug. 6, 2009). In Willis , an IRA owner borrowed money from his IRA to purchase a mortgage assignment on a building owned by a corporate entity in which he personally held a fifty percent interest. 2009 Bankr. LEXIS 2160 at *4-5, 2009 WL 2424548, at *1-2. After repaying the money to the IRA, the owner sold the building and retained the proceeds of the sale. 2009 WL 2424548, at *2. In so doing, the IRA owner benefitted financially by using IRA funds to further his own business activities without paying taxes on the withdrawals. The court noted, "Mr. Willis testified at his deposition that through this process, he also attempted to avoid taxation on the Merrill Lynch IRA withdrawals by returning funds to the Merrill Lynch IRA within sixty days. Mr. Willis repeatedly engaged in [check swapping] transactions where he simultaneously transferred funds from his Merrill Lynch IRA to his Joint Brokerage Account, and transferred funds from the Joint Brokerage Account to his Merrill Lynch IRA." 2009 WL 2424548, at *2. Here, Moore did pay taxes on his withdrawals, and there is no indication that he attempted to avoid doing so. In addition, Moore did not attempt to return money to his IRA. Similarly, the debtor in Yerian , also relied upon by the Trustee, admitted that he had engaged in prohibited transactions, including taking title to a car purchased by his IRA and residing in a property owned by the IRA. Yerian v, Webber , 927 F.3d 1223, 1228 (11th Cir. 2019). See also In re Williams , No. 09-43872-A-7, 2011 Bankr. LEXIS 5584, *15, 2011 WL 10653865, at *6 (Bankr. E.D. Cal. June 3, 2011) (finding that debtor engaged in a prohibited transaction when his wholly-owned entity provided services to and received payment from his self-directed IRA).
Here, the record does not reflect any self-dealing on Moore's part. The Trustee does not argue that Moore attempted to return funds to the IRA after lending them to Louisiana Oil or that he transferred IRA funds from his third-party investment account to Louisiana Oil or any other entity in which he held an interest. After Moore took a regular distribution and reported it as part of his income, the restrictions in § 4975 no longer applied to those funds because they ceased to be plan assets.
III. Conclusion
Accordingly, for the reasons stated, the court grants summary judgment in favor of the defendant, Mr. Moore, and determines that the debtor's claimed exemption is allowed. The Trustee's objection to the exemption of Mr. Moore's self-directed IRA is overruled (docs. 25, 80). The court will enter an order consistent with this decision.