- Category: Judge Somers
- Published on 17 January 2009
- Written by Judge Somers
SIGNED this 14 day of January, 2009.
Page 1 of 14
Dale L. Somers
UNITED STATES BANKRUPTCY JUDGE
Designated for on-line use and print publication.
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
WILLIAM ROCCO SCHWINN and CASE NO. 08-10528
CHERISH ROSE SCHWINN, CHAPTER 7
MEMORANDUM OPINION AND ORDER GRANTING MOTION FOR TURNOVER
OF ECONOMIC STIMULUS PAYMENT
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
Case: 08-10528 Doc #: 51 Filed: 01/14/2009 Page 2 of 14
Trustee), appears by Aaron Johnstun. There are no other appearances. The Court has
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
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
This Court has jurisdiction pursuant to 28 U.S.C.A. § 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.
A motion for turnover is a core proceeding which this Court may hear and determine as provided in 28
U.S.C.A. § 157(b)(2)(E).
There is no objection to venue or jurisdiction over the parties.
Case: 08-10528 Doc #: 51 Filed: 01/14/2009 Page 3 of 14
prior to filing a chapter 7 petition. Debtors became entitled to an
economic stimulus payment upon filing their 2007 tax return.2
A. Property of the Estate is Broadly Defined.
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
2 Doc. 40. The Court is not bound by the stipulation to the extent it is a stipulation of law rather than
fact. Koch v. United States, 47 F.3d 1015, 1018 (10th Cir. 1995) (“it is well-settled that a court is not bound
by stipulations of the parties as to questions of law”).
3 11 U.S.C.A. § 542 (future references to Title 11 in the text shall be to section only.)
4 Butner v. United States, 440 U.S. 48, 55 (1979).
5 E.g, Patterson v. Schumate, 504 U.S. 753 (1992) (debtor’s interest in ERISA plan); Segal v.
Rochelle, 382 U.S. 375 (1966) (loss-carryback refunds under federal tax law).
6 5 Collier on Bankruptcy ¶ 541.03 (Alan N. Resnick & Henry J. Sommer eds.-in-chief, 15th
ed. rev. 2008).
7 Segal v. Rochelle, 382 U.S. at 380.
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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
B. Nature of the Stimulus Payment.
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:
8 In re Lowe, 380 B.R. 251, 256 (Bankr. D. Kan. 2007).
9 Segal v. Rochelle, 382 U.S. at 380.
10 Barowsky v. Serelson (In re Barowsky), 946 F.2d 1516 (10th Cir. 1991).
11 PL 110-185, 2008 HR 5140.
12 26 U.S.C.A. § 6428 (Supp. 2008).
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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
13 26 U.S.C.A. § 6401 (Supp. 2008).
14 Subsection (f) (the credit mechanism) and subsection (g) (providing for refund checks)
(f) Coordination with advance refunds of credit.-(
1) In general.--The amount of credit which would (but for this paragraph)
be allowable under this section shall be reduced (but not below zero) by the
aggregate refunds and credits made or allowed to the taxpayer under
subsection (g). Any failure to so reduce the credit shall be treated as arising
out of a mathematical or clerical error and assessed according to section
(g) Advance refunds and credits.-(
1) In general.--Each individual who was an eligible individual for such
individual's first taxable year beginning in 2007 shall be treated as having
made a payment against the tax imposed by chapter 1 for such first taxable
year in an amount equal to the advance refund amount for such taxable year.
(2) Advance refund amount.--For purposes of paragraph (1), the advance
refund amount is the amount that would have been allowed as a credit under
Case: 08-10528 Doc #: 51 Filed: 01/14/2009 Page 6 of 14
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 “The provision includes a recovery rebate credit for
2008 which is refundable. The credit mechanism (and the issuance of checks described below)
is intended to deliver an expedited fiscal stimulus to the economy.”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). . . .
this section for such first taxable year if this section (other than subsection
(f) and this subsection) had applied to such taxable year.
(3) Timing of payments.--The Secretary shall, subject to the provisions of
this title, refund or credit any overpayment attributable to this section as
rapidly as possible. No refund or credit shall be made or allowed under this
subsection after December 31, 2008.
15 www.irs.gov/newsroom/article/0,,id=179211,00.html (November 6, 2008).
16 Joint Committee on Taxation, Technical Explanation of the Revenue Provision of H.R. 5140, the
“Economic Stimulus Act of 2008, as passed by the House of Representatives and the Senate on February 7,
2008 (JCX-16-08) (Feb. 8, 2008) (available at www.house.gov/jct) (hereafter “Technical Explanation”); see
154 Cong. Rec. H485-06, H488, 2008 WL 237421 (Statement of Representative Rangel: “I have asked the
nonpartisan Joint Committee on Taxation to make available to the public a technical explanation of the
provisions of H.R. 5140. The technical explanation expresses the committee’s understanding and legislative
intent behind this important legislation. This explanation, document JCX-5-08, is currently available on the
Joint Committee’s Web site.”).
17 Technical Explanation at 3.
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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
18 Id. at 4-5.
19 Doc. 46 at 4. The support for this proposition is a quotation from the IRS’s frequently asked
questions section web page that notes filing a federal tax return as a requirement for eligibility to receive the
economic stimulus payment.
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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
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  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
20 E.g., In re Alguire, 391 B.R. 252 (Bankr. W.D.N.Y. 2008); In re Schwenke, 2008 WL 4381822
(Bankr. D. Mont. 2008); In re Smith, 393 B.R. 205 (Bankr. S.D. Ind. 2008); In re Lacy, 2008 WL 4000176
(Bankr. S.D. Ind. 2008).
21 In re Schwenke, 2008 WL 4381822 at *5.
22 In re Alguire, 391 B.R. at 254.
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stimulus payments constituted a tax refund for debtors’ 2007 taxes.24 Lacy also reached this
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 refund of 2008 taxes. The Act
expressly provides in subsection (a) for the allowance of a credit for “the first taxable year
beginning in 2008.”26 Subsection (g) provides the advance payment is the amount “that would
have been allowed as a credit” under the Act if it had applied to tax year 2007.27 The
legislative history characterizes the stimulus payment as a credit for 2008.28 The references to
2007 tax returns are included for the purpose of facilitating the distribution of rebate checks
prior to the filing of 2008 tax returns. Some taxpayers, such as those who did not qualify for a
stimulus check distributed in 2008 but do qualify based upon their 2008 tax return, may realize
24 In re Smith, 393 B.R. at 209 (“Thus, the 2008 Act creates the fiction that the Debtors overpaid their
2007 taxes in the amount of the [stimulus payment], based on information contained within their 2007 tax
return. Consequently, the [stimulus payment] constitutes a tax refund for the Debtors’ 2007 taxes.”).
25 In re Lacy, 2008 WL 4000176 at *3 (“the [stimulus payment] constitutes a tax refund for the
Debtor’s 2007 taxes”).
26 26 U.S.C.A. § 6428(a) (Supp. 2008).
27 26 U.S.C.A.§ 6428(g) (Supp. 2008) (emphasis added).
28 Technical Explanation at 3.
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the benefit after filing their 2008 tax return.29 One opinion, Wooldridge,30 when construing the
Act for the purpose of determining if the payment was exempt, found the Act created a right to
a refund of 2008 taxes and that the “2007 return is but a template in the case of the majority of
taxpayers”31 and the “payment is not directly tied to the 2007 tax return.”32
The question whether the Stimulus Payment should be regarded as a refund of 2007
taxes or an advance refund of 2008 taxes is a difficult one, with well reasoned arguments
supporting both sides. For the reasons examined below, the Court does not decide the issue.
E. Debtors’ Proration Argument.
If the Stimulus Payment is a refund of 2007 taxes, it is clearly so rooted in Debtors’
prebankruptcy past that the entire payment is property of the estate. Debtors do not challenge
this proposition but rather contend, assuming the refund is of 2008 taxes, the estate’s interest is
determined by multiplying the Stimulus Payment by the percentage of tax year 2008 which had
passed before the date of filing. For the following reasons, the Court rejects this position and
29 “Q. I don’t qualify for a stimulus payment based on my 2007 return. But my tax situation will
be different in 2008. Will I qualify for any special benefit? A. Possibly. The 2008 tax instructions will
include a worksheet to help those who did not qualify for a payment or those who received a reduced amount
determine if they can obtain a benefit when they file their 2008 tax returns next year.” IRS Economic
Stimulus Payment Q&As: Eligibility, www.irs.gov/newsroom/article/0,,id=179181,00.html (Last visited Dec.
10, 2008). See 2008 Form 1040, line 70 and Recovery Rebate Credit Worksheet. See also Technical
Explanation at 4, quoted above.
30 In re Wooldridge, 393 B.R. 721 (Bankr. D. Idaho 2008). The Wooldridge court relied upon
Lambert, which construed the Economic Growth and Tax Relief Reconciliation Act of 2001, after which the
Act was patterned. Under the 2001 act, Lambert held that year 2000 tax information was used as a way to
calculate the year 2001 refund and the 2001 act had no effect upon the tax liability for year 2000. In re
Lambert, 283 B.R.16 (9th Cir. BAP 2002).
31 In re Wooldridge, 393 B.R. at 730.
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finds the Stimulus Payment is property of the estate whether characterized as a 2007 or 2008
In the Tenth Circuit, the general rule is that the portion of a debtor’s tax refund for the
tax year during which the petition was filed is property of the estate only to the extent
attributable to prepetition portion of the tax year.33 This rule was first adopted in Barowsky,
where the debtors asserted they were entitled to the full postpetition tax refund for the tax year
during which they filed for relief and the trustee claimed he was entitled to the portion of the
refund attributable to the prepetition portion of the tax year. The court found the trustee’s
position to be correct because the prepetition portion of the tax refund essentially represented
the “excessive tax withholding which would have been other assets of the bankruptcy estate if
the excessive holdings had not been made.”34
In Montgomery35 the Tenth Circuit applied the proration rule to earned income tax
credits (EIC) to which the debtor is entitled during the tax year when the petition is filed. The
EIC has been described as follows:
The Internal Revenue Code (IRC) allows individuals responsible
for the support of a child living with him a credit against income
taxes due equal to a certain percentage of so much of earned
income as does not exceed a specified amount. If the credit
exceeds tax liability, the excess is considered “an overpayment”
of tax under IRC 6401(b). Section 6402(a) provides for a refund
of “any overpayment” to the person who made it.36
33 In re Barowsky, 946 F.2d at 1516.
34 Id., 946 F.2d at 1518.
35 Williamson v. Jones (In re Montgomery), 224 F.3d 1193 (10th Cir. 2000).
36 Sorenson v. Secretary of Treasury, 475 U.S. 851, 851 (1986).
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The debtors had filed for relief in 1996, and the EICs at issue were received in 1997 as part of
their 1996 refunds. The Bankruptcy court held that the refunds were not property of the estate
because they were contingent interests which did not accrue until the end of the tax year. The
BAP reversed, and the Tenth Circuit affirmed. It noted that contingent interests are to be
included in the property of the estate and that EICs, in addition to being refunds payable at the
end of the tax year, may be obtained throughout the tax year since an individual eligible to
receive EIC may obtain advance payment of a portion of the amount as part of his wages.37 The
Given that EIC’s are to be treated as tax refunds, and that
contingent interests are to be included in the bankruptcy estate,
we agree with the BAP and the overwhelming weight of authority
that a debtor’s EIC for a tax year, as pro-rated to the date of the
bankruptcy petition was filed, is property of the estate regardless
of whether the petition was filed prior to the end of the tax year.38
Debtors contend this proration rule applies to the Stimulus Payment because it is an
advance refund of 2008 taxes and Debtors filed for relief during 2008.
F. Whether the Stimulus Payment is a Refund of 2007 Taxes or an Advance
Refund of 2008 Taxes, the Estate is Entitled to 100% of the Payment.
The estate is entitled to the value of the Debtors’ contingent interest in the refund as of
the date of filing. The 2008 Stimulus Payment received postpetition was a tax refund under
Federal law, but the proration rule does not automatically apply to all tax refunds. A prorata
distribution based upon the portion of the number of days of the tax year prior to filing is
merely an approximation of the debtor’s contingent interest in the refund on the date of filing.
37 In re Montgomery, 224 F.3d at 1194.
38 Id., 224 F.3d at 1195.
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When this approximation is at odds with the true situation, all of the facts, such as the portion
earnings and tax payments throughout the tax year, may be considered to reach a more accurate
allocation.39 For example, when the tax overpayment was made with postpetition earnings and
loans, the usual allocation method does not apply and the resulting refund is not property of the
estate.40 The purpose of the allocation is to value the debtor’s contingent interest on the date of
filing.41 In this case, that interest is the entire Stimulus Payment, whether it is characterized as a
refund of 2007 or 2008 taxes.42
The general rule that tax refunds are property of the estate based upon the percentage of
the tax year which passed before the date of filing has no applicability. As a matter of law, the
refund had no relationship to Debtors’ postpetition income or wage withholdings. For these
Debtors, who qualified for the payment based upon their filed 2007 tax return, their contingent
interest on the date of filing was the right to receive the entire stimulus amount. The Act
expressly provides that in the event the stimulus check is in excess of the amount to which
Debtors are entitled under the Act based upon their actual 2008 income rather than the income
estimated for 2008 based upon the 2007 return, no refund of the overpayment is required.43 The
39 In re Donnell, 357 B.R. 386 (Bankr. W.D. Tex. 2006)
40 Christie v. Royal (In re Christie), 233 B.R. 110 (10th Cir. BAP 1999).
41 In re Middendorf, 381 B.R. 774, 779 (Bankr. D. Kan. 2008).
42 Wooldridge, the case which construed the Act as creating a refund of 2008 taxes, nevertheless
rejected the debtors’ argument that proration applied finding that position “nonsensical” and contrary to the
IRS position that the stimulus payments are not refunds paid in advance. In re Wooldridge, 393 B.R. at 733.
43 26 U.S.C.A. § 6428(f)(1) (Supp. 2008).
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entire Stimulus Payment is property of the estate and must be turned over to the Trustee,
whether under the Act it is a refund of 2007 or 2008 taxes.
For the reasons stated above, the Stimulus Payment is property of the estate and must be
turned over to the Trustee. On the date of filing the Debtors had a contingent interest in the
Stimulus Payment, which was distributed to Debtors postpetition either as a refund of 2007
taxes or an advance payment of 2008 tax refund. Regardless of how the Stimulus Payment is
characterized, under the facts of this case, the estate is entitled to the entire payment. Although
the estate’s interest in tax refunds for the tax year in which the petition is filed is generally
prorata based upon the portion of the tax year which had passed before the filing, even if the
Stimulus Payment is a refund of 2008 taxes, that rule does not apply in this case where the
refund has no relationship to the amount of taxes owed by the Debtors in 2008. Since the
outcome of this case is the same whether the Stimulus Payment is characterized as a refund of
2007 or 2008 taxes, the Court declines to rule on that issue.
The foregoing constitute 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. A judgment based upon this ruling
will be entered on a separate document as required by Federal Rule of Bankruptcy Procedure
9021 and Federal Rule of Civil Procedure 58.
IT IS SO ORDERED.
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