In re: Kimberly Michelle EDWARDS, Debtor., United States Bankruptcy Court, D. Connecticut., 363 B.R. 55, No. 05-23528., Feb. 2, 2007
In re: Kimberly Michelle EDWARDS, Debtor.
United States Bankruptcy Court, D. Connecticut.
363 B.R. 55
Feb. 2, 2007.
Zenas Zelotes, Zenas Zelotes LLC, Gro╜ton, CT, for Debtor.
RULING ON TRUSTEE'S MOTION
FOR TURNOVER OF PROPERTY
OF THE ESTATE
ROBERT L. KRECHEVSKY, Bankruptcy Judge.
In this proceeding, Bonnie C. Mangan ("the trustee"), Trustee of the Chapter 7 estate of Kimberly Michelle Edwards ("the debtor") has filed a "Motion for Turnover of Property of the Estate" seeking the sum of $3,820.07 from the debtor. The parties submitted the matter to the court on a stipulation of facts ("the stipulation") and memoranda of law.
The stipulation states the following:
1. The Debtor filed a voluntary Chapter 7 petition on October 3, 2005.
2. On October 3, 2005, Bonnie C. Man╜gan was appointed as Trustee in the case.
3. The Debtor scheduled approximate╜ly $14,425.27 in unsecured debts on Schedule F of her petition.
4. The Debtor's Section 341 meeting that was held on November 10, 2005. At the meeting the Trustee asked the Debtor if she was entitled to a tax refund for 2005.
5. The Debtor did not schedule a 2005 tax refund on her bankruptcy sched╜ules.
6. The Debtor testified that she thought she would receive a 2005 tax refund but was not certain of the amount of the refund.
7. At the Section 341 meeting the Trustee put the Debtor on notice that all or part of the tax refund might be property of the estate.
8. On January 11, 2006, the Debtor amended her bankruptcy schedules to disclose a 2005 tax refund with a value of "TBD" and claimed an exemption in the amount of $374.21.
9. The Debtor used Connecticut Gener╜al Statutes Section 52-352 et seq. to exempt property from the bankrupt╜cy estate.
10. The Debtor received her discharge on January 16, 2006.
11. On January 21, 2006 the Trustee sent a letter to the Debtor and her counsel requesting a copy of the 2005 tax return and directing the Debtor to turn over her refund to the Trustee.
12. The Debtor and her non Debtor spouse filed their 2005 joint tax return on or about February 4, 2006.
13. On February 9, 2006 the Trustee was provided with an "H & R Block Advantage" cover sheet showing that the IRS would issue a $9,699.00 refund to the Debtor and her non Debtor spouse for 2005 and that the State of Connecticut would issue a $407.00 refund to the Debt╜or and her non Debtor spouse.
14. On or about March 24, 2006, the Debtor and her non Debtor spouse filed an "Injured Spouse Alloca╜tion" Form 8379 with the Internal Revenue Service which allocated a majority of the tax refund to the non Debtor spouse.
15. On or about July 27, 2006 the Debtor and her non Debtor spouse received a check in the amount of $8,677.08 from the Department of the Treasury and deposited said funds into a joint account at American Eagle Federal Credit Union.
16. On or about October 31, 2006 the Trustee received $1,231.01 from the Internal Revenue Service on behalf of the Debtor in connection with her 2005 tax refund.
17. The Debtor and her non Debtor spouse have filed joint tax returns since 2000.
18. The Debtor and her non Debtor spouse received the following refunds: 2000: $9,625.00; 2001: $9,567.00; 2002: $9,910.00; 2003: $9,538.00 and 2004: $10,649.00.
19. The only time that the Debtor and her non Debtor spouse made an "Injured Spouse Allocation" claim in connection with a joint tax re╜turn was in 2005.
20. The Debtor and her non Debtor spouse do not have any legally enforceable past due debts for federal taxes, state taxes, child support, spousal support or other federal non tax debt such as student loans.
21. On October 3, 2005, neither the Debtor nor her non Debtor spouse were under a legal obligation to file a "joint" 2005 tax return; both the Debtor and her non Debtor spouse could have filed separate 2005 tax returns (had they so elected).
22. Of the $12,798.00 withheld in 2005 (as reflected on Line 71 of the 2005 Form 1040): the non Debtor spouse contributed $12,615.00; whereas the Debtor contributed $183.00.
ARGUMENTS OF THE PARTIES
The trustee calculated the initial turn╜over request of $3,820.07 as follows:
The filing date of October 3, 2005 was 276 calendar days into the year. The estate would therefore be entitled to 0.756% [sic] of the refunds (276/365), or $10,106.00 x 0.756 which equals $7,640.13. The figure of $7,640.13 was then divided by two because the estate would have a claim to fifty (50%) percent of the refund, which sum equals $3,820.06.
(Tr. 12/7/2006 Mem. at 2.)
The trustee now requests is $2,588.97 in light of her receipt of $1,231.01 from the Internal Revenue Service ("the IRS"). ( See Stipulation ╤╤ 14-16.) The trustee urges the court to conclude: (1) that "a joint refund is owned by the spouses equally;" or (2) that a joint tax refund is "jointly owned unless a different owner╜ship allocation can be shown by court or╜der or an enforceable written prepetition contract between the parties;" and (3) that "the Debtor's conduct in connection with the ▒Injured Spouse Allocation' form" be held sanctionable because it was filed "solely for the purpose of avoiding the Trustee's turnover request." (Motion at 12-13.)
The debtor argues (1) "apportionment issues are relevant only in instances where a joint tax return is filed before commence╜ment" of the bankruptcy case; and (2) if relevant, the joint tax refund should be allocated in accordance with the percent╜age each spouse contributes to the couple's total withholding. (Debtor's Amended Re╜ply Brief. at 1-5) (citing In re Boudreau , 350 F.Supp. 644 (D.Conn.1972))
"The commencement of a case . . . creates an estate . . . . comprised of all . . . property, wherever located and by whom╜ever held . . . [including] all legal or equi╜table interests of the debtor in property as of the commencement of the case." 11 U.S.C. ╖ 541(a). Such estate includes the debtor's interest in any income tax refund based on prepetition income and withhold╜ing. See Kokoszka v. Belford , 417 U.S. 642, 647-48, 94 S.Ct. 2431, 41 L.Ed.2d 374 (1974). The question presented in this proceeding is how to determine the extent of the estate's interest in a refund of an overpayment of income tax withholding when the debtor and her non-debtor spouse file a joint income tax return. 1
1. The funds the trustee received from the IRS were apparently based upon IRS Form 8379: The parties have stipulated (Stip. ╤ 20) that their circumstances have nothing to do with the purposes of Form 8379. Accordingly, the court will ignore the IRS allocation of the tax refund amounts that were sent to the trustee and directly to the home of the taxpayers in arriving at the court's conclusion as to the estate's interest in the tax refund.
"Three approaches have developed con╜cerning this dilemma. The majority ap╜proach . . . holds that . . . . [a debtor or] non-debtor spouse is only entitled to keep the portion of the tax refund attributable to [his or] her tax withholdings. A second approach divides the tax refund between the debtor and non-debtor spouses based on each's income. The third approach . . . splits the tax refund equally between the spouses regardless of tax withholdings or income." In re Kleinfeldt , 287 B.R. 291, 292-93 (10th Cir. BAP 2002) (citations omitted).
The Connecticut District Court, in deal╜ing with the tax refund issue under the Bankruptcy Act of 1898, arrived at a con╜clusion that comports with the majority view. See In re Boudreau , 350 F.Supp. 644. In Boudreau , the debtor refused to turn over a tax refund to the trustee, contending his non-debtor spouse was enti╜tled to a one-half interest in the refund resulting from a joint tax return, despite the non-debtor spouse not having worked during the tax year. The district court stated:
Clearly state law governs the issue of the wife's property interest in the tax refund check . . . . [T]he statute govern╜ing property rights of husband and wife, Conn. Gen.Stat. [presently ╖ 46b-36] emphasizes the independence of each. It provides, ▒Neither husband nor wife shall acquire by the marriage any right to or interest in any property held by the other before or acquired after such marriage . . .' except survivor bene╜fits . . . . The [tax] law, while providing certain benefits in the filing of a joint return and imposing certain liabilities, does not go so far as to change the ownership of any property between the husband and wife. The filing of the joint return, therefore, did not vest in the wife, any title to any part of the tax refund . . . . We must look not to the check for the tax refund, but to the actual earnings and withholdings from the wages of husband and wife to deter╜mine what part of the refund should belong to each.
Id . at 645-46. The Second Circuit Court of Appeals has similarly held:
The filing of joint tax returns does not alter property rights between husband and wife. See Zeeman v. United States , 395 F.2d 861, 865 (2d Cir.1968). In par╜ticular, the filing of a joint return does not have the effect of converting the income of one spouse into the income of another. See , e.g. , McClelland v. Mas╜singa , 786 F.2d 1205, 1210 (4th Cir.1986) ("[T]he mere filing of a joint tax return by a husband and wife does not render the property taxed or the tax paid joint property.").
Callaway v. Commissioner , 231 F.3d 106, 117 (2d Cir.2000).
The court concludes that the ma╜jority approach of allocating the tax refund in proportion to the income tax withhold╜ings of each spouse appropriately reflects Connecticut property law. The second ap╜proach, allocating the refund in proportion to the total income earned by each spouse, may bear little relationship to the contri╜bution of each spouse toward the overpay╜ment which results in a refund. Those courts following the third approach, under which each spouse is entitled to one-half of the refund, have reasoned that such an approach mirrors the "equitable distribu╜tion" of marital property in a divorce pro╜ceeding, which may properly take into ac╜count the non-financial contributions of a non-working spouse. See, e.g. In re Bar╜row , 306 B.R. 28 (Bankr.W.D.N.Y.2004); In re Hejmowski , 296 B.R. 645 (Bankr. W.D.N.Y.2003); In re Aldrich , 250 B.R. 907 (Bankr.W.D.Tenn.2000). However, "it is state property law, not domestic rela╜tions law, that is applicable for purposes of [Bankruptcy Code] ╖ 541(a)." In re Lock , 329 B.R. 856, 859 (Bankr.S.D.Ill.2005).
Applying the court's conclusion, that the tax refund be apportioned in ac╜cordance with the amounts withheld from each spouse's earnings, to the trustee's calculations:
The filing date of October 3, 2005 was 276 calendar days into the year. The estate would therefore be entitled to 75.6% of the refunds (276/365), or $10,106.00 x 0.756 which equals $7,640.13. The figure of $7,640.13 is then allocated in proportion to each spouse's withholding, with the estate be╜ing entitled to the debtor's share of $7,640.13 multiplied by $183 / $12,798, which equals $109.25.
Accordingly, the trustee's motion is denied and trustee shall remit to the non-debtor spouse the sum of $1,121.76, which equals the excess of the $1,231.01 the trustee received from the IRS over the $109.25 which is property of the estate. It is