- Category: Judge Somers
- Published: 24 February 2014
- Written by Judge Somers
SIGNED this 12th day of February, 2014.
Designated for print publication
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
CHRISTIE LYNN LIKINS, CASE NO. 12-11662
MEMORANDUM OPINION AND JUDGMENT DENYING DEBTOR’S CLAIM
OF EXEMPTION OF AMERICAN OPPORTUNITY TAX CREDIT
Debtor Cristie Likins filed an amended Schedule C, “Property Claimed as
Exempt,” that included $1,0001 for her “2012 American Opportunity Credit” under 20
U.S.C. § 1095a(d). The Chapter 7 Trustee, Linda S. Parks, objected. The case has been
1 The $1,000 exemption amount is inconsistent with the parties’ joint Stipulation of Facts (doc.
58) and their briefs. The joint stipulation states, “Debtor’s AOC was $1,117.00. Of that, $534.00 was a
refundable credit and $583.00 was a non-refundable credit.” Debtor seeks to exempt both the refundable
and non-refundable credits, and the Trustee opposes both exemptions. The Court will decide the
controversy using the exemption amounts stated in the stipulated facts.
Case 12-11662 Doc# 64 Filed 02/12/14 Page 1 of 13
submitted for decision2 on a joint stipulation of facts and the briefs.3 For the reasons
discussed below, the Court denies the exemption.
SUMMARY OF STIPULATED FACTS.4
Debtor filed a petition under Chapter 7 on June 2012. Linda S. Parks is the
appointed and acting Chapter 7 Trustee. Debtor’s federal income tax return for 2012
reflects a refund $7,912, and her state income tax return reflects a refund of $1,349. The
Trustee is entitled to 172/366ths of the nonexempt refunds.
In her 2012 federal income tax return, Debtor received an education tax credit
called the American Opportunity Credit.5 “The . . . credit is allowed up to $2,500 per
student per year for qualified tuition, related expenses and course materials for each of the
first four years of a student’s post-secondary education in a degree or certificate
program.”6 The credit can be received regardless of whether the expenses are paid by
2 The Court has jurisdiction pursuant to 28 U.S.C. §§ 157(a) and 1334(a) and (b) and the Standing
Order of the United States District Court for the District of Kansas that exercised authority conferred by
§ 157(a) to refer to the District’s bankruptcy judges all matters under the Bankruptcy Code and all
proceedings arising under the Code or arising in or related to a case under the Code, effective July 10,
1984. The allowance of exemptions from property of the estate is a core proceeding which this Court
may hear and determine as provided in 28 U.S.C. § 157(b)(2)(B). There is no objection to venue or
jurisdiction over the parties.
3 Debtor is represented by Martin J. Peck. The Trustee is represented by Rachel Lomas of Hite,
Fanning & Honeyman, L.L.P.
4 The following facts are from the Stipulation of Facts, doc. 58, unless another source is stated.
5 26 U.S.C. § 25A(i).
6 8 Carina Bryant, Mertens Law of Federal Income Taxation, § 32:39 (database updated January
2014), available on Westlaw at MERTENS § 32:39.
Case 12-11662 Doc# 64 Filed 02/12/14 Page 2 of 13
cash, check, credit card, debit card, borrowed funds, or a third party.7 The credit can be a
refundable credit, a non-refundable credit, or both.
Debtor’s Amended Schedule C claimed as exempt her refundable and nonrefundable
American Opportunity Credits under 20 U.S.C. § 1095a(d). Her total credit
was $1,117. Of that $1,117, $583 was non-refundable; it reduced her tax liability to zero.
The remaining $534 of the credit was refundable and made up part of her $7,912 federal
tax refund. Debtor’s qualification for the credit was based upon the fact that she was a
student in 2012 and paid tuition with her federal student loan proceeds.
1. The American Opportunity Tax Credit.
The Taxpayer Relief Act of 1997 added two non-refundable tax credits for the
costs of higher education, the Hope Scholarship Credit and the Lifetime Learning Credit.8
For tax years 2009 through 2017, the Hope Scholarship Credit has been modified and
these modifications have been renamed the American Opportunity Credit (AOC). Under
the modifications, forty percent of the AOC is refundable, except in limited
circumstances.9 The source of the funding used to pay the costs of the higher education is
7 See Doc. 63-2, 2-3, Exhibit B to Trustee’s brief (2012 Instructions for IRS Form 8863,
“Education Credits (American Opportunity and Lifetime Learning Credits)”).
8 8 Mertens Law of Federal Income Taxation at § 32:2, “Education Credits.”
9 Id. at § 32:39.
Case 12-11662 Doc# 64 Filed 02/12/14 Page 3 of 13
not a factor in determining the credit.10
2. Applicable exemption statutes.
So long as they have lived in Kansas for two years or more, debtors filing
bankruptcy here are allowed the exemptions permitted under Kansas state law and non-
bankruptcy federal law.11 There is no Kansas exemption applicable to AOC refunds. The
non-bankruptcy federal exemptions available to Kansas debtors include one for “federally
insured or guaranteed student loans, grants, and work assistance” under 20 U.S.C.
1095a(d),12 which provides:
No attachment of student assistance. Except as
authorized in this section, notwithstanding any other provision
of Federal or State law, no grant, loan, or work assistance
awarded under this title, or property traceable to such
assistance, shall be subject to garnishment or attachment in
order to satisfy any debt owed by the student awarded such
assistance, other than a debt owed to the Secretary and arising
under this title.13
“This title” refers to Title 20 of the United States Code, “Education.” Most federal
student assistance is authorized by 20 U.S.C. § 1070, et seq. 14 Hence, federal student
10 See Doc. 63-2, 2-3, Exhibit B to Trustee’s brief (2012 Instructions for IRS Form 8863,
“Education Credits (American Opportunity and Lifetime Learning Credits)).
11 11 U.S.C. § 522(b)(3) and K.S.A. 60-2312.
12 4 Collier on Bankruptcy, ¶ 522.02 at 522-18 (Alan N. Resnick & Henry J. Sommer, eds.-inchief,
16th ed. 2013).
13 20 U.S.C. § 1095a(d) (emphasis added).
14Deanne Loonin, Student Loan Law, National Consumer Law Center, App. A at 193 (3rd ed.
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grants, loans, and work assistance, and property traceable to such assistance are exempt.
3. Neither the refundable nor the non-refundable portion of Debtor’s AOC is
exempt under 20 U.S.C. § 1095a(d).
In this case, Debtor contends that both the refundable and the non-refundable
portions of her AOC are exempt because they are traceable to her student loan assistance.
The factual basis for the position is the parties’ stipulations that Debtor “was able to take
the AOC because of tuition paid during 2012” and that Debtor “paid that tuition using
student loan proceeds.”15
Whether the exemption of the AOC refunds is permitted therefore turns on the
meaning of the phrase “property traceable to such assistance” in 20 U.S.C. § 1095a(d).
The statute does not define the phrase. “Tracing” is defined in Black’s Law Dictionary as
“[t]he process of tracking property’s ownership or characteristics from the time of its
origin to the present.”16 Tracing is expressly allowed for purposes of the exemptions
enumerated in 11 U.S.C. § 522(d)(11). For these exemptions, a leading bankruptcy
treatise defines tracing as “the right to preserve an exemption as the exemptable property
changes form, . . . for example, from the right to receive an exempt payment, to payment
in the form of a check, to a bank deposit, and ultimately to cash proceeds.”17
Cases finding the proceeds of student loans to be exempt under 20 U.S.C.
15 Doc. 58, 2.
16 Black’s Law Dictionary (9th ed. 2009), available on Westlaw at BLACKS, “tracing.”
17 3 William L. Norton, Jr., and William L. Norton III, Norton Bankruptcy Law & Practice 3d,
§ 56:9 at 56-29 (Thomson Reuters 2013).
Case 12-11662 Doc# 64 Filed 02/12/14 Page 5 of 13
§ 1095a(d) utilize generally accepted methods of tracing cash proceeds. For example, in
Brindle v. Arata, 18 the Indiana Court of Appeals held that the proceeds of a student loan
deposited into the student’s personal checking account retained their exempt status. It
reasoned that Congress intended to allow students to deposit loan proceeds in their
checking accounts without fear of attachment by judgment creditors.19 In Perkins, 20 the
bankruptcy court applied the lowest-intermediate-balance method of tracing to sustain a
debtor’s claim of exemption of student loan proceeds garnished from her savings account
prepetition and returned to the bankruptcy estate. In Drescher, 21 the court sustained the
debtor’s claimed exemption of garnished funds which were traceable, using the first-infirst-
out method the parties agreed was appropriate, to her deposit of student loan
proceeds into her savings account.
Debtor points to no case law supporting her contention that the AOC refunds are
traceable to her student loans, but she argues that “the [tax] credit was the direct result of
the debtor’s use of student loan proceeds.”22 As stated above, the legal or technical
meaning of tracing of property is the identification of specific property as it changes
form. “Result” as Debtor uses it here, on the other hand, means the consequence of a
18 Brindle v. Arata, 940 N.E.2d 320 (Ind. App. 2010).
19 Id. at 322.
20 In re Perkins, 2011 WL 4458961 at *5 (Bankr. N.D. Ohio Sept. 23, 2011).
21 In re Drescher, 2013 WL 4525232 at *4 n. 7 (Bankr. D. Or. Aug. 27, 2013).
22 Doc. 61, 2.
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particular action. Although the common usage meanings of “result” and “tracing” are
similar, they are entirely different legal concepts. The Court finds that the legal or
technical meaning of “tracing” should be adopted when construing 20 U.S.C. § 1095a(d).
It is the meaning used by the decisions cited above that found the exemption to be
applicable to the proceeds of student loans, and the meaning applied when construing the
exemptions allowed by 11 U.S.C. § 522(d)(11).23 To construe “property traceable to” a
student loan as used in 20 U.S.C. § 1095a(d) to include a tax refund which is the result of
a student loan would expand the meaning of the exemption. Debtor’s student loan
assistance did not change form; the AOC is a new property interest having its source in
the student loan assistance.
An argument, similar to Debtor’s, to apply the wage garnishment exemption for
25% of a person’s aggregate disposable income under the Consumer Credit Protection
Act to a tax refund having its source in wages was rejected by the United States Supreme
Court in Kokoszka v. Belford. 24 The Court characterized the debtor’s position as being
“that a tax refund, having its source in wages and being completely available to the
taxpayer upon its return without any further deduction, is ‘disposable earnings’ within the
meaning of the statute.”25 The Supreme Court agreed with the lower court that the terms
in the exemption statute “were limited to periodic payments of compensation” and did
23 See 3 Norton Bankr. Law & Prac. 3d, § 56:9 at 56-29.
24 417 U.S. 642 (1974).
25 Id. at 649.
Case 12-11662 Doc# 64 Filed 02/12/14 Page 7 of 13
“not pertain to every asset that is traceable in some way to such compensation.”26 The
Tenth Circuit27 cited Kokoszka when holding that a tax refund derived from wages was
not “earnings from personal services” for purposes of an Oklahoma exemption statute. It
reasoned that when an employer withheld funds from earnings, the withheld funds
changed form and became a tax, which was not exempt as “earnings from personal
services.”28 Judge Berger, another bankruptcy judge in this District, in Rangel29 relied in
part upon Kokoszka when holding that the Kansas exemption for “compensation paid or
payable for personal services” was not broad enough to include a federal income tax
refund simply because the refund could be traced to wages. He held that the exemption
required “a direct link between the compensation and the personal services,” and that the
link had been severed when wages were withheld and became a “tax.”30
The Court finds that the exemption for “property traceable to” student assistance is
limited to property which was at one time student assistance.31 Debtor’s tax refund was
never in the form of student assistance. A tax refund under the AOC results from or
follows from the expenditure of funds, including student loan proceeds, for specified
26 Id., 417 U.S. at 651.
27 In re Annis, 232 F.3d 749, 753 (10th Cir. 2000).
28 Id. at 752.
29 In re Rangel, 317 B.R. 553, 555 (Bankr. D. Kan. 2004).
30 Id. at 555-56.
31 In so holding, the Court is not implying that all property traceable to student loan proceeds is
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educational purposes, but the refund is not a different form of the assistance.
4. If Debtor’s AOC were covered by 20 U.S.C. § 1095a(d), the exemption
would apply only to the refundable portion of the credit.
The Trustee agrees that if the AOC refund is exempt, then the refundable portion
of the AOC, $534, should belong to Debtor. But Debtor argues that if the AOC refund is
exempt under 20 U.S.C. § 1095a(d) because it is traceable to Debtor’s student loan
proceeds, then she also may exempt the non-refundable portion, $583, “because had the
debtor not received the non-refundable portion of the credit, her $7,912 federal refund
would have been reduced by the $583.00 credit, to $7,329.”32 The Trustee responds that
“a non-refundable tax credit is not even property of the estate and so cannot be
exempted.”33 The Court agrees with the Trustee.
An examination of Debtor’s 2012 Form 1040A34 illustrates the difference between
the refundable and non-refundable portions of Debtor’s AOC. First, Debtor computed her
taxable income based on her wages. Since Debtor had no adjustments to gross income,
her tax liability of $583 was computed based upon her taxable income, less exemptions
and deductions. Then $583, the non-refundable portion of the AOC, was applied,
reducing her tax liability to zero. Next, her total tax payments and credits of $7,912 were
calculated as the sum of her wage withholdings, the earned income credit, the child tax
32 Doc. 61, 3.
33 Doc. 63, 7.
34 Doc. 63-4.
Case 12-11662 Doc# 64 Filed 02/12/14 Page 9 of 13
credit, and the AOC credit of $534. Since she owed no taxes, the full amount of the
payments and credits were determined to be the amount of her refund. Hence, the $543
AOC is referred to as a refundable credit.
Debtor provides no case authority allowing an exemption of a non-refundable tax
credit. The Trustee cites several cases holding non-refundable credits to be ineligible for
exemption. These cases include a decision holding that the debtors’ 1999 non-refundable
Hope Education Credit was not a “public assistance” benefit exempt under Idaho law.35
The court distinguished the Hope credit from the earned income credit, which it had held
was exempt under the Idaho public assistance exemption statute, on several bases,
including the fact that the Hope credit, unlike the earned income credit, was nonrefundable.
“[W]hile the Hope credit offsets, dollar for dollar, a taxpayer’s liability for
tax, the earned income credit is treated in the same fashion as a tax payment.”36 This
distinction between refundable and non-refundable credits is persuasive, since the AOC
for 2012 on which Debtor relies is a modified version of the 1999 Hope credit.
The Tenth Circuit has held that the non-refundable portion of a debtor’s federal
child tax credit was not within a Colorado statute exempting “[t]he full amount of any
federal or state income tax refund attributed to an earned income tax credit or a child tax
credit.”37 The court noted that non-refundable tax credits “are subtracted from the tax, but
35 In re Crampton, 249 B.R. 215 (Bankr. D. Idaho 2000).
36 Id. at 217-18.
37 Cohen v. Borgman (In re Borgman), 698 F.3d 1255, 1257 (10th Cir. 2012).
Case 12-11662 Doc# 64 Filed 02/12/14 Page 10 of 13
can only reduce the tax to zero.”38 It then stated,
We agree with the bankruptcy court that the
nonrefundable portion of the CTC — i.e. the portion claimed
in the “tax and credits” section of Form 1040 — never gives
rise to a “refund.” A reduction in tax liability, standing alone,
will never result in a refund. Only items treated as
“payments” — such as the earned income tax credit or the
Additional CTC — can give rise to a refund, and then only to
the extent that they exceed tax liability. Accordingly, the
nonrefundable portion of the CTC, which is not treated as a
“payment” under the Internal Revenue Code, is outside the
scope of [the Colorado statute], which exempts only
In a decision pre-dating the Tenth Circuit’s ruling, the Colorado bankruptcy court
held that the non-refundable component of the federal child tax credit was not property of
the estate, and therefore could not be exempted under the Colorado statute exempting any
federal or state income tax refund attributable to a child tax credit.40 It agreed with the
following language from another decision:
“The non-refundable child tax credit is not treated as an
overpayment and, therefore, does not constitute any portion of
a taxpayer’s income tax refund. As such, the non-refundable
child tax credit is not property of Debtors’ bankruptcy estate
and cannot be subject to collection and distribution by the
Trustee. Debtors have already obtained the benefit of the
entire child tax credit when they used the credit to reduce
their tax liability. They cannot also use the credit to insulate
part of their tax refund from use by the Trustee for the benefit
38 Id. at 1260.
39 Id. at 1261 (citations omitted).
40 In re Landgrebe, 2009 WL 3253933 (Bankr. D. Colo. Sept. 23, 2009).
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of their unsecured creditors.”41
The court also reasoned, in the alternative, that the non-refundable credit was not an
exempt refund for purposes of the Colorado exemption laws.42 The intent of such
exemptions is to keep certain property of a debtor protected from levy and sale under a
writ of attachment or garnishment. A non-refundable credit never puts property into the
hands of the debtor. In addition, although a creditor could attach or levy against the
refundable tax credit, it could never do so as to the non-refundable portion.
The Court finds the foregoing authorities persuasive. The distinctions between
refundable and non-refundable credits demonstrate that the non-refundable portion of the
AOC would not be within the exemption from garnishment and attachment of student
loan proceeds under 20 U.S.C. § 1095a(d), even if the refundable portion were. Debtor
fully realized the value of the non-refundable credit when it was applied to reduce her tax
liability to zero. Debtor could never receive the credit; its only function was to reduce her
tax liability. The non-refundable portion of the AOC is therefore not property of Debtor’s
bankruptcy estate. It could not be attached by Debtor’s creditors. The exemption of 20
U.S.C. § 1095a(d) does not apply to it.
For the forgoing reasons, the Court sustains the Trustee’s objection to Debtor’s
41 Id. at *2 (quoting In re Klostermeier, 2009 WL 1617090, at *4 (Bankr. N.D. Ohio May 29,
42 Id. at 3.
Case 12-11662 Doc# 64 Filed 02/12/14 Page 12 of 13
claim of exemption of the refundable and non-refundable portions of her AOC.
The foregoing constitutes Findings of Fact and Conclusions of Law under Rules
7052 and 9014(c) of the Federal Rules of Bankruptcy Procedure, which make Rule 52(a)
of the Federal Rules of Civil Procedure applicable to this matter.
Judgment is hereby entered granting the Trustee’s Objection to Exemption. The
judgment based on this ruling will become effective when it is entered on the docket for
this case, as provided by Federal Rule of Bankruptcy Procedure 9021.
IT IS SO ORDERED.
# # #
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