Daley v. Mostoller

Daley opened an IRA with Merrill Lynch, rolling over $64,646 from another financial institution. He signed a contract with a "liens" provision that pledged the IRA as security for any future debts to Merrill Lynch. No such debts ever arose. Daley never withdrew money from his IRA, borrowed from it or used it as collateral. Two years later, Daley filed a Chapter 7 bankruptcy petition and sought protection for the IRAs, 11 U.S.C. 522(b)(3)(C). The trustee objected, contending that the IRA lost its exempt status when Daley signed the lien agreement. The bankruptcy court and the district court ruled in favor of the trustee. The Sixth Circuit reversed. An IRA loses its tax-exempt status if the owner "engages in any transaction prohibited by section 4975 of the tax code. There are six such transactions, including “any direct or indirect” “lending of money or other extension of credit” between the IRA and its owner, 26 U.S.C. 4975(c)(1)(B). Daley never borrowed from the IRA, and Merrill Lynch never extended credit to Daley based on the existence of the IRA. View "Daley v. Mostoller" on Justia Law