In re Dickerson

• Citation: 227 BR 742
• Decision Date: 15 December 1998
• Docket Number: BAP No. WO-98-059,Bankruptcy No. 97-19682.
• Parties: In re Terrie Elaine DICKERSON, Debtor. Terrie Elaine DICKERSON, Appellant, v. Susan J. MANCHESTER, Chapter 7 Trustee, Appellee.
• Court: Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Tenth Circuit

227 B.R. 742 (1998)

In re Terrie Elaine DICKERSON, Debtor.

Terrie Elaine DICKERSON, Appellant, v. Susan J. MANCHESTER, Chapter 7 Trustee, Appellee.

BAP No. WO-98-059, Bankruptcy No. 97-19682.

United States Bankruptcy Appellate Panel of the Tenth Circuit.

December 15, 1998.

Thomas L. Allder, Oklahoma City, OK, for Appellant.

Susan Manchester, Taylor & Manchester, Oklahoma City, OK, for Appellee.

Before BOULDEN, ROBINSON, and MATHESON, Bankruptcy Judges.

OPINION

BOULDEN, Bankruptcy Judge.

Are funds that a debtor receives from the United States as a result of qualifying for an earned income credit "earnings from personal service" as used in Okla. Stat. tit. 31, § 1.1.A, and thus property that is exempt from administration in this bankruptcy estate? We conclude the funds are not earnings from personal services and are not exempt under Oklahoma law. We therefore affirm the ruling of the bankruptcy court.

BACKGROUND

Terrie Elaine Dickerson (Debtor) filed a 1997 federal income tax return that reported wages of $10,498. As the head of a household with two sons listed as dependants, the Debtor qualified for an earned income credit of $3,656. The Debtor filed a petition under Chapter 7 and claimed the funds as exempt under Okla. Stat. tit. 31, § 1.1. Susan Manchester, the Chapter 7 Trustee (Trustee), timely filed an objection to the Debtor's claimed exemption. Upon cross motions for summary judgment, the bankruptcy court issued a Memorandum of Decision and Order Sustaining Trustee's Objection to Debtor's Claim of Exemption (Order), holding that the Debtor's earned income credit was not exempt under Okla. Stat. tit. 31, § 1.1.A. This appeal followed.

APPELLATE JURISDICTION

This Court, with the consent of the parties, has jurisdiction to hear timely-filed appeals from "final judgments, orders, and decrees" of bankruptcy courts within the Tenth Circuit. 28 U.S.C. § 158(a)(1), (b)(1), and (c)(1). Under this standard, we have jurisdiction over this appeal. The parties have consented to this Court's jurisdiction in that they have not opted to have the appeal heard by the United States District Court for the Western District of Oklahoma. Id. at § 158(c); 10th Cir. BAP L.R. 8001-1(a) and (d). The appeal was filed timely by the Debtor, and the bankruptcy court's Order is "final" within the meaning of § 158(a)(1). See Fed.R.Bankr.P. 8001-8002.

STANDARD OF REVIEW

The Debtor does not ascribe error to the bankruptcy court's brief findings of fact, and neither party asserts that summary judgment was inappropriate due to the existence of material issues of disputed fact. Instead, the issue is whether the bankruptcy court's Order sustaining the Trustee's objection to the Debtor's claimed exemption was correct as a matter of law. In reviewing a grant of summary judgment, we review the case de novo, applying the same legal standards used by the bankruptcy court. Hollytex Carpet Mills, Inc. v. Oklahoma Employment Sec. Comm'n (In re Hollytex Carpet Mills, Inc.), 73 F.3d 1516, 1518 (10th Cir. 1996). De novo review requires an independent determination of the issues, giving no special weight to the bankruptcy court's decision. Salve Regina College v. Russell, 499 U.S. 225, 238, 111 S.Ct. 1217, 113 L.Ed.2d 190 (1991). Summary judgment is appropriate where, as here, there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Octagon Gas Sys., Inc. v. Rimmer, 995 F.2d 948, 952 (10th Cir.), cert. denied, 510 U.S. 993, 114 S.Ct. 554, 126 L.Ed.2d 455 (1993).

DISCUSSION

The sole legal issue in this case is whether funds paid to the Debtor as a result of qualifying for an earned income credit are exempt under Okla. Stat. tit. 31, §§ 1.1.A.¹ That section provides, in relevant part:

A. Following the issuance of an execution, attachment, or garnishment, . . . the debtor may file with the court an application requesting a hearing to exempt from such process by reason of undue hardship that portion of any earnings from personal services necessary for the maintenance of a family or other dependents supported wholly or partially by the labor of the debtor. A debtor with no family or other dependents may not claim an exemption under this section. A hearing on the application shall be set and conducted in the manner provided by Section 1172.2 of Title 12 of the Oklahoma Statutes and subsection D of Section 1174 of Title 12 of the Oklahoma Statutes.

Okla. Stat. tit. 31, § 1.1.A. (emphasis added).² Thus, in determining whether funds received due to earned income credits are exempt under § 1.1.A, we must decide whether such funds are "earnings from personal services." The resolution of this issue turns on an analysis of both the nature of earned income credits and of earnings under § 1.1.A. Both are discussed below.

The Nature of Earned Income Credits

Under 26 U.S.C. § 32, an "eligible individual" shall be allowed a credit against his or her income taxes equal to the credit percentage of so much of the individual's "earned income for the taxable year as does not exceed the earned income amount." 26 U.S.C. § 32(a); see id. at § 32(c) (defining "eligible individual" and "earned income"). This credit is generally known as an "earned income credit." Title 26, the Tax Code, does not state that earned income credits are "earnings," and does not provide guidance as to whether such credits are "earnings." But the Supreme Court's discussion of earned income credits in Sorenson v. Secretary of the Treasury, 475 U.S. 851, 106 S.Ct. 1600, 89 L.Ed.2d 855 (1986), aids in determining the nature of the credits.

In Sorenson, the Court determined that payments involving earned income credits were, similar to tax refunds, subject to "intercept" if the person failed to meet their child support obligations under 26 U.S.C. § 6402(c). Id. at 859-61, 106 S.Ct. 1600. The purpose of an earned income credit was described as follows:

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.

Id. at 864, 106 S.Ct. 1600. The Court, in discussing the lower court's decision which it affirmed, stated that the legislative history to the predecessor to 26 U.S.C. § 32 suggested that earned income credits were not "intended primarily as a type of welfare grant; rather, . . . since the earned-income credit was payable as a lump sum, it was more like excess withholding . . . than it was like wages. . . ." Id. at 858, 106 S.Ct. 1600 (citing Sorenson v. Secretary of the Treasury, 752 F.2d 1433, 1443 n. 1 (9th Cir.1985)). Earned income credits are different from other credits, and are treated as an overpayment of tax. Id. at 854 & n. 3 and 859, 106 S.Ct. 1600 (quoting 26 U.S.C. § 6401(b)). In particular, the Court stated:

Unlike certain other credits, which can be used only to off-set tax that would otherwise be owed, the earned-income credit is "refundable." Thus, if an individual\'s earned-income credit exceeds his tax liability, the excess amount is "considered an overpayment" of tax under 26 U.S.C. section 6401(b),. . . . and 26 U.S.C. § 6402(a) directs the secretary to credit or refund "any overpayment" to the person who made it. An individual who is entitled to an earned-income credit that exceeds the amount of tax he owes thereby receives the difference as if he had overpaid his tax in that amount.

. . . . .

. . . An individual can receive the amount by which his entitlement to an earned-income credit exceeds his tax liability only because § 6401(b) of the Tax Code defines that amount as an "overpayment," and § 6402 provides a mechanism for disbursing overpayments, namely, the income tax refund process. The refundability of the earned-income credit is thus inseparable from its classification as an overpayment of tax. Petitioner therefore acknowledges that the excess earned-income credit is an "overpayment" for purposes of § 6402(a), the general provision that authorizes all tax refunds.

Id. at 854-55 & 859, 106 S.Ct. 1600 (footnote omitted); accord In re Montgomery, 219 B.R. 913 (10th Cir. BAP 1998) (an earned income credit is classified as an overpayment or tax refund); but see In re Barnett, 214 B.R. 632 (Bankr.W.D.Okla.1997) (an earned income credit is not a refund).³

It is well-established that tax overpayments are not considered "earnings." Specifically, in Kokoszka v. Belford, 417 U.S. 642, 94 S.Ct. 2431, 41 L.Ed.2d 374 (1974), the Supreme Court addressed whether income tax refunds are "property" under the former Bankruptcy Act, and, if so, whether they were exempt as "earnings" under the Consumer Credit Protection Act (CCPA). The Court concluded that refunds are "property" under the Bankruptcy Act. It went on to approve the Second Circuit's holding that "earnings" under the CCPA⁴ "did not include a tax refund, but were limited to `periodic payments of compensation and (do) not pertain to every asset that is traceable in some way to such compensation.'" Id at 651, 94 S.Ct. 2431 (alteration in original) quoting In re Kokoszka, 479 F.2d 990, 997 (2d Cir.1973). The Court reasoned that the CCPA did not define tax refunds as "earnings," and the purpose of the CCPA and the Bankruptcy Act did not indicate that the refunds should be exempt. Of particular relevance is the following statement made by the Court as it approved the Second Circuit's ruling:

Since a "tax refund is not the weekly or other periodic income required by a wage earner for his basic support, to deprive him of it will not hinder his ability to make a fresh start unhampered by the pressure of preexisting debt". . . . "Just because some property interest had its source in wages . . . does not give it special protection, for to do so would exempt from the

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