In re Koch, 03-80077.

• Decision Date: 25 September 2003
• Docket Number: No. 03-80077.,03-80077.
• Citation: 299 B.R. 523
• Court: U.S. Bankruptcy Court — Central District of Illinois
• Parties: In re Laurie Suzanne KOCH, Debtor.

299 B.R. 523

In re Laurie Suzanne KOCH, Debtor.

No. 03-80077.

United States Bankruptcy Court, C.D. Illinois.

September 25, 2003.

Karl R. Niebuhr, Peoria, IL, for Debtor.

Charles E. Covey, Peoria, IL, trustee.

OPINION

THOMAS L. PERKINS, Bankruptcy Judge.

This matter is before the Court on the objection by the Trustee, Charles E. Covey (TRUSTEE), to the claim of exemption by the Debtor, Laurie S. Koch (DEBTOR), in her income tax refunds, and on the TRUSTEE'S motion for turnover of those refunds. As a matter of first impression, the Court must determine whether the federal child tax credit is in the nature of a public assistance benefit as that term is used in the Illinois personal property exemption statute.

The DEBTOR filed a Chapter 7 petition on January 8, 2003. The DEBTOR is divorced and has custody of her two minor children. The DEBTOR did not schedule any income tax refunds which she might receive for the year 2002. At the first meeting of creditors, held on February 5, 2003, the TRUSTEE discovered that the DEBTOR was entitled to receive significant federal and state income tax refunds for that year. The TRUSTEE promptly filed a motion for turnover of the tax refunds. The TRUSTEE obtained copies of the DEBTOR'S tax returns showing that she was entitled to receive a federal income tax refund of $5,488.00 and a state income tax refund of $536.00.

In an attempt to retain the refunds, the DEBTOR filed an amendment to her schedule of personal property, both including the tax refunds and reducing the value of her other property, and amending her claim of exemptions to reflect those changed values and to include a portion of the tax refunds she received. In her response to the TRUSTEE'S motion, the DEBTOR asserted that the amount subject to turnover was limited to $1,265.00, and offered to make monthly payments of $100.00, because she no longer had the funds.

At the hearing held on both the matters, the DEBTOR withdrew the amended schedules, including her amended claim of exemption. The TRUSTEE acknowledged that $14.00 of the total amount of the tax refunds of $6,024.00 received by the DEBTOR is exempt under the wildcard exemption, and conceded that the earned income credit in the amount of $1,917.00 is exempt. The TRUSTEE disputed the DEBTOR'S right to claim an exemption in the child tax credit, amounting to $1,200.00. The parties were directed to submit authority and the matter was taken under advisement by the Court. In his brief, the TRUSTEE identified the DEBTOR as having received two child tax credits in the amounts of $818.00 and $382.00. After reviewing the record, the Court directed the DEBTOR to file a complete copy of both her federal and state income tax returns. The DEBTOR has complied with this request and the tax returns are now a part of the record. Notwithstanding the fact that the DEBTOR has withdrawn her claim of exemption in the tax refunds, the parties have addressed the issue in their briefs and this Court will determine the merits of the claim and afford her an opportunity to amend her claim of exemption in accordance with its ruling.

In addition to the longstanding dependency exemption available to taxpayers, Section 24 of the Internal Revenue Code, enacted in 1997, provides for a credit for each of a taxpayer's dependent children under the age of seventeen.¹ 26 U.S.C. § 24. For the year 2002, the amount of the credit was $600.00 per child.² To the extent the joint income of married taxpayers exceeds $110,000.00, the credit is reduced by $50.00 for each $1,000.00 of income in excess of the threshold. The threshold for other taxpayers is $75,000.00. For some taxpayers, the child tax credit is partially refundable. The nonrefundable portion, like certain other tax credits, may be used by a taxpayer only to offset tax liability, whereas the refundable portion entitles a taxpayer to a payment from the government if the credit exceeds the tax due. The child tax credit is refundable to the extent of ten percent of the amount by which the taxpayer's earned income exceeds $10,350.00.³ The amount of the refundable child tax credit is referred to as the "additional child tax credit" and is claimed on Form 8812 of the income tax return.

The DEBTOR'S 2002 Federal Income Tax return reports wages in the amount of $24,060.00 and a tax liability of $818.00, reduced to zero by the general child tax credit claimed in that amount (line 33 of Form 1040A). The DEBTOR claimed an additional child tax credit of $382.00 (line 42 of Form 1040A), which, combined with her income tax withheld of $3,189.00 and the earned income credit of $1,917.00, entitled her to a refund of $5,488.00.⁴ The DEBTOR attached Form 8812, Additional Child Tax Credit, to her return.

The DEBTOR claims that both the general and the additional child tax credits are exempt as a "public assistance benefit" under Section 12-1001(g)(1) of the Illinois personal property exemption law, which provides for an exemption in a debtor's right to receive "a social security benefit, unemployment compensation, or public assistance benefit." 735 ILCS 5/12-1001(g)(1).⁵ The DEBTOR'S characterization of the issue as one of first impression is correct, as far as the Illinois statute, but, as the TRUSTEE points out, the issue has been considered by other courts under similar exemption provisions of other state statutes. See, e.g., In re Dever, 250 B.R. 701 (Bankr.D.Idaho 2000); In re Beltz, 263 B.R. 525 (Bankr.W.D.Ky.2001); In re Steinmetz, 261 B.R. 32 (Bankr.D.Idaho 2001); In re Soward, 2001 WL 1338506 (Bankr.E.D.Ky.2001). Those cases, involving child tax credits claimed for earlier years under prior versions of the provision, offer only a limited degree of guidance. Neither the TRUSTEE nor the DEBTOR differentiate between the general and the additional tax credits.

In both Dever and in Steinmetz, the courts followed the approach developed by the court in In re Crampton, 249 B.R. 215 (Bankr.D.Idaho 2000), in connection with a disputed claim of exemption by the debtor in an educational tax credit, considering the following:

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 [In re Jones, 107 B.R. 751 (Bankr.D.Idaho 1989)]. Second, what is the nature of the debtor/taxpayer's 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.

In Dever, the debtors claimed an exemption in the child tax credit taken on their tax return filed for 1999. Finding no substantiation in the legislative history that the purpose of the child tax credit was to aid low income families,⁶ characterizing the credit as nonrefundable, and emphasizing the availability of the credit to affluent taxpayers, the court concluded that the child tax credit was not subject to the exemption for public assistance.⁷

Steinmetz is closer to the present case. At issue there was the debtors' claim of exemption in the refundable portion of the child tax credit, available to taxpayers with three or more children.⁸ Despite the court's acknowledgment of the near absence of legislative intent in enacting the additional child tax credit and its recognition that the additional credit is refundable, the court focused upon the relatively high threshold at which the general credit begins to phase out. Comparing that aspect of the general tax credit to the educational tax credit at issue in Crampton, supra, the court concluded that the child tax credit was not intended as a form of public assistance legislation.⁹

This Court agrees with the earlier decisions cited by the TRUSTEE which hold that the nonrefundable general child tax credit may not be claimed exempt as public assistance. In reaching that result, those courts contrasted the general child tax credit with the earned income credit, differentiating the general child tax credit based on the acknowledged purpose of the earned income credit to afford economic relief to low-income families and the refundable nature of that credit. In this Court's view, the key factor is the refundability of the credit. If a credit is not refundable, further inquiry need not be made. The general child tax credit, which only reduces a debtor's tax liability, cannot be claimed as exempt.

A different result should occur with respect to the additional child tax credit. For tax years after 2000, the restricted refundability of the tax credit to taxpayers with three or more qualifying children was eliminated and the additional child tax credit was made available to all taxpayers with one or more qualifying children. The ensuing modifications and revisions, in particular the increased refundability of the additional child tax credit, diminish the impact of the statements of legislative intent surrounding the provision's original enactment.¹⁰ Like the earned income credit, the additional child tax credit may entitle the taxpayer to an actual refund.

In holding that the additional child tax credit may be exempted as a public assistance benefit, this Court reaches a contrary result from the court in Steinmetz. Since that decision, the additional child tax credit has been made available to all taxpayers with a qualifying child. Concentrating on the high income level of the phase-out, the court in Steinmetz did not consider the practical...