In re Steinmetz
| Decision Date | 07 March 2001 |
| Docket Number | No. 00-41660.,00-41660. |
| Citation | 261 BR 32 |
| Parties | In re Larry D. STEINMETZ and Carrie L. Steinmetz, Debtors. |
| Court | U.S. Bankruptcy Court — District of Idaho |
Bradley R. Rice, Twin Falls, Idaho, for debtors.
R. Sam Hopkins, Pocatello, Idaho, trustee.
Chapter 7 Trustee R. Sam Hopkins ("Trustee") objects to an exemption claimed by Debtors Larry D. and Carrie L. Steinmetz ("Debtors") concerning a portion of their federal income tax refund (Docket No. 23). A hearing was held on February 5, 2001, after which this matter was taken under advisement. The following constitutes this Court's findings of fact and conclusions of law. Fed.R.Bankr.P. 7052; 9014.
Debtors filed for relief under Chapter 7 of the Bankruptcy Code on October 2, 2000. On an amended schedule C filed on November 28, 2000 (Docket No. 11), Debtors claimed $779 of their $808 1999 federal income tax refund exempt pursuant to Idaho Code § 11-603(4). The portion of the refund claimed exempt is due to Debtors' eligibility for the "additional child tax credit" authorized under section 24(d) of the Internal Revenue Code. 26 U.S.C. § 24(d). Trustee timely objected on December 19, 2000 (Docket No. 14). Fed.R.Bankr.P. 4003(b).
Section 522(b) of the Bankruptcy Code allows a debtor to exempt property from the bankruptcy estate. As provided in Section 522(d), Idaho has "opted out" of the exemptions provided under the Bankruptcy Code, and instead limits residents to those exemptions authorized under state law. Idaho Code § 11-609. As the objecting party, Trustee has the burden of showing a claimed exemption is improper. Fed.R.Bankr.P. 4003(c); In re Dever, 250 B.R. 701, 704, 00.3 I.B.C.R. 149, 150 (Bankr.D.Idaho 2000). Moreover, exemption statutes are liberally construed in favor of the debtor. Id.
Idaho Code § 11-603(4) allows a debtor to exempt without limitation "benefits the individual is entitled to receive under federal, state, or local public assistance legislation." This Court has recently issued three decisions relating to whether tax refunds were properly claimed as exempt under this statute. When a debtor's refund is attributable to the "earned income credit" provided under Section 32 of the Tax Code, this Court held the refund was subject to exemption under Idaho Code § 11-603(4) as "public assistance." 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 (Bankr.D.Idaho 1995). On the other hand, when the refund is traceable to the education tax credit, known as the Hope Scholarship Credit, 26 U.S.C. § 25A, or the child tax credit, 26 U.S.C. § 24, the refund is not exempt. In re Crampton, 249 B.R. 215, 00.2 I.B.C.R. 83 (Bankr.D.Idaho 2000); Dever, 250 B.R. at 706, 00.3 I.B.C.R. at 151 (Bankr.D.Idaho 2000).
In Crampton and Dever, the Court adopted a three-part inquiry to determine whether the tax credit was actually in the nature of public assistance and therefore subject to exemption:
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/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.
Crampton, 249 B.R. at 217-18, 00.2 I.B.C.R. at 84-85; Dever, 250 B.R. at 704, 00.3 I.B.C.R. at 150.
Whether the additional child tax credit is properly exemptible as a benefit from "public assistance legislation" under Idaho Code § 11-603(4) is a question of first impression in this District. Additionally, the parties and Court have been unable to locate case law from other jurisdictions concerning this issue. After reviewing the nature of the additional child tax credit, the Court will apply this three step analysis from its own cases.
Debtors assert that $779 of their federal tax refund is attributable to the "supplemental child credit" provided under 26 U.S.C. § 32(n). However, upon closer analysis of the statutes, it appears the credit claimed is actually derived from 26 U.S.C. § 24(d), entitled "Additional credit for families with 3 or more children." This credit is referred to as the "additional child tax credit" on line 60 of the federal income tax Form 1040, and the supporting Form 8812, the additional child tax credit worksheet.
The provision establishing the additional child tax credit is a subsection of the child tax credit, authorized by Congress as part of the Taxpayer Relief Act of 1997. As noted above, this Court found the child tax credit could not be exempted under Idaho Code § 11-603(4). However, compared to the child tax credit, the additional child tax credit is different in one important respect. While the general child tax credit is a nonrefundable credit against tax, if a taxpayer's family has three or more children, a portion of the child tax credit is treated as a refundable credit for purposes of the additional child tax credit. This allows the qualifying taxpayer to receive an actual refund rather than an offset against any taxes due. In other words, to the extent the credit exceeds the total tax liability, a taxpayer qualifying for an additional child tax credit will receive a payment from the Government.
What was the purpose and policy Congress sought to achieve in enacting the additional child tax credit? Surprisingly, a search of the legislative history regarding the additional child tax credit leaves the Court to speculate. Rather than focusing specifically upon the additional child tax credit, the legislative history instead refers to the child tax credit in general. As reported in Dever, the following purpose was enunciated by Congress concerning that credit:
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.
Dever, 250 B.R. at 705, quoting 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.
Because no distinct legislative purpose was articulated to support enactment of the additional child tax credit, the Court must assume Congress' purpose and policy was the same as expressed to support the child tax credit, i.e., reducing the income tax burden for any large families. Importantly, this purpose is markedly different than the policy promoted by Congressional adoption of the earned income credit. As noted in this Court's decisions, the earned income credit was clearly designed "to afford economic relief to low income heads of household who work for a living." Jones, 107 B.R. at 751-52, 89 I.B.C.R. at 289, citation omitted.
As pointed out above, while the general child tax credit is usually non-refundable, a portion of this credit will be refunded if a taxpayer's family consists of three or more children. 26 U.S.C. § 24(d). Such a taxpayer is entitled to a...
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