Court Determines Annuities not Excludable in Bankruptcy

November 22, 2006 ( - The US District Court for the Western District of Pennsylvania has ruled that an individual's pension in the form of an annuity under section 403(b) of the Internal Revenue Code is not excludable as assets in bankruptcy.

In reversing a bankruptcy court’s findings that Linda Plonski’s 403(b) qualified annuity pension was excludable as income in her bankruptcy filing, the court relied on a US Supreme Court ruling which said Section 541 of the Bankruptcy Code allows debtors to “exclude property of the estate in a plan or trust.” While the bankruptcy court had relied on previous cases that interpreted “plan or trust” to mean that a pension plan that was not a trust was excludable, the trustee for the Plonskis’ bankruptcy case argued that the bankruptcy statute¬†requires a trust for assets to be excludable.

The district court also noted that another similar case for which the bankruptcy court issued the same finding was later reversed on appeal, applying a previous 3 rd Circuit decision which, in part, required an individual retirement account (IRA) to constitute a trust. The district court said there was nothing in the 3 rd Circuit’s reasoning that implied its standards for applying Section 541 should be restricted to an IRA.

In conclusion, the district court said the bankruptcy court failed to apply appropriate law to the case.

The case is Skiba v. Plonski, W.D. Pa., No. 05-150Erie, 10/31/06.