Assignment:
ROUSEY v. JACOWAY UNITED STATES SUPREME COURT
FACTS: Richard and Betty Jo Rousey were employed by Northrup Grumman Corporation. When their employment was terminated, Northrup Grumman required them to take lump-sum distributions from their employer-sponsored retirement plans. The Rouseys deposited the lump sums in two IRAs, one in each of their names. Several years later, the Rouseys fi led a joint Chapter 7 bankruptcy petition in which they listed the IRAs as exempt. The trustee objected to this exemption, and the bankruptcy court agreed with the trustee that the IRAs should be included in the bankruptcy estate. On appeal, the Bankruptcy Appellate Panel and Court of Appeals agreed that the IRAs were not exempt. The Rouseys appealed to the U.S. Supreme Court, which granted certiorari and heard the case. ISSUE: Do the individual IRA accounts satisfy two requirements under the Bankruptcy Code for exemption: (1) the right to receive the compensation due to a pension plan, annuity, profi t-sharing plan, and the like; and (2) the right to receive payment due to illness, disability, or minimum retirement age? REASONING: The Court fi rst held that the right to receive payment pursuant to the IRAs was on account of the Rouseys' age. The Court determined that "on account of" means "because of," thereby requiring a causal connection between the right to receive payment and age. Although the Rouseys could withdraw funds from the IRAs for any reason whatsoever as long as they were willing to pay a 10 percent penalty before the age of 59½ years, this did not mean that the right to payment was unrelated to old age. The Court held that the substantial tax penalty suggested that the U.S. Congress designed it to preclude early access to IRAs. It therefore limits the Rouseys' right to payment of the balance of their IRAs. This limitation ROUSEY v. JACOWAY UNITED STATES SUPREME COURT 544 U.S. 320 (2006) CASE 19-2 could be removed only by age, specifi cally, the account holder turning 59½ years old. The Court then addressed the issue of whether the IRAs were a stock bonus, pension, profi t-sharing, annuity, or similar plan or contract. To be "similar," an IRA must be like, though not identical to, the specifi c plans or contracts listed in the Bankruptcy Code and must share common characteristics. Although the Bankruptcy Code does not defi ne any of these terms, their common feature is that they provide income that substitutes for wages. The Court concluded that the income the Rouseys would derive from their IRAs is income that substitutes for wages. First, the minimum-distribution requirements mandate that distribution must begin, at the latest, in the calendar year after the year in which the account holder turns 70½, after which they are most likely retired and lacking wage income. Second, the Internal Revenue Code's tax treatment of money held in IRAs encourages account holders to wait until retirement to withdraw the funds. Third, withdrawals before age 59½ are subject to a tax penalty, restricting preretirement access to the funds. Fourth, to ensure that the benefi ciary uses the IRA in his retirement years, an account holder's failure to take the requisite minimum distributions results in a 50 percent tax penalty on funds improperly remaining in the account. All of these features show that IRA income substitutes for wages lost upon retirement and distinguish IRAs from typical savings accounts. DECISION AND REMEDY: The U.S. Supreme Court reversed the bankruptcy appellate panel and the court of appeals and held that the IRAs were exempt. SIGNIFICANCE OF THE CASE: This case put to rest one of the most compelling interests that employees have, specifi cally, protection of personal IRAs.
CRITICAL THINKING
One of the most controversial issues surrounding the judiciary is the notion of judicial activism, the claim that judges act outside their role as judges and begin to legislate through judicial opinions. Critics argue that this role should be left to the legislatures, not the judiciary. Others argue that such interpretation is necessary to keep the law relevant and up to date. Do you believe that this case, coming from a relatively conservative Supreme Court, is an example of judicial activism?
ETHICAL DECISION MAKING
We can certainly understand the interests advanced by the decision the Court made in this case. But what stakeholders are potentially harmed by this decision?