In re Mecka

• Decision Date: 01 April 2016
• Docket Number: Case No. 15–27118 (CMG)
• Citation: 547 B.R. 139
• Parties: In re: Steven Mecka, Debtor.
• Court: U.S. Bankruptcy Court — District of New Jersey

547 B.R. 139

In re: Steven Mecka, Debtor.

Case No. 15–27118 (CMG)

United States Bankruptcy Court, D. New Jersey.

Signed April 1, 2016

William H. Oliver, Jr., Esq., Attorney for Debtor

Trenk, DiPasquale, Della Fera & Sodono, P.C., Andrea Dobin, Esq., Attorneys for Chapter 7 Trustee, Barry R. Sharer

OPINION

CHRISTINE M. GRAVELLE

, U.S.B.J.

I. Introduction

This matter comes before the Court by way of a Motion for Turnover of Property filed by Barry Sharer, the Chapter 7 Trustee (the "Trustee") of the bankruptcy estate of the debtor, Steven Mecka ("Debtor"). Specifically, the Trustee is seeking recovery of the non-exempt portion of Debtor's state and federal tax refunds for 2013 and 2014, as well as the anticipated refund for the pre-petition portion of the 2015 tax year (the "Refunds").¹ The issue before this Court is the proper allocation of these Refunds between the Debtor, who is the sole wage earner in his household, and his non-debtor spouse. This Court finds that the entirety of the non-exempt Refunds is an asset of the bankruptcy estate available to the Trustee for turnover.

II. Jurisdiction and Venue

The Court has jurisdiction over this contested matter under 28 U.S.C. §§ 1334(a)

and 157(a) and the Standing Order of the United States District Court dated July 10, 1984, as amended October 17, 2013, referring all bankruptcy cases to the bankruptcy court. This matter is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(A) and (E). Venue is proper in this Court pursuant to 28 U.S.C. § 1408. Pursuant to Fed. R. Bankr.P. 7052, the Court issues the following findings of fact and conclusions of law.

III. Procedural History and Relevant Facts

Debtor filed a Chapter 7 bankruptcy petition on September 10, 2015. Debtor is married with three children. His wife is not listed as a debtor on the petition. Debtor is employed by Ocean County, New Jersey as a detective. His non-debtor spouse is not employed outside of the home and does not draw an income. The Debtor notes the need for his wife to stay home with the children, both of whom are dealing with digestive problems requiring a costly type of formula.

Pursuant to 11 U.S.C. § 341(a)

, the Trustee conducted the first meeting of creditors on October 14, 2015. At that time it came to light that Debtor's 2013 and 2014 tax returns had not been timely filed. Both the state and federal returns provided to the Trustee were filed as "Married Filing Jointly". The federal returns, each dated October 12, 2015, indicate a refund in the amount of $7,692 due for the 2013 tax year, and a refund in the amount of $7,688 due for the 2014 tax year. The state tax returns, each undated,² indicate a refund in the amount of $874 due for the 2013 tax year, and a refund in the amount of $1,003 due for the 2014 tax year. Thus, in total for the two tax years, Debtor is entitled to refunds totaling $17,257. Debtor's accountant certifies that, had Debtor and his non-debtor spouse filed as "Married Filing Separately" for the 2013 and 2014 tax years, they would receive a combined federal and state tax refund of $2,781.³

Shortly after the meeting of creditors, Debtor amended his schedules to reflect the Refunds.⁴ On October 22, 2015 he filed an amended Schedule B listing "Recently filed Joint 2013 & 2014 Taxes" as personal property. The entry notes the value of the Refunds at $15,380, which corresponds to the total 2013 and 2014 federal refunds, but does not appear to include the value of the state refunds for the corresponding years. No anticipated 2015 state or federal tax refund appears in the entry.⁵ Additionally, the entry indicates a 1/2 interest in the Refunds, setting the current value of the Debtor's interest in the property at $7,690. On Debtor's amended Schedule C he claims a $7,225 exemption on the Refunds under 11 U.S.C. § 522(d)(5)

.

The Trustee does not contest the exemption claimed by the Debtor against the Refunds. He does, however, contest the valuation that the Debtor has placed on the asset, essentially arguing that because Debtor is the sole wage earner in the household, the entirety of the Refunds is property of the Debtor and the bankruptcy estate, not merely a 1/2 interest as listed on the amended Schedule B.

Though the Trustee has taken steps to intercept the federal tax refunds for 2013, 2014 and 2015, he seeks an order requiring that the Debtor turn over any of those refunds which may be sent to the Debtor, as well as all state tax refunds for the applicable years that are received by the Debtor. Debtor has opposed the motion to the extent that it seeks the entirety of the Refunds, as opposed to his purported ½ interest.

The motion therefore, while styled as a "Motion for Turnover of Property," is seeking a determination of the value of the Debtor's interest in the property based upon the allocation of the Refunds between Debtor and his non-debtor wife. After briefing and oral argument, the Court is prepared to rule.

IV. Discussion

We begin by reciting the well-established law set forth in the Bankruptcy Code that the filing of a bankruptcy petition under Title 11 creates an estate comprised of, "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1)

. "Congress has generally left the determination of property rights in the assets of a bankrupt's estate to state law." Butner v. United States, 440 U.S. 48, 54, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979).

There is very little law in New Jersey that addresses the property rights of spouses in a tax refund issued on a jointly filed federal tax return. Nor, for that matter, does state law offer much guidance as to property rights of spouses in a tax refund paid on a jointly filed state tax return. State tax law tracks federal law in that it requires married couples who file joint federal returns to file joint state returns, and married couples who file as "married filing separately" to do the same with their state return. See N.J.S.A. § 54A:8–3.1(b) and (c)

(state tax liability for married couple determined based on federal tax filing).

The sole state court decision applicable to this matter recognized that federal law must be applied to determine tax liability issues since the income tax is imposed by federal law. See In the Matter of Carson , 83 N.J.Super. 287, 290, 199 A.2d 407 (N.J.Super.1964)⁶

. Consistent with the later holding of the U.S. Supreme Court in Butner, it noted "[t]he importance of local law concerning property rights when dealing with federal revenue statutes ..." See id. Nevertheless, the Carson court looked to federal law to reach its decision in addressing the ownership interests of a married couple in a federal tax refund issued as a result of a joint tax filing. In Carson, the widow of the sole income earner and the income earner's probate estate made claims to the refund. The Carson court held that the refund belonged to the filer who paid the withholding and that "the mere filing of a joint return" did not change that ownership right. See id. , 83 N.J.Super. at 292, 199 A.2d 407. It found that the deceased held a 100% ownership interest in the tax refund because he earned the sole income for the couple and, as a result, made the only contributions to the tax withholding. See id. The Carson court ordered that the full refund be paid to the probate estate.

While New Jersey state law on the issue is sparse, numerous bankruptcy courts around the country have ruled on factual situations similar to the one at bar. These courts have taken three different approaches when determining what portion of a tax refund due on a jointly filed return is property of the bankruptcy estate when only one spouse files bankruptcy. The first line of cases, employed by the Carson

court and which to date has been considered the majority approach, holds that a joint tax refund should be allocated between spouses in accordance with the tax withholdings of those parties (the "Withholding Approach"). See, e.g., In re Carlson, 394 B.R. 491 (8th Cir. BAP 2008)

; In re Kleinfeldt, 287 B.R. 291 (10th Cir. BAP 2002) ; In re Gartman, 372 B.R. 790 (Bankr.D.S.C.2007) ; In re Edwards, 363 B.R. 55 (Bankr.D.Conn.2007) ; In re WDH Howell, LLC, 294 B.R. 613 (Bankr.D.N.J.2003) ; In re Levine, 50 B.R. 587 (Bankr.S.D.Fla.1985).

The second approach holds that a joint return should be divided in proportion to the income of the parties (the "Income Approach"). See, e.g., In re Kestner, 9 B.R. 334 (Bankr.E.D.Va.1981)

.⁷

The final approach, which has been applied in an increasing number of cases, holds that each spouse owns the refund equally, and it should therefore by allocated equally between the two (the "50/50 Approach"). See, e.g., In re McKain, 455 B.R. 674 (Bankr.E.D.Tenn.2011)

; In re Glenn, 430 B.R. 56 (Bankr.N.D.N.Y.2010) ; In re Garbett, 410 B.R. 280 (Bankr.E.D.Tenn.2008) ; In re Trickett, 391 B.R. 657 (Bankr.D.Mass.2008) ; In re Marciano, 372 B.R. 211 (Bankr.S.D.N.Y.2007) ; In re Innis, 331 B.R. 784 (Bankr.C.D.Ill.2005) ; In re Barrow, 306 B.R. 28 (Bankr.W.D.N.Y.2004) ; In re Hejmowski, 296 B.R. 645 (Bankr.W.D.N.Y.) ; In re Aldrich, 250 B.R. 907 (Bankr.W.D.Tenn.2000).

The tension between tax law and matrimonial law is to blame for these differing approaches. Generally, courts applying the Withholding Approach or Income Approach cite to tax law to support their holdings. Tax law states that "filing a joint tax return does not convert the income of one spouse into the income of another spouse." In re Kleinfeldt, 287 B.R. at 293

(quoting Callaway v. Comm'r of Internal Revenue, 231 F.3d 106, 117 (2d Cir.2000) ). This remains the case even though a non-debtor spouse is held jointly liable for any tax deficiencies. See In re WDH Howell, LLC , 294 B.R. at 618 (citing Coerver v. Commissioner, 36 T.C. 252 (1961), aff'd per curiam, 297 F.2d 837 (3d Cir.1962) ). Additionally, "[a] joint return does not itself create equal property interests for each party in a refund. Spouses who file a joint return have...