In re Dever
| Decision Date | 21 July 2000 |
| Docket Number | No. 99-02853.,99-02853. |
| Citation | 250 BR 701 |
| Parties | In re Thomas and Lynnette DEVER, Debtors. |
| Court | U.S. Bankruptcy Court — District of Idaho |
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Randal J. French, Bauer & French, Boise, ID, for Debtors.
Lois K. Murphy, Boise, ID, Chapter 7 Trustee.
Gary L. McClendon, Boise, ID, Office of the U.S. Trustee.
Thomas and Lynette Dever ("Debtors") are married and have three minor children. They filed a chapter 7 petition for relief on October 29, 1999 and received a discharge on February 2, 2000.
The Debtors' budget, schedules I and J, projected a combined year 2000 gross income of $50,000. In 1999, according to their federal tax return they had a combined adjusted gross income of $66,359.
The Debtors did not indicate, on their original schedule B, that either tax refunds or distributable tax credits were anticipated for the 1999 tax year. However, on March 6, 2000 the Debtors filed an amended schedule B disclosing $3,999 in tax refunds. The Debtors' 1999 tax returns reflect an Idaho state tax refund of $180 and a federal refund of $3,819.
They also filed an amended schedule C to shield a large portion of their refunds from administration by the Trustee. A $1,600 exemption was claimed pursuant to Idaho Code § 11-605(10), and $1,500 of the refund was characterized as a "child tax credit" and claimed exempt pursuant to § 11-603(4).
The Trustee filed a timely objection to the amended claim of exemption for the child tax credit on March 21, 2000.1 See, Fed.R.Bankr.P. 4003(b). A hearing on the Trustee's objection was held on May 15, 2000, after which the Court requested additional briefing and took the matter under advisement.
Upon consideration of the record, the arguments of the parties and applicable authorities, the Court determines that the Trustee's objection shall be sustained.
Section 522(b) allows a debtor to exempt property of the estate from administration by the trustee. In re DeBoer, 99.3 I.B.C.R. 101, 102 (Bankr.D.Idaho 1999). Since Idaho has opted-out of § 522's federal exemptions, see Idaho Code § 11-609, state law controls the validity of the claimed exemption, though this Court interprets and applies that law in bankruptcy proceedings. DeBoer, 99.3 I.B.C.R. at 102 citing In re Collins, 97.3 I.B.C.R. 78 (Bankr.D.Idaho 1997).
Exemption statutes are liberally construed in favor of the debtor. DeBoer, 99.3 I.B.C.R. at 102; In re Skaar, 98.1 I.B.C.R. 13 (Bankr.D.Idaho 1998). Still, the statutory language of the exemption cannot be tortured in the guise of liberal construction. DeBoer, 99.3 I.B.C.R. at 102; Collins, 97.3 I.B.C.R. at 79. The Trustee, as the objecting party, has the burden of proving the exemption is not proper. Fed.R.Bankr.P. 4003(c).
Under Idaho law, a debtor is allowed an exemption for "benefits the individual is entitled to receive under federal, state, or local public assistance legislation." Idaho Code § 11-603(4). This Court has previously determined that exemption of the "earned income credit" under § 11-603(4) is proper. In re Jones, 107 B.R. 751, 89 I.B.C.R. 288 (Bankr.D.Idaho 1989). See also, In re Dennett, 1995 WL 128474 (1995). The Debtors argue that the child tax credit can and should be similarly viewed as a form of "public assistance" and therefore be exempt under this provision.
The child tax credit was authorized by Congress in 1997 as part of the Taxpayer Relief Act of 1997. The credit is codified at 26 U.S.C. § 24. This provision allows taxpayers to claim a credit against tax liability in a taxable year of $500.00 for each qualifying child. 26 U.S.C. § 24(a). In order to take advantage of the credit each child must be claimed as a dependent, be under the age of 17 at the close of the taxable year, and bear the appropriate relationship to the taxpayer. 26 U.S.C. § 24(c)(1)(A)-(C). The Debtors thus claimed a $1,500 credit for their three minor children. The credit does not begin to phase out for joint taxpayers until their modified adjusted gross income exceeds $110,000. 26 U.S.C. § 24(b)(1) and (2)(A).2
While the question of exemption of the child tax credit under § 11-603(4) is a matter of first impression, the Court has previously developed an approach to such issues. See, In re Crampton, 249 B.R. 215, 00.2 I.B.C.R. 83-84 (Bankr.D.Idaho 2000). Crampton rejected a similar attempt to bring a federal tax credit within the reach of § 11-603(4). In that case, the issue involved the "Hope credit." In rejecting the argument that this credit was a form of "public assistance" like the earned income credit found exempt in Jones, the Court essentially adopted a three-part inquiry: First, what is the purpose and policy of the tax credit, as enunciated by the courts or established by legislative history, and in particular is that policy one of "public assistance" as found in Jones. Second, what is the nature of the debtor/taxpayers access to the credit, i.e., is it a refundable credit. Third, when and at what income levels is the credit phased down and/or eliminated. 249 B.R. at 218, 00.2 I.B.C.R. at 84-85.
In order to evaluate the child tax credit, reference must first be made to the purpose and policy of the earned income credit found exempt in Jones. Sorenson v. Secretary of the Treasury of the United States, 475 U.S. 851, 106 S.Ct. 1600, 89 L.Ed.2d 855 (1986) states:
The earned-income credit was enacted to reduce the disincentive to work caused by the imposition of Social Security taxes on earned income (welfare payments are not similarly taxed), to stimulate the economy by funneling funds to persons likely to spend the money immediately, and to provide relief for low-income families hurt by rising food and energy prices.
475 U.S. at 864, 106 S.Ct. 1600. See also, In re Jones, 107 B.R. at 751-52, 89 I.B.C.R. at 289, quoting In re Searles, 445 F.Supp. 749 (D.Conn.1978)(" . . . the primary purpose was clearly to afford economic relief to low income heads of household who work for a living.")3 and citing Goldberg v. Kelly, 397 U.S. 254, 90 S.Ct. 1011, 25 L.Ed.2d 287 (1970).
Crampton found the Hope credit did not share that focus on assisting the poor:
The Hope credit was designed to benefit a broad range of individuals and families incurring education expenses, including many earning substantial incomes. While undoubtedly the Hope credit will aid lower income individuals and families its purpose was not limited to assisting the working poor, as was the earned income credit.
249 B.R. at 218, 00.2 I.B.C.R. at 85.
Similarly, there is no articulation in legislative history or case law that the main or primary purpose of the child tax credit was to assist or provide relief to low income families. To the contrary, the intent was to provide relief to a broad spectrum of taxpayers with families:
The Committee believes that the individual income tax structure does not reduce tax liability by enough to reflect a family\'s reduced ability to pay taxes as family size increases. In part, this is because over the last 50 years the value of the dependent personal exemption has declined in real terms by over one-third. The Committee believes that a tax credit for families with dependent children will reduce the individual income tax burden of those families, will better recognize the financial responsibilities of raising dependent children, and will promote family values. In addition, the Committee believes that the credit is an appropriate vehicle to encourage taxpayers to save for their children\'s education.
H.R. Rep. 105-148, at 309-10 (1997); S. Rep. 105-33, at 42 (1997), U.S.Code Cong. & Admin.News 1997 at pp. 678, 704. Congressmen and Senators, in connection with the inclusion of this credit in the Taxpayer Relief Act of 1997, repeatedly voiced that the child tax credit was enacted to provide relief for hardworking middle-income families and to allow these families to invest their own money into their children's education, housing, nutrition, nurturing and care. See, 143 Cong. Rec. H4922-01 (daily ed. July 9, 1997) (statement of Rep. Kilpatrick); 143 Cong. Rec. E1281-02 (daily ed. July 20, 1997)(statement of Rep. Packard); 143 Cong. Rec. S6440-2, S6461 (daily ed. July 26, 1997)(statement of Sen. Gramm); 143 Cong. Rec. S6332-01, S6333 (daily ed. June 25, 1997)(statement of Sen. Roth).4
While the child tax credit may have been viewed by Congress as good and necessary social policy, it was designed so as to benefit a large percentage of Americans. This includes taxpayers with incomes up to $110,000 per year. It can hardly be said that it was designed or implemented as "public assistance" legislation in the sense of social welfare as discussed by the Court in Jones and Crampton.
Thus, just as with the Hope credit considered in Crampton, the Court here finds and concludes that the "child tax credit" was not adopted with a legislative purpose of public assistance within the contemplation or reach of § 11-603(4).
The child tax credit and the Hope credit are codified within Nonrefundable Personal Credits, Title 26, Chapter 1, Subchapter A, Part IV, Subpart A, U.S.Code. Debtors may use those credits to directly reduce tax liability. This may facilitate a refund where prior payments or withholdings are in an amount greater than the tax liability net of the credit. But these credits, unlike the earned income credit, are not themselves recoverable as a refund by taxpayers. Debtors have no claim to the amount of the credit other than in using it to reduce tax liability.
Crampton noted that the earned income credit is phased out entirely for taxpayers with income over $30,850. Thus, it can only be claimed by those debtors occupying the lowest rungs on the economic ladder.
In contrast, the child tax credit benefits a broad range of taxpaying...
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