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IRS Lien Could Attach to Debtor's Interest in Nondebtor Spouse's Retirement Account

(Parker Tax Publishing January 2019)

A district court held that the United States could garnish 50 percent of an individual's retirement accounts to recover restitution owed by the individual's spouse because the accounts were the spouse's solely managed community property. The court found that (1) the state law treatment of the couple's retirement funds as community property was not preempted by Code Sec. 408, (2) the percentage of the funds that could be garnished was not limited by the Consumer Credit Protection Act, and (3) there were no equitable grounds for reducing the garnishment amount. U.S. v. Berry, 2018 PTC 440 (S.D. Tex. 2018).

Gwendolyn Berry was sentenced to 51 months in prison for wire fraud, mail fraud, and making and subscribing a false tax return. She was also ordered to pay approximately $2.1 million in restitution. In a Texas district court, the government filed an application for a writ of garnishment against five investment accounts, three owned by Mrs. Berry and two owned by her husband, Michael Berry. Mr. Berry's accounts were rollover individual retirement accounts (IRAs) comprised of funds that were once regulated by the Employee Retirement Income Security Act (ERISA). The government sought to garnish 50 percent of Mr. Berry's retirement accounts under Fifth Circuit case law that allows a restitution lien to attach to a nondebtor's solely managed community property.

The Berrys moved to quash the writs of garnishment against Mr. Berry's two accounts. They argued that the Texas community property law was preempted by Code Sec. 408(a)(4), which provides that an individual's interest in an IRA is nonforfeitable. The Berrys cited Boggs v. Boggs, 520 U.S. 833 (1997), which held that ERISA's anti-alienation provision generally prohibits any assignment of benefits. The Berrys contended that, like ERISA, the alienation and preemption provisions in Code Sec. 408 rendered state efforts to categorize retirement funds as community property meaningless. The Berrys contended that under Texas law, Mrs. Berry waived her rights to the funds, thus removing that property from the marital estate. They also argued that, even if the government could garnish Mr. Berry's retirement accounts, the Consumer Credit Protection Act (CCPA) limited the garnishment to 25 percent of Mrs. Berry's interest in the accounts. In the alternative, the Berrys requested an equitable modification of the writ of garnishment to reduce the financial strain on Mr. Berry.

The district court denied the Berrys' motion. The court found that Mr. Berry's accounts were not governed by ERISA so the holding in Boggs did not apply. Moreover, the court found no case involving an IRA in which a federal law other than ERISA preempted state community property law. The court agreed with the conclusion in PLR 199937055, in which the IRS ruled that Code Sec. 408(g) (which provides that Code Sec. 408 applies without regard to any community property laws) does not abrogate any substantive rights under state law.

The court found that Code Sec. 408(a)(4) was not analogous to ERISA's anti-alienation provision. While ERISA generally prohibits the assignment of retirement benefits except for two statutory exceptions, the court explained, Code Sec. 408(a) allows the beneficiary to assign the account to a third person and to withdraw money from the account at any time. In the court's view, Code Sec. 408's preemption and alienation provisions could not be read to preempt state community property laws.

The court rejected all of the Berrys' other arguments. It found that Mrs. Berry did not waive her community property interest in the accounts but only waived her right to an annuity due to the fact that Mr. Berry chose a lump sum payment when he created the IRAs. The CCPA did not limit the garnishment percentage, in the court's view, because while the statute applies to periodic payments, Mr. Berry had the uninhibited ability to withdraw all of the money in one lump sum. Finally, the court found that the writ of garnishment sought only Mrs. Berry's community property interest in the disputed accounts so there was no hardship that would require its modification.

For a discussion of the taxation of IRAs, see Parker Tax ¶134,505.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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