In re Carlson

• Decision Date: 10 September 2008
• Docket Number: No. 08-6013.,08-6013.
• Citation: 394 B.R. 491
• Parties: In re Brian Jay CARLSON and Coalee Breanna Carlson, Debtors. Coalee Breanna Carlson, Debtor-Appellant, v. Timothy D Moratzka, Trustee-Appellee.
• Court: U.S. Bankruptcy Appellate Panel, Eighth Circuit

394 B.R. 491

In re Brian Jay CARLSON and Coalee Breanna Carlson, Debtors Coalee Breanna Carlson, Debtor-Appellant, v. Timothy D Moratzka, Trustee-Appellee.

No. 08-6013.

United States Bankruptcy Appellate Panel for the Eighth Circuit.

Submitted: August 26, 2008.

Filed: September 10, 2008.

John Lamey, III, Oakdale, MN, for appellant.

Mychal A. Bruggeman, Minneapolis, MN, Timothy D. Moratzka, Minneapolis, MN, on brief, for appellee.

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.

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 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 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 coownership.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

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 codebtor 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 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

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

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...