Judge Makes Debtor give up part of Tax Return

Judge Makes Debtor give up part of Tax Return


IN RE: DANNY R. BOWLES, Case No. 11-35340 Chapter 7 Proceeding Hon. Daniel S. Opperman Debtors. _____________________________________/


Collene K. Corcoran, the appointed Chapter 7 Trustee in this case, has filed a Motion to compel turnover of Debtor Danny R. Bowles’’ non-exempt portion of his 2011 federal tax refund. The amount at issue is $3,909.58, calculated by taking one-half of the total 2011 federal tax refund of $9,819.17, which is $4,909.58, and reducing such by the $1,000.00 exemption claimed by Debtor.

Debtor asserts that the Trustee’’s calculation is incorrect because a 50/50 split as to his entitlement to the tax refund is not appropriate under the unique facts of this case. A hearing was held on the instant Motion on May 30, 2012, and the parties agreed that the facts are undisputed without further need for evidentiary hearing.


Debtor filed his petition seeking Chapter 7 relief with this Court on November 22, 2011. Debtor’’s spouse did not file for bankruptcy. On Schedule B, Debtor listed a “”2011 YTD Tax Refund”” in the amount of $1,000.00, representing “”Debtor husband portion of the refund.”” On Schedule C, Debtor again listed the value of his portion of the refund at $1,000.00, and exempted $165.00 pursuant to 11 U.S.C. §§ 522(d)(5), which was the remaining amount available to Debtor under this subsection.

It does not appear that the Trustee disputes the $165 exemption, because the Trustee did not file an objection to the amount of exemption taken. In the Motion for Turnover, the Trustee references a $1,000.00 exemption, and references this amount as the exemption taken in the tax refund. However, the Debtor’’s Schedule C clearly limits the exemption taken to the $165 claimed, as that is all Debtor had remaining to utilize under Section 522(d)(5). Accordingly, Debtor is only entitled to $165.00 exemption for the subject tax refund.

The Trustee objects to the Debtor’’s allocation of the tax refund, asserting that the Debtor should be entitled to half of the $9,819.17 federal tax refund, or $4,909.58, when reduced to Debtor’’s one-half portion. This amount is then further reduced by the $165.00 Debtor has claimed as exempt. The total amount at issue is therefore $4,744.58.

Debtor responds that because his non-filing spouse is the main income earner, his portionof the tax refund is actually $288.00, including his deduction for one of the children. Per the Court’’s calculation, deducting the $165.00 claimed exemption, if the Court were to adopt the Debtor’’s argument, would result in a total of $123.00, which Debtor would be required to turnover to the



This Court has subject matter jurisdiction over this proceeding under 28 U.S.C. §§§§ 1334(b), 157(a), and 157(b)(1) and E. D. Mich. LR 83.50(a). This is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(A) (matters concerning the administration of the estate).


The Court begins its analysis with the case of Araj v. Kohut (In re Araj), 371 B.R. 240 (E.D. Mich. 2007), in which District Court Judge Battani held that tax refunds were property of the estate and should be prorated on a per diem basis.

1 The Court calculates the amount as follows: federal tax refund $9,819.17 ÷÷ 365 = $26.90 x 326 (total pre-petition days in 2011) = $8,769.40. 3

It is clear to this Court that this tax refund is property of the estate and that Judge Battani’’s formula of determining the amount of the property of the estate should be followed because it is logical and straightforward. The Araj analysis indicates that of the $9,819.17 federal tax refund, $8,769.40 is in issue.1

Courts across the United States have reached different conclusions as to how tax refunds that are property of the estate should be divided between a husband and wife. One approach holds that the tax refund from a joint tax return should be allocated proportionally between the husband and wife in accordance with their respective tax withholdings during the relevant year. See In re Gartman, 372 B.R. 790 (Bankr. D. S.C. 2007). A second approach is to allocate the joint tax refund proportionally in accordance with income produced. See In Levine, 50 B.R. 587 (Bankr. S.D. Fla.1985); In re Verill, 17 B.R. 652 (Bankr. D. Md. 1982); In re Kestner, 9 B.R. 334 (Bankr. E.D. Va. 1981); In re Colbert, 5 B.R. 646 (Bankr. S.D. Ohio 1980). A third approach courts have adhered to is that a joint tax refund should be allocated equally between the husband and wife without regard to tax withholdings or income produced. See In re Innis, 331 B.R. 784 (Bankr. C.D. Ill 2005); In re Barrow, 306 B.R. 28 (Bankr. W.D. N.Y. 2004); In re Aldrich, 250 B.R. 907 (Bankr. W.D. Tenn 2000); Bass v. Hall, 79 B.R. 653, (W.D. Va. 1987). All of these cases, however, are consistent in that state law governs the determination of the property right. Butner v. United States, 440 U.S. 48, 99 S. Ct. 914 (1979).

Here, it is undisputed that Debtors are owed a refund of $9,819.17, and that the refund is joint. Since Michigan law governs, the Court notes that M.C.L. §§ 557.151 states:

All bonds, certificates of stock, mortgages, promissory notes, debentures, or other evidences of indebtedness hereafter made payable to persons who are husband andwife, or made payable to them as endorsees or assignees, or otherwise, shall be held by such husband and wife in joint tenancy unless otherwise therein expressly provided, in the same manner and subject to the same restrictions, consequences and conditions as are incident to the ownership of real estate held jointly by husband and wife under the laws of this state, with full right of ownership by survivorship in case of the death of either.

Accordingly, Michigan law holds that the refunds in this case are jointly held as an “”other evidence[s] of indebtedness””. Moreover, tax refunds and liabilities are often divided equally in the event of divorce or separation.

In this case, the total combined federal and state refund was $9,819.17, of which $8,769.40 is the prorated amount. Each Debtor is apportioned $4,384.70. Debtor claimed $165.00 as exempt. Accordingly the Trustee is entitled to turnover of the remaining $4,219.70. The Trustee is directed to prepare an Order consistent with this Opinion. . Signed on August 28, 2012 /s/ Daniel S. Opperman Daniel S. Opperman United States Bankruptcy Judge

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