The general rule is that an IRA is exempt from the claims of creditors. Indeed, the Federal Bankruptcy Code provides in Sections 522(b)(3)(C) and 522(d)(12) that a retirement plan, including an IRA and a Roth IRA, is an exempt asset in bankruptcy. However in Green v. Pershing L.L.C., N.D. Okla., No. 4:12-cv-00296-CVE-FHM, 10/22/12, the U.S. District Court for the Northern District of Oklahoma ruled that the plan sponsor was not liable for turning over Mr. Green’s entire IRA to the IRS in response to the Notice of Levy and demand the IRS served on Pershing L.L.C. (“Pershing”).
In this case, the IRS sent a Notice of Levy to Pershing attaching the IRA as property of Mark Green (“Green”) to satisfy the taxes owed by Green. When Pershing received the Notice of Levy, it sent a letter to Green asking that he notify the broker as to how he was planning to satisfy his tax obligation and letting Green know that they were restricting his ability to withdraw funds from the account until the tax obligation was paid. Green apparently took no action and did not pay the tax obligation. Consequently, 4 months later, the IRS sent a Final Demand for Payment to Pershing, demanding that Pershing turn over the funds in the account and notifying Pershing that if they failed to do so, Pershing would be liable for penalties under IRC § 6332. Pershing again notified Green, and Green’s response was to demand that Pershing not forward any funds from his IRA to the IRS. Two weeks later, Pershing sent the IRS all of the funds in Green’s IRA, and notified Green that it had done so.
Green then filed suit against Pershing, alleging that Pershing lacked authority to deliver funds in Green’s IRA to the IRS and seeking to recover those funds as well as special, compensatory, general and punitive damages in the amount of $1 Million. Pershing filed a Motion for Judgment on the Pleadings.
In ruling in favor of Pershing on its Motion, the Court noted the following:
1. The IRS is authorized under IRC § 6321 to impose tax liens on “all property and rights to property, whether real or personal, belonging to [a] person.”
2. The IRS may enforce its lien through an “administrative levy” under IRC § 6331(a), which is initiated by serving a Notice of Levy on the third-party holding the property, in this case Pershing. Once the Notice of Levy is served on the third-party, the IRS has all the rights of the taxpayer as to the property, even an IRA.
3. There are only two defenses a third-party has to liability as a result of failing to comply with an IRS demand for levy on property of the taxpayer in its possession: (i) that it is not in possession of property of the taxpayer, and (ii) that the property is subject to a prior judicial attachment or execution. There is no defense that the property in question is an IRA.
4. Pursuant to IRC § 6332(e), once the third-party delivers the taxpayer’s property to the IRS in satisfaction of the levy, it is “discharged from any obligation or liability to the delinquent taxpayer, with no exception for an IRA.”