Sean L. Trickett

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UNITED STATES BANKRUPTCY COURT
DISTRICT OF MASSACHUSETTS

IN RE : CHAPTER 7
SEAN L. TRICKETT
DEBTOR : CASE NO. 07-44418-JBR

MEMORANDUM OF DECISION

This matter came before the Court on the Debtor’s Motion for Adjudication of
Whether Debtor’s Personalty is Property of Estate or Whether Property is Exempt
(Docket #21) (the “Motion”) and the Chapter 7 Trustee’s Response thereto, which
included a prayer for turnover of the property pursuant to 11 U.S.C. § 542 (Docket #24).
The property at issue is the Debtor and his non-debtor spouse’s joint federal and state tax
refunds for the year 2007.

FACTS:

Sean L. Trickett (the “Debtor”) filed his chapter 7 petition on December 21, 2007.
The Debtor and his non-debtor spouse filed joint federal and state tax returns for the
2005, 2006 and 2007 tax years. For the tax year 2007, the Debtor and his spouse
received a federal tax refund of $3,975.00 and a state tax refund of $546.00 for a total
sum of $4,522.00 (the “Refund”). The Debtor did not list the Refund on his Schedule B.
In his Motion, the Debtor alleges that his spouse earned $46,045.00 with federal
withholding of $5,118.00 and state withholding of $2,332.00 and that he earned
$33.417.00 with federal withholding of $2,000.00 and state withholding of $1,218.00.
The Debtor and his spouse’s joint federal tax liability was $3,142.00 and their joint state
tax liability was $3004.00. The Debtor alleges in his Motion that his individual post-

petition withholdings are $387.84 for the last 10 days of December 2007.

AUTHENTICATED
U.S. GOVERNMENT
INFORMATION

GPO

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The Trustee asserts in her Response that the Debtor and his spouse use one joint
bank account for the receipt of income and payment of family expenses. The Trustee
also alleges that the Debtor and his spouse deposited their joint 2006 tax refund into their
joint bank account, which is supported by the Debtor’s bank statements attached to the
Trustee’s Response as Exhibit 1.

POSITIONS OF THE PARTIES:

The Debtor initially contended in his Motion that the portion of the Refund
attributable to post-petition withholding is not part of the bankruptcy estate. He also
contended that the pre-petition portion of the Refund should be allocated proportionately
based on his and his spouse’s respective withholdings and that only the portion
attributable to him is property of the estate. In his post-trial memorandum, the Debtor
asserts for the first time an inconsistent position: no portion of the Refund should be
considered property of the estate as the Debtor retained the ability to control the amount
of the Refund by adjusting his post-petition withholding to reduce or even eliminate the
Refund.' Although she believes that the failure of the Debtor to list the Refund on his
schedules constitutes grounds to seek recovery of the entire tax refund, the Trustee takes

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the position in her Response thé

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t the Debtor’s portion of the Refund attributable to the
pre-petition portion of the tax year is property of the estate. The Trustee argues that the
determination should be made by a pro rata by days allocation of the Refund amount
using a 365-day year. With respect to the allocation of the Refund between the Debtor

and his spouse, the Trustee contends it should be 50/50. Accordingly, the Trustee seeks

' Although in some cases it may be possible for a debtor to substantially reduce or eliminate a refund, it
factually could not have happened in this case because the Debtor’s petition was filed a mere 10 days
before the end of the tax year, leaving insufficient time for this type of post-petition adjustment.

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to recover the one half of the portion of the Refund that is attributable to the pre-petition
period of the 2007 tax year, i.e. January 1, 2007 to December 21, 2007.
DISCUSSION:

The Debtor’s Motion raises three distinct issues regarding whether and to what
extent the Refund becomes property of the Debtor’s bankruptcy estate. First, does any
portion of the Debtor’s tax Refund for the tax year in which he filed bankruptcy
constitute property of the bankruptcy estate. Second, if the first question is decided in the
affirmative, how should the Court allocate the Refund between pre and post-petition
portions of the tax year. The final issue arises because the Debtor filed joint returns with
his non-debtor spouse, i.e. how should the Court allocate the pre-petition portion of the
Refund between the Debtor and his spouse as only the portion attributable to the Debtor
becomes property of the estate. The answer to the first and second questions is a matter
of federal law as it calls upon the Court to determine whether a tax refund is “property”
under section 541 of the Bankruptcy Code. In re Marvel, 372 B.R. 425, 430 (Bankr.
N.D. Ind. 2008) (citing Butner v. United States, 440 U.S. 48, 55 (1979)). As discussed
below, it is well established bankruptcy law that the portion of the Refund allocable to
‘the tax year becomes property of the estate while the portion of
the Refund allocable to the post-petition portion of the tax year is property of the Debtor.
The method of allocation, however, is the subject of some dispute. To answer the third
question, the Court must look to state law to determine the extent of the Debtor’s interest

in the pre-petition portion of the joint Refund as of the commencement of the case. Jd:

see also In re Marciano, 372 B.R. 211, 214 (Bankr. S.D.N.Y. 2007) (applying state law

to determine extent of debtor’s interests in the pre-petition portion of a joint tax refund).

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A. IS ANY PORTION OF THE REFUND PROPERTY OF THE ESTATE?

Although cases on this issue are scant in the First Circuit, it is without question
that the pre-petition portion of the Debtor’s Refund is property of the bankruptcy estate.
Section 541 of the Bankruptcy Code makes “all legal or equitable interests of the debtor
in property as of the commencement of the case” property of the bankruptcy estate. 11
U.S.C. § 541(a). The starting point for an analysis of whether a tax refund becomes
property of the estate is the U.S. Supreme Court’s decision in Segal v. Rochelle, 382 U.S.
375 (1966) (“Segal”), which has been cited with approval by the bankruptcy courts in
this district when dealing with contingent or inchoate claims. See In re Tomaiolo, 205
B.R. 10, 14 (Bankr. D. Mass. 1997); In re Riccitelli, 320 B.R. 483, 489 (Bankr. D. Mass.
2005) (both applying Segal to determine whether a debtor’s malpractice claim was
property of the estate). The Court in Segal indicated that one of the primary purposes of
the Bankruptcy Act was “to secure for creditors everything of value the bankrupt may
possess in alienable or leviable form when he files his petition.” Sega/, 382 U.S. at 379.
The Court went on to note that “the term ‘property’ had been broadly construed to

achieve that end, permitting even novel or contingent interests to be included.” Jn re

The Court in Segal acknowledged that another main purpose of the Bankruptcy Act was
to “leave the bankrupt free after the date of his petition to accumulate new wealth in the
future.” Segal, 379-80. Therefore, according to Segal, only property that was
“sufficiently rooted in the pre-bankruptcy past” was to be considered property of the

estate. /d. at 380. Applying this reasoning, the Court held that the debtors’ post-petition

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tax refund, attributable to loss-carrybacks to pre-petition tax years, was property of the
bankruptcy estate. Sega/, 382 U.S. at 376.

The Supreme Court also addressed the issue of tax refunds in Kokosza v. Belford,
417 U.S. 642 (1974). The debtor had filed his bankruptcy petition in early January 1972.
The Court held that the entire refund for the 1971 tax year belonged to the bankruptcy
estate as “the tax payments refunded here were income tax payments withheld from the
petitioner prior to his filing for bankruptcy and are based on earnings prior to that filing.”
Kokosza. 417 U.S. at 647. The legislative history underlying the enactment of section
541 of the Code specifically instructs that “[the] result of [Segal] is followed, and the
right to a refund is property of the estate.” S. Rep. No. 989, 95th Cong., 2d Sess. 82,
reprinted in 1978 U.S.C.C.A.N. 5787, 5868. Since the enactment of the Bankruptcy
Code, courts have adhered to the Supreme Court’s reasoning in Segal and Kokosza,
holding that the portion of a debtor’s tax refund attributable to the pre-petition portion of
the tax year from which the refund derived is property of the bankruptcy estate.’ See In re
Barowsky, 946 F.2d 1516, 1518 (10th Cir. 1991) (compiling cases and noting that every
court that has considered the issue has followed this approach). Having answered the
ourt now turns to tl

allocating the Refund between pre and post-petition periods to determine the portion of

the Refund that could potentially be property of the estate.*

* Some courts have reasoned that the “sufficiently rooted” portion of the Segal test no longer applies. These
courts reason that the definition of “property of the estate” under the Code differs from the treatment of the
term property under the Act in that the Code limits its reach to “all legal and equitable interests of a debtor
in property as of the commencement of the case” whereas the Act did not. /n re Burgess, 438 F.3d 493,
498 (Sth Cir. 2006); Donnell, 357 B.R. at 391 n.6. Property that falls within the inherent temporal
limitation of section 541 (a) satisfies the sufficiently rooted test as a matter of law.

* | use the word “potentially” due to the Debtor’s joint filing with his non-debtor spouse. The joint filing
requires the additional step taken in Part C of this Decision of allocating the pre-petition portion of the
refund that would otherwise become property of the estate among the Debtor and his spouse. If the Debtor
and his spouse filed a joint bankruptcy case, this step would also be required to divide the refund between
their respective estates.

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B. ALLOCATING THE REFUND BETWEEN PRE AND POST-PETITION

The burden of proof in allocating the Refund is on the Trustee. Because the
action is akin to a turnover action, “it is the trustee who must come forward with
sufficient evidence to establish that the portion of the tax refund claimed is in fact
property in which the debtor had a legal or equitable interest as of the commencement of
the case.” Donnell, 357 B.R. at 396. The real question is whether the pro rata by days
allocation method advocated by the Trustee is appropriate and sufficient to carry her
burden in this case.

The pro rata by days method 1s frequently used to allocate a tax refund between
pre and post-petition periods. See /n re Orndoff, 100 B.R. 516 (Bankr. E.D. Cal. 1989);
Barowsky, 946 F.2d at 1518 n.1; In re Martell, 349 B.R. 233, 235 (Bankr. D. Idaho
2005); In re Edwards, 363 B.R. 55, 59 (Bankr. D. Conn. 2007). This method of
calculating the portion of a refund attributable to the estate involves dividing a debtor’s
refund over a 365-day year and multiplying the resulting number by the number of days
from the beginning of the year to the petition date. A tax year is exactly that, a tax year:

therefore, in determining the amount of the refund that becomes property of the Debtor’s

urn to determine the portion o
Debtor’s refund attributable to actual pre-petition withholding or to particular deductions,
credits, individual business income and losses or exemptions. The Court is mindful that
a pro rata by days approach may not yield a perfect result in every situation, but it is

better than any other available approach. It provides a bright-line test that effectuates

Congress’s intent as expressed in the language of and legislative history of section 541.’

* The Court is aware that some courts have concluded that the pro rata by days method is not mandatory.
Donnell, 357 B.R. at 395-96. Even if there are circumstances that support using a different approach, they
are not present in this case.

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Applying the pro rata by days approach to the Refund of $4,522.00 yields a per
diem amount of $12.39. The per diem amount multiplied by 355 days (the number of
calendar days in the tax year preceding the Debtor’s bankruptcy filing) yields the amount
of $4,398.45, to which the estate is entitled pending further adjustment based on the
allocation between the Debtor and his spouse. Having determined the pre-petition
portion of the Debtor and his spouse’s Refund, the Court now turns to state law to
determine the extent of the Debtor’s interest in this amount.

C. DETERMINING EXTENT OF DEBTOR’S INTEREST IN PRE-PETITION
PORTION OF TAX REFUND

Determining the extent of the debtor’s interest in the pre-petition portion of the
Refund involves allocating the pre-petition portion between the Debtor and his joint-tax-
filing, non-debtor spouse. The question of the extent of a debtor’s interest is one of state
law and no state law in Massachusetts speaks directly to the issue. A review of cases
facing this same apportionment question reveals that there are at least three approaches to
accomplish this task. The first approach is to apportion the Refund based on each
spouse’s withholding. /n re Lyall, 191 B.R. 78 (E.D. Va. 1996) (summarizing different
approaches). Another approach is to allocate the Refund based on the income earned by
each spouse. Jn re Verill, 17 B.R. 652 (Bankr. D. Md. 1982). The final approach,
adopted by the bankruptcy in /n re Innis, 331 B.R. 784, 786 (Bankr. C.D. Ill. 2005), and
in /n re Barrow, 306 B.R. 28 (Bankr. W.D.N.Y. 2004), is to split the Refund equally
between the spouses, the so-called “50/50 refund rule.”

It would be difficult to articulate the reason for adopting the “50/50 refund rule”

better than the court in Barrow did in its decision, in which it stated:

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] disagree with those courts that allocate refunds in proportion either to
income or amount of withholdings. The reality of the Internal Revenue
Code is that the total tax is not necessarily linked to income, while the

overpayment is not necessarily linked exclusively to income or
withholdings. For many taxpayers, a significant portion of the refund is
attributable not to these factors, but to any number of credits, such as the
child tax credits or credits for education or for child and dependent care
expenses. In many ways, the tax consequences of a joint filing exhibit no
proportionality to respective levels of withholding and income. Joint tax
filers may claim an exemption for each spouse, thereby effectively
allowing them to use the exemption to offset income of the spouse with
higher earnings. Similarly, the losses or deductions of one spouse may
favorably impact their joint taxable income. For many married couples, a
joint filing permits use of a more favorable tax table. The results are most
dramatically indicated when one spouse earns the entire family income.
In that instance, because a spouse without income has joined in signing
the tax return, the family may pay significantly less tax, as compared to
the tax that would have accrued to a married person filing separately but
with identical income and withholdings. It is simply inaccurate to say that
the greater refund is attributable only to the income and withholdings of
the employed spouse.

Barrow, 306 B.R. at 30-31.

The court in /nnis goes on to explain the underpinnings of the “50/50 refund rule”
as well as the practical reasons supporting its adoption. The imposition of joint and
several liability for a tax deficiency that results from a jointly filed tax return is one of
the factors underlying the presumption o
B.R. at 787. Ifa debtor’s spouse can suffer the burdens of filing a joint return, he or she
should get the attendant benefits as well. /d.

Some courts have looked to marital dissolution law as support for a joint
ownership approach. Jnnis, 331 B.R. at 787; see also Hejmowski, 296 B.R. 645, 649-50
(Bankr. W.D.N.Y. 2003); Aldrich, 250 B.R. 908, 913 (Bankr. W.D. Tenn. 2000). Other

courts have criticized this approach in that marital dissolution law only applies upon

dissolution of a marriage, and it is property law that should be looked to instead. /n re

Lock, 329 B.R. 856, 859 (Bankr. S.D. Ill. 2005). Although there is no marital or property

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law directly on point, this Court finds that in Massachusetts, “the concept of marriage as
a shared partnership is a broad principle that is now widely accepted and used by courts
as part of their decisional framework.” Jnnis, 331 B.R. at 788 (recognizing overarching
theme of martial partnership in Illinois law); See Baccanti v. Morton, 434 Mass. 787
(2001) (recognizing general principle that property acquired during marriage is part of
the marital property subject to distribution); Mass. Gen. Laws ch. 208, § 34 (2003).
Therefore, Massachusetts law is not at odds with the 50/50 split approach and the Court
adopts this method of apportioning the Refund in this case.

The Court is aware that other courts adopting the “50/50 refund rule” have
permitted rebuttal evidence based on the history of the spouses’ financial independence.
Innis, 331 B.R. at 789. This Court respectfully disagrees and will allow only the narrow
rebuttal evidence permitted by the court in /nnis.

In the absence of a domestic relations court order or an enforceable,

written, prepetition contract between the spouses designating alternative

ownership of the refund, it is difficult to see why any inquiry need be

made beyond the fact that the parties voluntarily elected to file a joint

return.

Id.
The test adopted by this Court provides a bright-line rule that is easy to

understand and apply. Moreover, it “provides guidance, in advance, to debtors and their
attorneys that allows for effective prebankruptcy planning,” a concern raised by the
Debtor in his Motion. /d. Finally, it will “eliminate much of the litigation that would
otherwise be needed to resolve the issue...and...simplif[y] the issues in the litigation that
may still be necessary.” Jd.

Applying the “50/50 refund rule” to the case at hand leads to the conclusion that

the Trustee is entitled to one half of the amount of the Refund attributable to the pre-

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petition portion of the 2007 tax year, or $2199.22. The Debtor offers no evidence of the
sort discussed above to rebut the presumption of joint ownership. Instead, the Debtor
asks the Court to adopt a rule allocating the pre-petition portion of the Refund between
him and his spouse based on their respective withholding; the Court declines to adopt this
rule.

A separate order shall issue.

Dated: July 25, 2008 By the Court,
fe 6 louie

Joel B. Rosenthal
United States Bankruptcy Judge

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