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Bankruptcy Court Prorates Tax Refund Between Debtor and Bankruptcy Estate.

(Parker Tax Publishing February 11, 2015)

After reviewing conflicting circuit court precedents, a bankruptcy court within the Eleventh Circuit held that a bankruptcy trustee was entitled to a turnover of only a portion of amounts debtor received as tax refunds after filing for bankruptcy. In re: Mooney, 2015 PTC 19 (Bankr. M.D. Ga. 2015).


Denise Mooney is a physical therapist who owns Rehab Specialists of South Georgia, Inc. Mooney's tax returns show that she receives income from her salary, investments, rental real estate, and S corporations. In 2013, Mooney had state and federal income tax withheld from her salary paychecks, which she received every two weeks. In addition, she made estimated tax payments. In June of 2013, she sent two checks for $3,300 each to the Georgia Department of Revenue for her first and second quarter 2013 state estimated tax payments, and also sent two checks for $18,350 each to the United States Treasury for her first and second quarter 2013 federal estimate tax payments.

Mooney filed for bankruptcy shortly after making the June 2013 estimated tax payments and disclosed the payments on her Statement of Financial Affairs, but did not list her 2012 state refund, her 2013 estimated tax credits, or her 2013 potential federal and state refunds as assets on her Schedule B. The bankruptcy trustee demanded, pursuant to Bankruptcy Code Section 542(a), that Mooney turn over the federal and state tax refunds arising from the 2013 estimated tax payments that she made before filing her bankruptcy case.

Mooney had received her 2013 federal and state tax refunds, totaling $36,700 and $6,600 respectively, by the time the trustee brought the case, but portions of those refunds had not been received when Mooney filed for bankruptcy. The refunds were held in her attorney's trust account pending the court's decision.

The trustee contended the tax credits were property of the bankruptcy estate, within the "control of the debtor" for purposes of Bankruptcy Code Section 542(a), and therefore subject to turnover.


The Bankruptcy Court, located in the Eleventh Circuit, noted that the issue was one of first impression, as neither the Eleventh Circuit Court of Appeals nor any district court or bankruptcy court within the Eleventh Circuit had published a decision on the issue. Further, the court observed that while the Ninth Circuit and Tenth Circuit had each published decisions, they had reached opposite conclusions.

In Nichols v. Birdsell, 491 F.3d 987 (9th Cir. 2007), the debtors elected to have their 2001 tax refund applied to their 2002 tax liability and sixteen days later, the debtors filed bankruptcy. The Ninth Circuit held that Bankruptcy Code Section 541(a) defines property of the bankruptcy estate as "all legal or equitable interests of the debtor in property as of the commencement of the case." The court further noted that Bankruptcy Code Section 541(c)(1) provides that a debtor's interests become property of the estate even in circumstances in which the interest cannot be liquidated and transferred by the debtor. Thus, as the debtors had control over the refunds prior to declaring bankruptcy, the Ninth Circuit held that the tax credits were property of the estate and ordered a turnover.

The Tenth Circuit, in Weinman v. Graves, 609 F.3d 1153 (10th Cir. 2010), faced with similar facts and relying in part on Nichols, acknowledged that the tax credits were property of the estate, but noted that a trustee takes property subject to the same restrictions that existed at the commencement of the case, and to the extent an interest was limited in the hands of a debtor, it was equally limited as property of the estate. The Court noted the debtors had no right to any cash from their prior year refund applied as a prepayment of their current taxes until their current tax liability was determined, and then only if they were entitled to a further refund. Having found that the estate's interest in the debtor's tax credits was limited to the same extent the debtor's interest was limited by the uncertainty of the amount of any potential refund, the court held that the debtors were never in "possession, custody, or control" of their interest in the prepayment of their current year taxes, and thus were not required to turn over those amount to the estate.

The bankruptcy court noted that the Eleventh Circuit, in Raborn v. Menotte, 470 F.3d 1319 (11th Cir. 2006), recognized that the trustee succeeds only to the title and rights in the property that the debtor possessed prior to petitioning the bankruptcy court. The only interest which Mooney had in the pre-petition estimated payments was the right to a refund after filing her tax return.

Finding that both the facts of Mooney's case and the precedent in Raborn favored siding with the reasoning of the Tenth Circuit in Graves, the bankruptcy court held that the trustee was not entitled to turnover of the prepetition estimated tax payments. Mooney could thus recover the refunds from the estimated payments made prepetition, but was still required to turn over $16,769, representing the prorated prepetition portion of her federal and state tax refunds which she received after filing for bankruptcy. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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