charsetndows-1252
Naive question: how could a tax refund on pre-petition income, be any different from any other account receivable? I have never had a trustee in any chapter object to a claim of exemption of a tax refund; why would Chapter 13 be any different?
Jason Wallach
jwallach@gladstonemichel.com
On Nov 10, 2011, at 2:18 PM, Nancy Clark wrote:
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> My understanding is that the other Judges in Riverside have not signed on to Judge Jurys decision.
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> Thank you,
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> Nancy B. Clark
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> 100 N. Barranca Ave, Suite 250
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> West Covina, CA 91791
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> Tele: (626) 332-8600
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> Fax: (626) 332-8644
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www.blclaw.com
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Hale Andrew Antico
> Sent: Thursday, November 10, 2011 1:43 PM
> To:
cdcbaa@yahoogroups.com
> Subject: FW: [cdcbaa] FW: Update from the State Bar Business Law Section's INSOLVENCY LAW COMMITTEE
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> Good Central District of CA case to protect some tax refunds from being turned over in a Chapter 13. If prepetition, it's an asset, and not income.
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> Thanks for forwarding, Hank!
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> Hale
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Henry Toles
> Sent: Thursday, November 10, 2011 1:19 PM
> To:
cdcbaa@yahoogroups.com
> Subject: [cdcbaa] FW: Update from the State Bar Business Law Section's INSOLVENCY LAW COMMITTEE
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> Sent: Thursday, November 10, 2011 11:49 AM
> To: Sections: Bus Law Insolvency Constituency List
> Subject: Update from the State Bar Business Law Section's INSOLVENCY LAW COMMITTEE
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> Insolvency Law Committee - Business Law Section of the State Bar of California
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> Bankruptcy e-Bulletin
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> Robert G. Harris
> Co-Chair
> Binder & Malter LLP
> 2775 Park Avenue
> Santa Clara, CA 95050
> 408-295-1700
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rob@bindermalter.com
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> Elissa D. Miller
> Co-Chair
> Sulmeyer Kupetz
> 333 S. Hope Street, 35th Fl.
> Los Angeles, CA 90071
> 213-626-2311
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emiller@sulmeyerlaw.com
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> Thomas R. Phinney
> Co-Vice Chair
> Parkinson Phinney
> 400 Capitol Mall, Suite 2560
> 916-449-1444
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tom@parkinsonphinney.com
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> James P. Hill
> Co-Vice Chair
> Sullivan Hill Lewin Rez & Engel
> 550 West C Street, 15th Floor
> San Diego, CA 92101
> 619-233-4100
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hill@sullivanhill.com
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> November 11, 2011
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> Dear Insolvency Law Committee constituency list members, the following is a recent case update:
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> Summary:
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> In a well-reasoned opinion, the U.S. Bankruptcy Court for the Central District of California, Riverside Division, has held that tax refunds accrued on a Chapter 13 debtors prepetition earnings, but received by the debtor postpetition, constitute property rather than income subject to turnover to the Chapter 13 trustee. See In re Diaz, B.R. , 2011 WL 4621448 (Bankr. C.D. Cal., Oct. 3, 2011).
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> Facts:
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> Debtors Marcos and Alma Diaz filed their Chapter 13 petition on March 26, 2010. They disclosed their expected 2009 tax refund on their Schedule B (Personal Property). The debtors exempted their tax refund on their Schedule C (Property Claimed as Exempt), utilizing the grubstake, or wild card,b)(5). In April, 2010, the debtors filed their 2009 tax returns, and received their tax refund on June 2, 2010.
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> On March 3, 2011, the debtors filed their proposed Chapter 13 plan using the mandatory form plan promulgated by bankruptcy courts in the Central District of California. Confirmation was uncontested and, in accord with procedural practice in the Riverside Division, the Chapter 13 trustee submitted the form of confirmation order, which was entered by the court on March 27, 2011.
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> Notably, the plan and confirmation order provided for conflicting treatment of tax refunds. Particularly, while the plan itself was silent regarding tax refunds, the confirmation order stated that all tax refunds would be utilized to pay creditors under the plan. This conflict therefore exists in all Chapter 13 plans and confirmation orders in the Riverside Division.
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> Subsequently, the trustee moved to dismiss the Chapter 13 case, as a result of the debtors failure to turn over the subject tax refund, and the debtors opposed the motion. The bankruptcy court denied the trustees motion, holding that the tax refund accrued on the debtors prepetition earnings did not constitute income to be used in making payments to creditors under the confirmed plan, and therefore was not subject to turnover to the Chapter 13 trustee.
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> Reasoning:
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> Interpreting the confirmation order, the court concluded that the term tition. In reaching this conclusion, the bankruptcy court relied at least in part on the debtors understanding at the time of plan confirmation, which was apparent from their scheduled exemption of prepetition tax refunds.
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> The court then addressed, and rejected, the trustees argument that Sections 1322(a) and 1325(b) of the Code required that the debtors use their prepetition tax refund to pay creditors under their plan. The court noted that the trustees argument hinged on whether a tax refund is considered >
> Acknowledging that the term income is undefined in the Bankruptcy Code, the court noted that case law generally holds that prepetition tax refunds are in the nature of property, as opposed to income. See, e.g., Kokoszka v. Belford, 417 U.S. 642, 648, 94 S.Ct. 2431, 41 L.Ed.2d 374 (1974)(noting that a tax refund earned prepetition is not the equivalent of al v. Rochelle, 382 U.S. 375, 380, 86 S.Ct. 511, 15 L.Ed.2d 428 (1966)(concluding that a prepetition tax refund was sufficiently rooted in the pre-bankruptcy past that it should be regarded as property); In re Feiler, 218 F.3d 948 (9th Cir. 2000)(holding that tax refunds are property).
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> The court confirmed that Section 1322(a)(1) requires that the debtor submit his future earnings or other future income to the supervision and control of the trustee as is necessary to execute the plan. It therefore found that Section 1322(a)(1)s deliberate inclusion of the word future to describe income limits the income which must be devoted to a Chapter 13 plan to the debtors postpetition earnings which exclude a tax refund accrued on a debtors prepetition income.
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> Next, the court acknowledged that, pursuant to Section 1325(b)(1)(B), a Chapter 13 plan must provide that all of the debtors projected disposable income to be received in the applicable commitment period will be used to pay creditors under the plan. However, rejecting the trustees argument that a tax refund constitutes projected disposable income, the court stressed that the plain language of the Code mandates that a trustee may receive only projected or future income. Accordingly, the court concluded that the debtors were not obligated to turn over to the trustee any tax refund earned in the prepetition year.
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> The court stressed that the rationale for including tax refunds in the plan is to prevent debtors from overstating their tax withholdings. Explaining that a tax refund is received only when the taxes withheld on the debtorx refunds must be paid back to the estates creditors. The court clarified, however, that a debtors overstatement of prepetition taxes does not justify turnover of the overstated amount to creditors because, unlike a postpetition refund, the debtor would not have been required to turn over the corollary increase in income had they not overstated their tax expense.
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> Concluding that prepetition tax returns did not constitute income which must be devoted to a Chapter 13 plan, the bankruptcy court recognized that trustees nonetheless have the ability to hold cases open until the final tax refund accrued on earnings within the commitment period is received by the debtors. Accordingly, the bankruptcy court recommended that trustees permit debtors to elect either to contribute their prepetition tax refunds to their plan, or delay their discharge until such date as their final plan payment is submitted.
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> These materials were prepared by Monique Jewett-Brewster, of MacConaghy & Barnier, PLC, in Sonoma, California.
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> Thank you for your continued support of the Committee.
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> Best regards,
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> Insolvency Law Committee
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> The Insolvency Law Committee of the Business Law Section of the California State Bar provides a forum for interested bankruptcy practitioners to act for the benefit of all lawyers in the areas of legislation, education and promoting efficiency of practice. For more information about the Business Law Standing Committees, please see the standing committees web page.
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