In re Schwinn, Case No. 08-10528 (D. Kan. 1/14/2009)
| Decision Date | 14 January 2009 |
| Docket Number | Case No. 08-10528. |
| Parties | In re: WILLIAM ROCCO SCHWINN and CHERISH ROSE SCHWINN, Chapter 7, Debtors. |
| Court | U.S. District Court — District of Kansas |
The matter under advisement is the Trustee's motion for turnover of the 2008 economic stimulus payment received by the Debtors postpetition. Debtors William and Cherish Schwinn (hereafter Debtors) appear by William J. Fields. The Trustee, Edward J. Nazar (hereafter Trustee), appears by Aaron Johnstun. There are no other appearances. The Court has jurisdiction.1
The issue presented is whether, as contended by the Trustee, the entire payment made pursuant to the Economic Stimulus Act of 2008 received by the Debtors postpetition must be turned over to the Trustee or whether, as contended by the Debtors, the Trustee is entitled to only the portion of payment attributable to portion of tax year 2008 that had elapsed prior to Debtors' filing for relief. For the reasons stated below, the Court holds that the Trustee is entitled to turnover of the entire Stimulus Payment.
FINDINGS OF FACT.
The parties stipulated to the facts as follows. Debtors filed a voluntary Chapter 7 petition on March 17, 2008. Edward J. Nazar was appointed Trustee. On or about May 8, 2008, Debtors received payment pursuant to the Economic Stimulus Act of 2008 in the amount of $1,800 (hereafter the "Stimulus Payment"). On May 13, 2008, the Trustee filed a motion for turnover of Debtors' 2008 federal and state income tax refunds and the Stimulus Payment.
The parties filed the following stipulations regarding the Economic Stimulus Act of 2008:
Pursuant to the 2008 Economic Stimulus Act, debtors were required to file a 2007 tax return in order to qualify for a 2008 economic stimulus payment. Debtors filed their 2007 tax return prior to filing a chapter 7 petition. Debtors became entitled to an economic stimulus payment upon filing their 2007 tax return.2
ANALYSIS.
Trustee is entitled to turnover of the Stimulus Payment to the extent it is property of the estate.3 As provided in § 541, the estate includes all property interests of the debtors as of the date of filing, subject to exceptions not relevant in this case. For purposes of § 541, property interests are determined by nonbankruptcy law, usually state law unless "some federal interest requires a different result."4 When the property interest in question is a creature of federal law, the nonbankruptcy law which defines the debtor's, and therefore the estate's, interest is federal law.5 In this case, the interest in question is a Stimulus Payment created by federal tax law.
As provided in § 541(a)(1), the estate includes all legal and equitable interests of the Debtors as of the date of filing. Generally, in a Chapter 7 case, property of an individual debtor not owned on the date of filing but subsequently acquired by the debtor does not become property of the estate.6 However, under the rule of Segal v. Rochelle,7 interests of the debtor are not excluded from the estate because they are novel or contingent or because enjoyment is postponed. Even a debtor's contractual right to future, contingent property is considered property of the estate.8 When property coming into the possession of the debtor postpetition "is [so] rooted in the pre-bankruptcy past and so little entangled with the bankrupt's ability to make an unencumbered fresh start [then] it should be" property of the estate.9
The parties agree that on the date of filing the Debtors' interest in the Stimulus Payment was a contingent interest and that interest was property of the estate. The dispute is over the extent of that interest, whether the entire Stimulus Payment, although received postpetition, is property of the estate or whether the estate's interest is limited to only that portion of the refund attributable to the prepetition portion of tax year 2008, as would be the case if the payment is truly a refund of taxes overpaid during the year of filing.10
Resolving this dispute therefore first requires the Court to consider the nature of the Stimulus Payment under federal law. The starting point is the Economic Stimulus Act of 2008 (the "Act"),11 effective on February 13, 2008, title 1 of which amended IRC 6428.12 Subsection (a) of IRC 6428 now provides:
In the case of an eligible individual, there shall be allowed as a credit against the tax imposed by subtitle A for the first taxable year beginning in 2008 an amount equal to the lesser of —
(1) net income tax liability, or
(2) $600 ($1,200 in the case of a joint return).
Subsection (b) states a special rule increasing the amount by $300 for each qualifying child of the taxpayer. Subsection (c) provides that the "credit allowed by subsection (a) shall be treated as allowed by subpart C of part IV of subchapter A of chapter 1," the subpart which enumerates refundable credits, including the earned income credit, which credits are considered overpayments under IRC 6401 if they exceed the tax imposed by subtitle A.13
To effect the intended economic stimulus effect, the Act provides in subsection (g) for advance payment of the refund amount and in subsection (f) coordinates that advance refund with the 2008 tax credit otherwise allowable.14 The IRS website containing basic information on the stimulus payment, in response to the question "How do you get it?", states: "Just file a federal tax return for 2007 by October 15, 2008, even if you normally don't have to because your income usually doesn't meet the filing threshold."15 As stated in the legislative history (hereafter the "Technical Explanation"):16 17
The legislative history explains these provisions to mean that if a stimulus check computed with reference to the taxpayer's 2007 tax return is in excess of the amount of the refund calculated based upon the 2008 return, the taxpayer will not be required to return the excess payment. The Technical Explanation states as follows:
Most taxpayers will receive this credit in the form of a check issued by the Department of the Treasury. The amount of the payment will be computed in the same manner as the credit except that it will be done on the basis of tax returns filed for 2007 (instead of 2008). . . .
Taxpayers will reconcile the amount of the credit with the payment they receive in the following manner. They will complete a worksheet calculating the amount of the credit based on their 2008 income tax return. They will than subtract from the credit the amount of the payment they received in 2008. For many taxpayers, these two amounts will be the same. If, however, the result is a positive number (because, for example, the taxpayer paid no tax in 2007 but is paying tax in 2008), the taxpayer may claim that amount as a refundable credit against 2008 tax liability. If, however, the result is negative (because, for example, the taxpayer paid tax in 2007 but owes no tax for 2008), the taxpayer is not required to repay that amount to the Treasury. Otherwise, the checks have no effect on tax returns filed for 2008; the amount is not includible in gross income and it does not otherwise reduce the amount of withholding.18
C. Trustee's Contention that the Stimulus Payment Received Postpetition is Property of the Estate Because the Crucial Qualifying Event to Receive a Stimulus Payment was the Filing of Debtors' 2007 Tax Return, a Prepetition Event.
The Trustee argues that the Debtors' interest in the Stimulus Payment arose when they filed a 2007 income tax return, because this is the "crucial qualifying event" necessary before becoming eligible to receive the payment.19 According to the Trustee, since the Debtors filed their petition after the Act was passed and after they had filed their income tax return for 2007, a legal interest had attached to the Stimulus Payment at the time of filing and therefore the Stimulus Payment is property of the estate.
The reported decisions agree with the Trustee's position that for taxpayers filing after February 13, 2008, the effective date of the Act, stimulus payments received postpetition based upon the debtor's 2007 tax returns are property of the estate.20 These cases hold that for debtors who filed after February 13, 2008, stimulus payments received postpetition based upon 2007 tax returns are so rooted in the prebankruptcy past that they are property of the estate under § 541.
D. Debtors' Contention that the Stimulus Payment is an Advance Payment of 2008 Tax Refund.
Debtors respond that Trustee is entitled to the Stimulus Payment under the foregoing theory only if it is in fact an advance refund of 2007 taxes, rather than a credit against 2008 taxes. Several of the cases holding postpetition payments received pursuant to the Act are property of the estate find the payment to be a refund of 2007 prepetition taxes. For example, in Schwenke, the court concluded that the "economic stimulus payment . . . is not an advance on 2008 tax refund."21 In Alguire, the court found that in the Act Congress "decided to restructure and re-calculate the pre-petition [2007] tax liabilities of debtors"22 and declared "that what the taxpayer is to receive in the check is to be viewed as an extra payment on the 2007 tax liability."23 Likewise, Smith, where the IRS briefed the issue, the court concluded that the stimulus payments constituted a tax refund for debtors' 2007 taxes.24 Lacy also reached this conclusion.25
However, the language of the Act and the legislative history support the contrary view urged by the Debtors that the Stimulus Payment is an advance...
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Sarmiento v. United States
... ... no less than $300 for a single person and $600 in the case of a joint return. 26 U.S.C.A 6428(a). For every ... In Re Schwinn, 400 B.R. 295, 302 (Bankr.D.Kan.2009).The relevant ... ...