If you thought your ERISA retirement plan was safe in Bankruptcy from the IRS think again!

A recent unpublished California case, Stuart A. Gross v. Commissioner of Internal Revenue, (CA 9 2/25/2014) AFTR 2d 2014-529, addresses the exemption versus the exclusion of an ERISA plan (basically a retirement plan such as a 401(k) or defined contribution plan, the “Plan”) in a federal bankruptcy proceeding and the ability of the IRS to levy against such a plan.

As I understand  (I do not delve in the area of bankruptcy.. .but I have great attorneys to whom I can refer)  when you file a bankruptcy proceeding you have to complete a petition and attach certain schedules. Mr. Gross completed the schedule and INCLUDED a PLAN on the schedule, stating it was EXCLUDED, and in an attached schedule stated the Plan was EXEMPT. Generally, if property is EXEMPT then the property is not available to satisfy prepetition debts during or after the bankruptcy.

After the bankruptcy, the IRS sent a levy notice to Mr. Gross for back taxes and determined that the IRS was not precluded from levying assets EXCLUDED from the bankruptcy estate. If the Plan was EXCLUDED the Plan was never property of the bankruptcy estate and the IRS tax lien on the EXCLUDED Plan survives the bankruptcy.

Mr. Gross stated that he did include the Plan in the petition but, not only did he state it was EXCLUDED, he also stated that it was EXEMPT.

A simple error on the petition? The court determined that because Mr. Gross stated it was EXCLUDED from the bankruptcy estate, even though he stated later it was EXEMPT, the Plan was available for the IRS levy because the Plan was EXCLUDED from the bankruptcy proceeding. The court determined that “any ambiguity in a bankruptcy schedule is construed against the debtor”.

Bottom Line: Confusing? Yes! Get a competent bankruptcy attorney to represent you in these proceedings. The petition is NOT just some form to fill out and hope for the best. As you can see a simple word EXCLUDED versus EXEMPT matters.
 
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