Coalee Breanna Carlson v. Timothy D. Moratzka

United States Bankruptcy Appellate Panel
FOR THE EIGHTH CIRCUIT
____________
No. 08-6013
____________
In re: Brian Jay Carlson and *
Coalee Breanna Carlson, *
*
Debtors *
*
Coalee Breanna Carlson, * Appeal from the United States
* Bankruptcy Court for the
Debtor - Appellant * District of Minnesota
*
v. *
*
Timothy D Moratzka, *
*
Trustee - Appellee *
______________
Submitted: August 26, 2008
Filed: September 10, 2008
_______________
Before FEDERMAN, MAHONEY and VENTERS, Bankruptcy Judges
FEDERMAN, Bankruptcy Judge
Debtor Coalee Carlson appeals the Bankruptcy Court’s1 Order sustaining the
Chapter 7 Trustee’s objection to her claimed exemption in an income tax refund. The
basis for the objection was that she did not earn any of the income or pay any of the
withholdings to which the refund was attributable. For the reasons that follow, we
affirm.
The facts in this case are undisputed. Coalee Carlson and her husband, Brian
Carlson, filed a joint Chapter 7 petition on January 8, 2008. After they filed their
bankruptcy petition, they filed joint state and federal tax returns for 2007 and received
tax refund checks totaling $13,842. Brian was the sole wage-earner during 2007;
Coalee was a homemaker and earned no income. The Carlsons say that they deposited
the refund checks into a joint bank account and used the funds to pay household bills.
They each claimed half of the refunds as exempt on their Schedule C. Brian does not
have enough available exemptions to claim the entire amount of the refunds exempt
himself, and without Coalee’s exemption, $6,186.47 would be non-exempt. The
Chapter 7 Trustee objected to Coalee’s claiming the exemption because Brian was the
sole wage earner in 2007 and, thus, the refunds were entirely his property. The
Trustee argued that Coalee had no property interest in the refunds and thus was not
entitled to claim exemptions in them. The Bankruptcy Court sustained the Trustee’s
objection and Coalee appeals.
1
The Honorable Nancy C. Dreher, Chief Bankruptcy Judge, United States
Bankruptcy Court for the District of Minnesota.
2
The BAP reviews findings of fact for clear error, and legal conclusions de
novo.2 Since the facts are undisputed, and the resolution of this case involves only
issues of law, our review is de novo.3
A tax refund that is received post-petition is property of the estate if it is
attributable to wages earned and withholding payments made during prepetition
years.4 Even though the Carlsons filed a joint bankruptcy petition, the Bankruptcy
Code views the two of them as separate debtors with separate estates, and the Carlsons
must claim exemptions individually under § 522(m) of the Bankruptcy Code.5 The
question here is whether Coalee has an ownership interest in a portion of the tax
refunds such that she may claim an exemption in them.
The parties correctly point out that bankruptcy courts have essentially taken
three approaches to the allocation of income tax refunds between spouses who file a
2
First Nat’l Bank of Olathe v. Pontow (In re Pontow), 111 F.3d 604, 609 (8th Cir.
1997); Sholdan v. Dietz (In re Sholdan), 108 F.3d 886, 888 (8th Cir. 1997); Fed. R.
Bankr. P. 8013.
3
In re Klienfeldt, 287 B.R. 291, 292 (B.A.P. 10th Cir. 2002).
4
In re Benn, 491 F.3d 811, 813 (8th Cir. 2007) (“A debtor’s anticipated tax refund,
to the extent it is attributable to events occurring prior to the filing of the petition for
bankruptcy, is part of the bankruptcy estate.”).
5
See Thomas v. Peyton, 274 B.R. 450, 456 (E.D. Va. 2001) (“When spouses file a
joint petition for bankruptcy, the separate estates are administratively consolidated for
convenience and efficiency but they remain legally distinct for purposes of satisfying
creditors’ claims.”); In re Beck, 298 B.R. 616, 624 (Bankr. W.D. Mo. 2003) (“Although
the filing of a joint case creates an estate under 11 U.S.C. § 541, separate estates exist for
each debtor, unless or until the court orders substantive consolidation.”); 11 U.S.C. §
522(m) (“Subject to the limitation in subsection (b), this section shall apply separately
with respect to each debtor in a joint case.”).
3
joint tax return, where one of them is the main or sole income earner.6 The first
approach, referred to as the majority approach, allocates the joint tax refund between
the spouses in proportion to their respective tax withholdings.7 This is the approach
relied on by the cases cited by the Bankruptcy Court, with which we agree. Similarly,
the second approach divides the refund according to the income generated by each
spouse.8 In this particular case, because Coalee had no income, and no withholding,
the result under the first and second approaches would be the same. The third
approach, argued here by the Carlsons, would split the refund equally between the
spouses, regardless of the source of the income or tax withholding.9
The parties agree that we should apply Minnesota law to determine who owns
the income tax refunds and, therefore, who may claim an exemption in them.
However, they point to no Minnesota law directly addressing this particular issue, and
we found none. The parties further agree that Minnesota is neither a community
property nor a tenancy by entireties state, and, in general, has no presumption of equal
ownership between spouses. Rather, with certain limited exceptions, a spouse in
Minnesota is presumed to separately own property titled in his or her own name.10 As
6
See In re Klienfeldt, 287 B.R. at 292 (listing the three approaches) (citing In re
Lyall, 191 B.R. 78, 85 (E.D. Va. 1996)).
7
See, e.g., Kleinfeldt, 287 B.R. at 292-93; In re WDH Howell, 294 B.R. 613, 618
(Bankr. D. N.J. 2003); In re Levine, 50 B.R. 587 (Bankr. S.D. Fla. 1985).
8
See, e.g., In re Kestner, 9 B.R. 334 (Bankr. E.D. Va. 1981).
9
See, e.g., In re Trickett, ___ B.R. ____, 2008 WL 2885731 (Bankr. D. Mass. July
25, 2008); In re Marciano, 372 B.R. 211 (Bankr. S.D. N.Y. 2007). In re Barrow, 306
B.R. 28 (Bankr. W.D. N.Y. 2004); In re Hejmowski, 296 B.R. 645 (Bankr. W.D. N.Y.
2003); Loevy v. Aldrich (In re Aldrich), 250 B.R. 907, 913 (Bankr. W.D. Tenn. 2000).
10
See Minn. Stat. Ann. § 519.01 (declaring that women shall retain the same legal
existence and legal personality after marriage as before, and that every married woman
shall receive the same protection of her rights as a woman which her husband does as a
man, including the right to sue in her own name) and § 519.02 (providing that all property
4
particularly relevant here, Coalee’s counsel candidly conceded at oral argument that
the Bankruptcy Court was correct when it stated that a spouse’s income (or paycheck)
is considered to be that spouse’s separate property in Minnesota, until that spouse
takes some action to convert it to joint property or otherwise convey it to the other
spouse. It follows, then, that the taxes withheld from such spouse’s income would
likewise be that spouse’s property and, since a tax refund essentially represents the
government’s repayment to the taxpayer of an overpayment made by that taxpayer,11
such a refund is the property of the spouse who earned the income and overpaid the
tax.
Coalee contends, however, that we should look to Minnesota’s marital
dissolution laws for guidance, as many of the courts applying the 50/50 split of such
refunds have done.12 Coalee points to § 518.003 of the Minnesota Statutes, which
provides that, for purposes of marital dissolution, property acquired by either spouse
subsequent to the marriage is presumed to be jointly-owned marital property
regardless of whether title is held individually or by the spouses in a form of co-
ownership.13 Further, Minnesota law provides that, in the context of a dissolution of
marriage, the court shall make a just and equitable division of the marital property,
considering all relevant factors, including the contribution of a spouse as a
homemaker.14
owned by a woman at the time of her marriage shall continue to be her separate property
after marriage, and that any married woman may acquire property free from the control of
her husband as fully as if she were unmarried).
11
See Kleinfeldt, 287 B.R. at 293.
12
See, e.g., Aldrich, 250 B.R. at 911; Hejmowski, 296 B.R. at 650.
13
Minn. Stat. Ann. § 518.003, subd. 3b (2007).
14
Minn. Stat. Ann. § 518.58, subd. 1 (2007). See also Crace v. Crace, 396
N.W.2d 877, 881 (Minn. App. 1986) (holding that a marital dissolution court’s equal
division of potential refunds resulting from joint tax returns was not error under §
5
Although some bankruptcy courts in other states have looked to their marital
statutes for guidance, we agree with the Bankruptcy Court here that such reliance is
misplaced in this context, particularly since § 518.003 (which, as stated above,
provides for the presumption of equal ownership of marital property) expressly states
that its terms apply only in marital dissolution proceedings.15
In addition, the marital dissolution statutes providing for a presumption of equal
ownership in that context have different goals and policy rationales than the
Bankruptcy Code does. Marital dissolution laws are intended to accomplish an
equitable distribution of assets between spouses. The presumption of equal ownership
comports with that purpose. In contrast, the bankruptcy scheme promotes an equitable
distribution among debtors’ creditors. Equitable issues as between co-debtor spouses
are not relevant to this analysis.16 As a result, even disregarding the express limitation
of Minnesota’s marriage dissolution statutes to divorce cases, the reliance on such
statutes is not appropriate in bankruptcy cases.
Coalee next argues that, if the wages and withholdings were her husband’s
property when they were earned, the filing of joint tax returns and/or the depositing
of the joint refund checks into a joint account transformed the refunds into joint
property. To the contrary, however, both the IRS and the Minnesota Department of
Revenue treat a refund as credited to the taxpayer who made the overpayment of the
518.58); Rundell v. Rundell, 423 N.W.2d 77, 81 (Minn. App. 1988) (holding that a
marital dissolution court’s determination that an expected tax refund was a marital asset
and awarding it to the husband was not error).
15
Minn. Stat. Ann. § 518.003, subd. 1 (2007). Accord In re Lock, 329 B.R. 856,
859 (Bankr. S.D. Ill. 2005) (applying Illinois law, which similarly limits the application
of its marital dissolution statute to divorce cases).
16
Accord WDH Howell, 294 B.R. at 617.
6
tax,17 regardless of whether a joint return is filed. Consistent with that premise, the
Eighth Circuit in Wetteroff held that the Internal Revenue Code provision allowing a
husband and wife to file a joint tax return does not affect or change ownership rights
between the taxpayers.18 The Eighth Circuit further suggested that a joint tax return
cannot be viewed as a conveyancing instrument because it contains no language of
conveyance.19 Therefore, the Eighth Circuit held, the debtors in Wetteroff failed to
establish that a refund based on the husband’s income was held by the spouses as a
tenancy by the entirety under Missouri law.20 As the Trustee urges, this would also
be true under Minnesota law because of the presumption that spouses own property
separately unless there is an act of conveyance to the other spouse.21
17
26 U.S.C. § 6402(a) (directing the treasury secretary to credit and refund any
overpayment of tax to “the person who made the overpayment”); Minn. Stat. Ann. §
289A.50 (stating that “a taxpayer who has paid a tax in excess of the taxes lawfully due .
. . will be refunded or credited with the overpayment”) (emphasis added).
18
In re Wetteroff, 453 F.2d 544, 546 (8th Cir. 1972).
19
Id.
20
Id. See also Kleinfeldt, 287 B.R. at 293 (citing Callaway v. Commissioner of
Internal Revenue, 231 F.3d 106, 117 (2d Cir. 2000) (holding that the filing of a joint tax
return does not convert the income of one spouse into income of another spouse)); United
States v. Elam, 112 F.3d 1036, 1038 (9th Cir. 1997) (“[a] joint return does not itself create
equal property interests for each party in a refund [and] [s]pouses who file a joint return
have separate interests in any overpayment, the interest of each depending upon his or her
relative contribution to the overpaid tax.”); WDH Howell LLC, 294 B.R. at 619-20
(holding that neither the filing of a joint return, nor the issuance of a joint refund check,
transforms the refund into joint property).
21
In this particular case, if the Carlsons were correct that the filing of the joint tax
returns and/or the deposit of the refunds into a joint account transformed them into joint
property, then the transformation into joint property would have been an avoidable
transfer of estate assets from Brian to Coalee because property rights are fixed as of the
date of the filing of the bankruptcy petition, and the Carlsons filed the joint returns after
they filed their petition.
7
Coalee asserts that she should also be considered to be the owner of half of the
refunds for policy reasons. First, she asserts that it is inconsistent and fundamentally
unfair to make both spouses liable for tax liability on a joint return regardless of the
respective incomes, but to then say that the non-income-earner is entitled to none of
the refund.22 However, that is how the IRS views the situation23 and, as the Court in
WDH Howell pointed out, taxpayers have a choice as to whether to file a joint income
tax return.24 They often do so in order to benefit from perceived tax advantages.
However, “this [does] nothing to alter the fact that the overpayment of tax
withholdings which ultimately resulted in a tax refund clearly came from the
Debtor.”25
22
See Aldrich, 250 B.R. at 912 (holding that it was “inconsistent and
fundamentally unfair” to hold a spouse jointly liable for a tax deficiency debt but prevent
her from reaping any portion of the good fortune of a tax refund). But see WDH Howell,
294 B.R. at 618 (stating that 26 U.S.C. § 6013(d)(3) has been interpreted to hold a wife
responsible for the tax liability of her husband if they have filed a joint return, even
though she did not earn the income giving rise to the tax obligation, but expressly
disagreeing with Aldrich that it was fundamentally unfair to hold that the wife did not
have a property interest in the refund).
23
See WDH Howell, 294 B.R. at 618 (noting that the “United States Tax Court,
however, has consistently held that the filing of a joint tax return does not have the effect
of converting the income of one spouse into the income of the other, regardless of each
spouse’s potential liability”) (citing Robert A. Coerver v. Commissioner of Internal
Revenue, 36 T.C. 252, 1961 WL 1128 (1961), aff’d per curiam, 297 F.2d 837 (3d Cir
1962)).
24
294 B.R. at 619 and n.6 (“If a spouse is concerned with liability [for filing a
joint tax return], the filing of a separate return insulates the non-income producing spouse
from any tax liability.”) (citation omitted).
25
Kleinfeldt, 287 B.R. at 295.
8
Coalee also asserts that it is insulting to stay-at-home parents to not allocate any
portion of income tax refunds to them.26 That may be true in the context of a marital
dissolution proceeding because, as stated above, the issue in those cases is an
equitable division of property as between the spouses. However, as stated, the goal
in bankruptcy, in contrast, is to create equity among the spouses’ creditors. Allowing
debtors to “transform” separate property to joint property, with the result being to
allow a co-debtor spouse to claim an exemption in property she does not own, or to
allow a non-debtor spouse to keep half a tax refund out of the debtor-spouse’s estate,
is not equitable.
Coalee next argues that she should be given credit for the part of the refunds
that were based on Child Tax and Child and Dependent Expense Credits because she
was the primary caretaker of the children. However, these credits are not based on
those types of considerations. Rather, in order to receive either credit, the child must
be a dependent or “qualifying child” of the claimant, which, as the Trustee suggests,
appears to require at least some amount of financial support,27 and, in the case of the
Child and Dependent Care Credit, the taxpayer must have actually paid the child care
expenses.28 Thus, even assuming a taxpayer could receive a refund for these credits
while having no tax liability or withholdings against which they could be credited, it
appears unlikely that Coalee would have been able to claim the credits if she had filed
a separate return because she did not provide financial support or pay any of the child
26
See Aldrich, 250 B.R. at 912.
27
See 26 U.S.C. §§ 24(c) and 152(c). See also Nobles v. CIR, T.C. Memo. 2007-
277, 2007 WL 2687617 (Sept. 13, 2007) (denying a child tax credit because the petitioner
could not substantiate the dollar amount he paid towards the support of the children).
28
26 U.S.C. § 21(b)(2)(A) (“The term ‘employment-related expenses’ means
amounts paid for the following expenses, but only if such expenses are incurred to enable
the taxpayer to be gainfully employed . . . [for] expenses for the care of a qualifying
individual.”) (emphasis added).
9
care expenses. However, we need not decide that here, because Coalee chose not to
file a separate return. Since she incurred none of the tax liability against which the
credits were actually applied, Coalee is not entitled to claim a property interest in the
refunds based on those credits.
Finally, Coalee argues that the 50/50 approach is preferable because it provides
a bright line test.29 However, the allocation of a refund based on the spouses’
respective withholdings would not appear to be a difficult task in most cases. In
addition, while we see the value in courts adopting bright line tests for simplicity in
appropriate circumstances, it is not appropriate to do so if that is contrary to the law.
In sum, we conclude that the Bankruptcy Court did not err in finding that, in
Minnesota, a spouse who did not pay any of the withholdings to which a joint income
tax refund is attributable has no ownership interest in the refund.30 As a result, Coalee
was not entitled to claim exemptions in the refunds resulting solely from Brian’s
withholdings. The Bankruptcy Court’s Order sustaining the Trustee’s objection to her
exemption is, therefore, AFFIRMED.
29
See Trickett, 2008 WL 2885731 at *5.
30
Two Minnesota courts have likewise concluded that a joint tax refund should be
allocated in proportion to the respective withheld tax contributions, albeit on equitable
grounds and expressly limited to the facts of those cases. See In re Buchholtz, 259 F.
Supp. 31, 32 (D. Minn. 1966); In re Jones, 337 F. Supp. 620 (D. Minn. 1971).
10