September 24, 2009, Decided
COUNSEL: APPEARANCES:
Richard F. Artura, Esq., Phillips, Weiner, Artura & Cox, Lindenhurst, New
York.
Kenneth Kirschenbaum, Esq., Kirschenbaum & Kirschenbaum, Garden City, New
York.
JUDGES: Alan S. Trust, United States Bankruptcy Judge.
OPINION BY: Alan S. Trust
OPINION
MEMORANDUM OPINION REGARDING TURNOVER OF TAX REFUND
Issues Before the Court and Summary of Decision
Pending before the Court is the Motion to Turnover Property Under Section
521(a)(4) ("Motion") filed by the chapter 7 Trustee Kenneth Kirschenbaum
("Trustee"). At issue are refunds of prepetition federal and state income
taxes
paid by Debtor and his non-debtor spouse. The aggregate amount of the
refunds is
$ 8,136.00. The Trustee has requested that this Court direct the Debtor to
turn
over $ 5,636.00 as the nonexempt portion of the tax refunds. Debtor
asserts that
his non-debtor spouse is entitled to half of the refunds, and that the
amount of
the refunds to which the Trustee is entitled is one half of $ 8,136.00
less the
$ 2,500.00 exemption allowable to Debtor, for a total amount to be turned
over
of $ 1,568.00.
For the reasons herein, but not for the reasons argued by either side, the
Court agrees with Debtor.
Jurisdiction
This Court has jurisdiction over this core proceeding pursuant to 28 U.S.C.
§§ 157(b)(2)(A), (B), (E) and (O), and 1334(b), and the Standing Order of
Reference in effect in the Eastern District of New York.
Procedural History
On February 28, 2009, Debtor filed a voluntary petition for relief under
Chapter 7 of the United States Bankruptcy Code ("Petition Date"). Debtor
filed,
inter alia, his Schedules and Statement of Financial Affairs ("SOFA").
[dkt item
1] In his Schedule B, Debtor disclosed an "Anticipated Tax Refund" in the
amount
of $ 5,500.00, which he listed as jointly owned with his wife. In his
Schedule
C, Debtor then claimed an exemption in $ 2,500.00 of the anticipated
refund,
pursuant to New York Debtor and Creditor Law Section 283. N.Y. DEBT. &
CRED. LAW
§ 283 (McKinney 2009). The tax refunds arise from tax returns filed for
year
2008, which returns were filed and for which the associated taxes were paid
prior to the Petition Date.
On May 18, 2009, the Trustee filed the Motion. [dkt item 18]
On May 22, 2009, the Debtor filed his Opposition to the Motion, in which he
states that "he earns 100% of the family income." [dkt item 19]
On June 16, 2009, the Trustee filed a Reply. [dkt item 23]
This Court held a hearing on the Motion on June 23, 2009. At the hearing,
the
parties agreed that, although the issue of refunds of prepetition taxes
has been
raised in prior cases before this Court, and opinions on this issue have
been
written in other districts, this is an issue of first impression because
there
are no published opinions from the Eastern District of New York or binding
decisions from the Second Circuit Court of Appeals. The parties also
agreed that
the facts are not in controversy as to which spouse is and has been the
wage
earner at all times relevant to the Motion, and agreed that this matter
could be
resolved on submissions, without an evidentiary hearing.
The Court directed the parties to submit briefing and supplemental
submissions focusing on the applicability of the 50/50 ownership rule, as
described infra. Any additional briefing and evidence was to be submitted
to the
Court by July 1, 2009, at which time this matter would be deemed under
submission.
On June 26, 2009, Debtor filed a post-hearing submission. [dkt item 25]
That
submission provides, in pertinent part, as follows:
My wife, Madeline Spina, and I have a joint personal checking
account with Capital One Bank. See attached statement.
Madeline Spina and I have been married for twelve (12) years and
are the parents of five year old twins. We own our house together, we
file joint income tax returns, share our cars, and in all respect have
combined household income and expenses with me being the wage earner
and my wife being the homemaker.
[dkt item 25, PP 2,3]
The Trustee did not file additional briefing or submissions.
Legal Analysis
This Court must determine how to allocate refunds of income taxes paid
prior
to the petition date as between a debtor and a non-debtor spouse. The
Trustee is
entitled to turn over of the debtor's non-exempt portion of the tax
refunds, but
not to the non-debtor spouse's portion, as the non-debtor's portion is not
property of the bankruptcy estate. The Trustee asserts that the tax
refunds are
property of the estate under Section 541 of the Bankruptcy Code, and that
the
Debtor is obligated to turn over the full amount, less any allowable
exemption,
under Sections 521 and 541. The Debtor asserts that his non-debtor spouse
is
entitled to half of the refunds, and that this Court should adopt the
presumptive "50/50 ownership rule" ("50/50 Rule") discussed in In re
Marciano,
372 B.R. 211 (Bankr. S.D.N.Y. 2007), and limit the estate's interest to
one-half
of the refund, less the Debtor's $ 2,500.00 exempt portion.
When, as here, a debtor and non-debtor spouse file joint tax returns, and
the
debtor earns the substantial portion or even the entirety of the married
couple's taxable income, there is a split of authority among bankruptcy
courts
regarding how to allocate the refund as between the spouses, and,
therefore, as
between the estate and the non-debtor spouse. As discussed below, three
different lines of cases have developed on this issue. However, the
analysis in
all of these cases begins with Section 541(a)(1) of the Bankruptcy Code,
which
broadly defines property of the estate as, "all legal and equitable
interests of
the debtor in property as of the commencement" of the bankruptcy
proceedings. 11
U.S.C. § 541(a)(1). Under Section 541(a)(1), "a tax refund that is received
post-petition is property of the estate if it is attributable to wages
earned
and withholding payments made during prepetition years." Carlson v.
Moratzka (In
re Carlson), 394 B.R. 491, 493 (8th Cir. B.A.P. 2008) (citing In re Benn,
491
F.3d 811, 813 (8th Cir. 2007)). 1
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -1 The
Bankruptcy Code also includes as property of the bankruptcy estate, "all
interests of the debtor and the debtor's spouse in community property as
of the
commencement of the case that is under the sole, equal, or joint
management and
control of the debtor." 11 U.S.C. § 541(a)(2)(A). However, because New
York is
not a community property state, this opinion does not address any possible
issues arising under § 541(a)(2)(A).
- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
The three lines of analysis which have developed are referred to as: the
withholding rule; the income rule; and the 50/50 Rule referenced above.
Each of
these approaches analyzes Section 541(a), and also looks to applicable
state law
to determine how the tax refund would be apportioned between the spouses
outside
of bankruptcy.
The majority of courts follows the withholding rule, which, as the Eighth
Circuit's Bankruptcy Appellate Panel stated in Carlson, "allocates the
joint tax
refund between the spouses in proportion to their respective tax
withholding."
In re Carlson, 394 B.R. at 494(citing In re Kleinfeldt, 287 B.R. 291, 292
(10th
Cir. B.A.P. 2002)). According to the withholding rule, a non-debtor spouse
may
have been employed but not have generated any withheld taxes, and,
therefore,
would have no right to any withheld taxes which are repaid to the
taxpayer. In
re Kleinfeldt, 287 B.R. at 293.
In comparison, the income approach divides the refund according to the
income
generated by each spouse. In re Carlson, 394 B.R. at 494. This view, also
known
as the "Proportionate Income Rule," allocates the tax refund as a direct
percentage of the earnings of the spouses.
The third approach, the 50/50 Rule, represents the minority view, and has
been followed by the bankruptcy courts in both the Southern and Western
Districts of New York. See, e.g., In re Marciano, 372 B.R. 211 (Bankr.
S.D.N.Y.
2007); In re Barrow, 306 B.R. 28 (Bankr. W.D.N.Y. 2004). The 50/50 Rule
applies
New York state matrimonial law to first establish each spouse's rights to
marital property, and then considers what the division of marital
property, such
as a tax refund, would be in a divorce proceeding. The 50/50 Rule creates a
rebuttable presumption that each spouse contributed equally to the
household,
including nonmonetary contributions, and, therefore, the refund should be
divided equally between the spouses. This presumption exists regardless of
the
taxable earnings of the spouses, and regardless of the source of the
taxable
income or tax withholding. As noted, however, the 50/50 rule creates a
"rebuttable presumption of equal ownership to any joint tax refund." In re
Marciano, 372 B.R. at 214 (citing In re Barrow, 306 B.R. at 31). To
overcome the
presumption, evidence must be presented that the "couple's 'present
conduct or
history of financial management' suggests separate financial affairs." Id.
To depart from the presumption of equal ownership, a court following the
50/50 Rule would analyze several factors from a married couple's history of
financial management, which may include:
Whether the monthly bills of the debtors' are paid out of joint
accounts; Whether the debtor considers the responsibility for paying
the household bills to be a joint responsibility; Whether the accounts
of the debtor and non-debtor spouse have always been held jointly;
Whether the debtor and non-debtor spouse have ever held individual
accounts at any point during the marriage; Whether both husband and
wife have equal access to funds in accounts; Whether their joint tax
refunds have always been deposited into joint checking accounts with
both debtors having full access to the funds; and the purpose or use
to which the tax refunds have traditionally been applied (e.g., for
household expenses or educational expenses for their children).
In re Hejmowski, 296 B.R. 645, 650 (Bankr. W.D.N.Y. 2003); see also
Marciano,
372 B.R. at 217 (utilizing these factors to determine that the debtor's
course
of conduct with regard to the marital assets did not overcome the 50/50
Rule
presumption); In re Barrow, 306 B.R. at 31(using the same analysis to
determine
the refund should be divided equally).
Both the Marciano and Barrow courts referred to New York matrimonial law
for
guidance. Under Section 236 of the New York Domestic Relations Law, any
property
acquired during a marriage is owned equally by the spouses in an "economic
partnership," and is thus available for equitable distribution upon
dissolution
of the union. N.Y. Dom. REL. LAW § 236 (McKinney 2009); see also Musso v.
Ostashko, 468 F.3d 99, 102 (2d. Cir. 2006); Marciano, 372 B.R. at 215.
Under New
York law, "as a general rule, the refund on a joint tax return is a joint
asset
that spouses own 'in equal shares'. . . [and u]nder the current tax code,
[a
court] simply cannot assume that any refund represents income for one
spouse or
the other." Marciano, 372 B.R. at 216 (quoting Barrow, 306 B.R. at 31).
Consequently, under the 50/50 Rule, "an income tax refund should be split
equally between spouses for purposes of allocating property of the estate
pursuant to 11 U.S.C. § 541." Marciano, 372 B.R. at 216.
A Different Approach to the Division of Tax Refunds
This Court has determined that a different approach should be taken to the
tax refund analysis which harmonizes applicable tax, bankruptcy, and state
marital property law. In this Court's view, spouses filing joint returns
who
equally share the liability for payment of the taxes should equally share
the
benefit of any tax refund.
This Court begins its analysis with Section 6013 of Title 26 of the United
States Code, the Internal Revenue Code ("IRC"), which governs the filing of
joint tax returns:
6013. Joint returns of income tax by husband and wife:
(a) Joint returns.--A husband and wife may make a single return
jointly of income taxes under subtitle A, even though one of the
spouses has neither gross income nor deductions[.]
26 U.S.C. § 6013(a)(emphasis supplied). When spouses file a joint return,
subsection (d)(3) of Section 6013 creates joint and several liability for
the
taxes due. 2 Married couples who decide to file jointly may do so for any
number
of reasons, including receiving the economic value of any tax benefits
derived
from filing jointly.
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -2
Specifically, the subsection provides:
(d) Special rules.--For purposes of this section-
(3) if a joint return is made, the tax shall be computed on the aggregate
income and the liability with respect to the tax shall be joint and
several.
26 U.S.C.A. § 6013(d)(3).
- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
The IRC does provide statutory relief from the joint and several liability
provision of Section 6013(d)(3). A spouse may be relieved from liability
under
procedures established for what has come to be referred to as the innocent
spouse exception, as established under Section 6015(b). 3 In addition,
taxpayers
who are no longer married or are legally separated may apply for relief
under
Section 6015(c). Compare Shafman v. U.S. Dep't of the Treasury (In re
Shafman),
267 B.R. 709, 714-717 (Bankr. N.D. W. Va. 2001)(finding that debtor seeking
determination of dischargeability of income tax liability did not qualify
for
innocent spouse relief under Section 6015(b), but she did qualify for
limited
liability under Section 6015(c)), with In re Hinckley, 256 B.R. 814
(Bankr. M.D.
Fla. 2000)(finding the debtor-wife entitled to "innocent spouse" relief
from
liability for a joint tax debt arising from a jointly filed return, on
theory
that she had been "coerced" into signing returns that failed to report
certain
pension benefits as income).
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -3
Section
6015(b) provides procedures for relief from liability applicable to all
joint
filers as follows:
(1) In general.-Under procedures prescribed by the Secretary, if-
(A) a joint return has been made for a taxable year;
(B) on such return there is an understatement of tax attributable
to erroneous items of one individual filing the joint return;
(C) the other individual filing the joint return establishes that
in signing the return he or she did not know, and had no reason to
know, that there was such understatement;
(D) taking into account all the facts and circumstances, it is
inequitable to hold the other individual liable for the deficiency in
tax for such taxable year attributable to such understatement; and
(E) the other individual elects (in such form as the Secretary may
prescribe) the benefits of this subsection not later than the date
which is 2 years after the date the Secretary has begun collection
activities with respect to the individual making the election,
then the other individual shall be relieved of liability for tax
(including interest, penalties, and other amounts) for such taxable
year to the extent such liability is attributable to such
understatement.
26 U.S.C. § 6015(b)(1).
- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
Federal tax courts addressing joint and several tax liability under the IRC
often consider the innocent spouse exception. See, e.g., Nihiser v.
C.I.R., T.C.
Memo 2008-135, 2008 WL 2120983 (Tax Ct. May 20, 2008) (granting innocent
spouse
joint tax liability relief to stay-at-home mom due to husband's actions);
Clarke-Lewis v. C.I.R., T.C. Summ. Op. 2008-14, 2008 WL 360715 (Tax Ct.
Feb. 11,
2008 )(denying relief due to spouse's written agreement to assume the
joint tax
liability).
Under New York law, taxpayers who file joint returns are jointly and
severally liable for the taxes owed. See N.Y. Tax Law § 651 (McKinney
1999).
Either spouse may seek to employ the exceptions and limitations to this
joint
and several liability available under IRC Section 6015. See N.Y. Tax Law §
654
(McKinney 1999)(making provisions of IRC § 6015 applicable for jointly
filed
state income tax returns). Other states haves similar provisions. See,
e.g., In
re James, 308 B.R. 569, 570-72 (Bankr. S.D. Ala. 2002)(applying Alabama tax
code, which paralleled IRC, and denying innocent spouse relief to a debtor
claiming she did not contribute income to the jointly filed return
assessing tax
liability).
Under the Bankruptcy Code, because spouses have joint and several liability
for the taxes due under joint returns, neither spouse has an allowable
claim for
subrogation against the other for taxes paid, but may assert a contribution
claim for one-half of the sum paid to the taxing authorities. See 11
U.S.C. §§
502, 509; see also In re Schuler, 354 B.R. 37, 41-42 (Bankr. W.D.N.Y. 2006)
(discussing theories of subrogation and contribution under the Bankruptcy
Code
and New York law). The Schuler court addressed these issues with respect
to a
deceased debtor's wife who sought reimbursement from the debtor's estate
for the
full amount she paid toward the couple's joint tax liability. In re
Schuler, 354
B.R. at 41. The court found that the debtor's wife should have asserted her
innocent spouse defense to the taxing authorities prior to paying the
obligation
in full, and stated that the court "must apply the outcome [she] accepted
in her
dealings with the Internal Revenue Service." Id. The court further found
the
debtor's wife had no right to subrogation and could only recover one-half
of the
taxes she paid as a claim against the debtor's estate. Id. at 41-42.
Under the IRC, spouses filing joint returns share the burden of the tax
liability, regardless of who generates the taxable income. Moreover,
spouses may
file jointly "even though one of the spouses has neither gross income nor
deductions." IRC § 6013(a). Federal tax law provides a mechanism for one
spouse
to reduce or eliminate their joint and several tax liability under
established
IRC law and procedures. New York tax law mirrors federal tax law on these
issues. Federal bankruptcy law provides that neither spouse can assert a
subrogation claim against the other in a bankruptcy case for any paid
taxes, but
one spouse can assert a contribution claim for one-half of the sum that
has been
paid to the taxing authorities. Given these principles, it seems entirely
consistent for spouses who file joint returns to share equally in any tax
refund
return, regardless of who earned how much of the taxable income, and
regardless
of who generated the claimed deductions. Thus, any tax refund presumptively
belongs to the spouses equally. This outcome is consistent with Section
541(a)
of the Bankruptcy Code, Sections 6013 and 6015 of the IRC, and Section 236
of
New York Domestic Relations Law. However, the Trustee may rebut this
presumption
if, had the taxes not been paid, the non-debtor spouse could have limited
or
avoided liability under the innocent spouse exception to the tax liability
under
Section 6015(b) of the IRC, or could have qualified for limited liability
under
Section 6015(c) for taxpayers no longer married or taxpayers legally
separated
or not living together.
Conclusion
This case presented an issue of first impression in this district, and this
Court's analysis is also one of first impression. This Court recognizes
the
briefing and submissions of the parties addressed the 50/50 Rule and
whether it
should be adopted by this Court. Therefore, the parties should be afforded
the
opportunity to submit any further submissions on whether the Debtor or Ms.
Spina
could have avoided or reduced liability for the taxes owed on the 2008 tax
returns at issue, if those taxes had not been paid. Any supplemental
submissions
shall be due twenty (20) days from entry of this opinion. Absent further
briefing, this Court will enter an order directing Debtor to turn $
1,568.00
over to the Trustee.
Dated: September 24, 2009
Central Islip, New York
/s/ Alan S. Trust
Alan S. Trust
United States Bankruptcy Judge
September 24, 2009, DecidedCOUNSEL: APPEARANCES:
Richard F. Artura, Esq., Phillips, Weiner, Artura & Cox, Lindenhurst, New York.
Kenneth Kirschenbaum, Esq., Kirschenbaum & Kirschenbaum, Garden City, New York.
JUDGES: Alan S. Trust, United States Bankruptcy Judge.
OPINION BY: Alan S. Trust
OPINION
MEMORANDUM OPINION REGARDING TURNOVER OF TAX REFUND
Issues Before the Court and Summary of Decision
Pending before the Court is the Motion to Turnover Property Under Section521(a)(4) ("Motion") filed by the chapter 7 Trustee Kenneth Kirschenbaum("Trustee"). At issue are refunds of prepetition federal and state income taxespaid by Debtor and his non-debtor spouse. The aggregate amount of the refunds is$ 8,136.00. The Trustee has requested that this Court direct the Debtor to turnover $ 5,636.00 as the nonexempt portion of the tax refunds. Debtor asserts thathis non-debtor spouse is entitled to half of the refunds, and that the amount ofthe refunds to which the Trustee is entitled is one half of $ 8,136.00 less the$ 2,500.00 exemption allowable to Debtor, for a total amount to be turned overof $ 1,568.00.
For the reasons herein, but not for the reasons argued by either side, theCourt agrees with Debtor.
Jurisdiction
This Court has jurisdiction over this core proceeding pursuant to 28 U.S.C.§§ 157(b)(2)(A), (B), (E) and (O), and 1334(b), and the Standing Order ofReference in effect in the Eastern District of New York.
Procedural History
On February 28, 2009, Debtor filed a voluntary petition for relief underChapter 7 of the United States Bankruptcy Code ("Petition Date"). Debtor filed,inter alia, his Schedules and Statement of Financial Affairs ("SOFA"). [dkt item1] In his Schedule B, Debtor disclosed an "Anticipated Tax Refund" in the amountof $ 5,500.00, which he listed as jointly owned with his wife. In his ScheduleC, Debtor then claimed an exemption in $ 2,500.00 of the anticipated refund,pursuant to New York Debtor and Creditor Law Section 283. N.Y. DEBT. & CRED. LAW§ 283 (McKinney 2009). The tax refunds arise from tax returns filed for year2008, which returns were filed and for which the associated taxes were paidprior to the Petition Date.
On May 18, 2009, the Trustee filed the Motion. [dkt item 18]
On May 22, 2009, the Debtor filed his Opposition to the Motion, in which hestates that "he earns 100% of the family income." [dkt item 19]
On June 16, 2009, the Trustee filed a Reply. [dkt item 23]
This Court held a hearing on the Motion on June 23, 2009. At the hearing, theparties agreed that, although the issue of refunds of prepetition taxes has beenraised in prior cases before this Court, and opinions on this issue have beenwritten in other districts, this is an issue of first impression because thereare no published opinions from the Eastern District of New York or bindingdecisions from the Second Circuit Court of Appeals. The parties also agreed thatthe facts are not in controversy as to which spouse is and has been the wageearner at all times relevant to the Motion, and agreed that this matter could beresolved on submissions, without an evidentiary hearing.
The Court directed the parties to submit briefing and supplementalsubmissions focusing on the applicability of the 50/50 ownership rule, asdescribed infra. Any additional briefing and evidence was to be submitted to theCourt by July 1, 2009, at which time this matter would be deemed undersubmission.
On June 26, 2009, Debtor filed a post-hearing submission. [dkt item 25] Thatsubmission provides, in pertinent part, as follows:
My wife, Madeline Spina, and I have a joint personal checkingaccount with Capital One Bank. See attached statement.
Madeline Spina and I have been married for twelve (12) years andare the parents of five year old twins. We own our house together, wefile joint income tax returns, share our cars, and in all respect havecombined household income and expenses with me being the wage earnerand my wife being the homemaker.
[dkt item 25, PP 2,3]
The Trustee did not file additional briefing or submissions.
Legal Analysis
This Court must determine how to allocate refunds of income taxes paid priorto the petition date as between a debtor and a non-debtor spouse. The Trustee isentitled to turn over of the debtor's non-exempt portion of the tax refunds, butnot to the non-debtor spouse's portion, as the non-debtor's portion is notproperty of the bankruptcy estate. The Trustee asserts that the tax refunds areproperty of the estate under Section 541 of the Bankruptcy Code, and that theDebtor is obligated to turn over the full amount, less any allowable exemption,under Sections 521 and 541. The Debtor asserts that his non-debtor spouse isentitled to half of the refunds, and that this Court should adopt thepresumptive "50/50 ownership rule" ("50/50 Rule") discussed in In re Marciano,372 B.R. 211 (Bankr. S.D.N.Y. 2007), and limit the estate's interest to one-halfof the refund, less the Debtor's $ 2,500.00 exempt portion.
When, as here, a debtor and non-debtor spouse file joint tax returns, and thedebtor earns the substantial portion or even the entirety of the marriedcouple's taxable income, there is a split of authority among bankruptcy courtsregarding how to allocate the refund as between the spouses, and, therefore, asbetween the estate and the non-debtor spouse. As discussed below, threedifferent lines of cases have developed on this issue. However, the analysis inall of these cases begins with Section 541(a)(1) of the Bankruptcy Code, whichbroadly defines property of the estate as, "all legal and equitable interests ofthe debtor in property as of the commencement" of the bankruptcy proceedings. 11U.S.C. § 541(a)(1). Under Section 541(a)(1), "a tax refund that is receivedpost-petition is property of the estate if it is attributable to wages earnedand withholding payments made during prepetition years." Carlson v. Moratzka (Inre Carlson), 394 B.R. 491, 493 (8th Cir. B.A.P. 2008) (citing In re Benn, 491F.3d 811, 813 (8th Cir. 2007)). 1
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -1 TheBankruptcy Code also includes as property of the bankruptcy estate, "allinterests of the debtor and the debtor's spouse in community property as of thecommencement of the case that is under the sole, equal, or joint management andcontrol of the debtor." 11 U.S.C. § 541(a)(2)(A). However, because New York isnot a community property state, this opinion does not address any possibleissues arising under § 541(a)(2)(A).- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
The three lines of analysis which have developed are referred to as: thewithholding rule; the income rule; and the 50/50 Rule referenced above. Each ofthese approaches analyzes Section 541(a), and also looks to applicable state lawto determine how the tax refund would be apportioned between the spouses outsideof bankruptcy.
The majority of courts follows the withholding rule, which, as the EighthCircuit's Bankruptcy Appellate Panel stated in Carlson, "allocates the joint taxrefund between the spouses in proportion to their respective tax withholding."In re Carlson, 394 B.R. at 494(citing In re Kleinfeldt, 287 B.R. 291, 292 (10thCir. B.A.P. 2002)). According to the withholding rule, a non-debtor spouse mayhave been employed but not have generated any withheld taxes, and, therefore,would have no right to any withheld taxes which are repaid to the taxpayer. Inre Kleinfeldt, 287 B.R. at 293.
In comparison, the income approach divides the refund according to the incomegenerated by each spouse. In re Carlson, 394 B.R. at 494. This view, also knownas the "Proportionate Income Rule," allocates the tax refund as a directpercentage of the earnings of the spouses.
The third approach, the 50/50 Rule, represents the minority view, and hasbeen followed by the bankruptcy courts in both the Southern and WesternDistricts of New York. See, e.g., In re Marciano, 372 B.R. 211 (Bankr. S.D.N.Y.2007); In re Barrow, 306 B.R. 28 (Bankr. W.D.N.Y. 2004). The 50/50 Rule appliesNew York state matrimonial law to first establish each spouse's rights tomarital property, and then considers what the division of marital property, suchas a tax refund, would be in a divorce proceeding. The 50/50 Rule creates arebuttable presumption that each spouse contributed equally to the household,including nonmonetary contributions, and, therefore, the refund should bedivided equally between the spouses. This presumption exists regardless of thetaxable earnings of the spouses, and regardless of the source of the taxableincome or tax withholding. As noted, however, the 50/50 rule creates a"rebuttable presumption of equal ownership to any joint tax refund." In reMarciano, 372 B.R. at 214 (citing In re Barrow, 306 B.R. at 31). To overcome thepresumption, evidence must be presented that the "couple's 'present conduct orhistory of financial management' suggests separate financial affairs." Id.
To depart from the presumption of equal ownership, a court following the50/50 Rule would analyze several factors from a married couple's history offinancial management, which may include:
Whether the monthly bills of the debtors' are paid out of jointaccounts; Whether the debtor considers the responsibility for payingthe household bills to be a joint responsibility; Whether the accountsof the debtor and non-debtor spouse have always been held jointly;Whether the debtor and non-debtor spouse have ever held individualaccounts at any point during the marriage; Whether both husband andwife have equal access to funds in accounts; Whether their joint taxrefunds have always been deposited into joint checking accounts withboth debtors having full access to the funds; and the purpose or useto which the tax refunds have traditionally been applied (e.g., forhousehold expenses or educational expenses for their children).
In re Hejmowski, 296 B.R. 645, 650 (Bankr. W.D.N.Y. 2003); see also Marciano,372 B.R. at 217 (utilizing these factors to determine that the debtor's courseof conduct with regard to the marital assets did not overcome the 50/50 Rulepresumption); In re Barrow, 306 B.R. at 31(using the same analysis to determinethe refund should be divided equally).
Both the Marciano and Barrow courts referred to New York matrimonial law forguidance. Under Section 236 of the New York Domestic Relations Law, any propertyacquired during a marriage is owned equally by the spouses in an "economicpartnership," and is thus available for equitable distribution upon dissolutionof the union. N.Y. Dom. REL. LAW § 236 (McKinney 2009); see also Musso v.Ostashko, 468 F.3d 99, 102 (2d. Cir. 2006); Marciano, 372 B.R. at 215. Under NewYork law, "as a general rule, the refund on a joint tax return is a joint assetthat spouses own 'in equal shares'. . . [and u]nder the current tax code, [acourt] simply cannot assume that any refund represents income for one spouse orthe other." Marciano, 372 B.R. at 216 (quoting Barrow, 306 B.R. at 31).Consequently, under the 50/50 Rule, "an income tax refund should be splitequally between spouses for purposes of allocating property of the estatepursuant to 11 U.S.C. § 541." Marciano, 372 B.R. at 216.
A Different Approach to the Division of Tax Refunds
This Court has determined that a different approach should be taken to thetax refund analysis which harmonizes applicable tax, bankruptcy, and statemarital property law. In this Court's view, spouses filing joint returns whoequally share the liability for payment of the taxes should equally share thebenefit of any tax refund.
This Court begins its analysis with Section 6013 of Title 26 of the UnitedStates Code, the Internal Revenue Code ("IRC"), which governs the filing ofjoint tax returns:
6013. Joint returns of income tax by husband and wife:
(a) Joint returns.--A husband and wife may make a single returnjointly of income taxes under subtitle A, even though one of thespouses has neither gross income nor deductions[.]
26 U.S.C. § 6013(a)(emphasis supplied). When spouses file a joint return,subsection (d)(3) of Section 6013 creates joint and several liability for thetaxes due. 2 Married couples who decide to file jointly may do so for any numberof reasons, including receiving the economic value of any tax benefits derivedfrom filing jointly.
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -2Specifically, the subsection provides:
(d) Special rules.--For purposes of this section-
(3) if a joint return is made, the tax shall be computed on the aggregateincome and the liability with respect to the tax shall be joint and several.
26 U.S.C.A. § 6013(d)(3).- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
The IRC does provide statutory relief from the joint and several liabilityprovision of Section 6013(d)(3). A spouse may be relieved from liability underprocedures established for what has come to be referred to as the innocentspouse exception, as established under Section 6015(b). 3 In addition, taxpayerswho are no longer married or are legally separated may apply for relief underSection 6015(c). Compare Shafman v. U.S. Dep't of the Treasury (In re Shafman),267 B.R. 709, 714-717 (Bankr. N.D. W. Va. 2001)(finding that debtor seekingdetermination of dischargeability of income tax liability did not qualify forinnocent spouse relief under Section 6015(b), but she did qualify for limitedliability under Section 6015(c)), with In re Hinckley, 256 B.R. 814 (Bankr. M.D.Fla. 2000)(finding the debtor-wife entitled to "innocent spouse" relief fromliability for a joint tax debt arising from a jointly filed return, on theorythat she had been "coerced" into signing returns that failed to report certainpension benefits as income).
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -3 Section6015(b) provides procedures for relief from liability applicable to all jointfilers as follows:
(1) In general.-Under procedures prescribed by the Secretary, if-
(A) a joint return has been made for a taxable year;
(B) on such return there is an understatement of tax attributableto erroneous items of one individual filing the joint return;
(C) the other individual filing the joint return establishes thatin signing the return he or she did not know, and had no reason toknow, that there was such understatement;
(D) taking into account all the facts and circumstances, it isinequitable to hold the other individual liable for the deficiency intax for such taxable year attributable to such understatement; and
(E) the other individual elects (in such form as the Secretary mayprescribe) the benefits of this subsection not later than the datewhich is 2 years after the date the Secretary has begun collectionactivities with respect to the individual making the election,
then the other individual shall be relieved of liability for tax(including interest, penalties, and other amounts) for such taxableyear to the extent such liability is attributable to suchunderstatement.
26 U.S.C. § 6015(b)(1).- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
Federal tax courts addressing joint and several tax liability under the IRCoften consider the innocent spouse exception. See, e.g., Nihiser v. C.I.R., T.C.Memo 2008-135, 2008 WL 2120983 (Tax Ct. May 20, 2008) (granting innocent spousejoint tax liability relief to stay-at-home mom due to husband's actions);Clarke-Lewis v. C.I.R., T.C. Summ. Op. 2008-14, 2008 WL 360715 (Tax Ct. Feb. 11,2008 )(denying relief due to spouse's written agreement to assume the joint taxliability).
Under New York law, taxpayers who file joint returns are jointly andseverally liable for the taxes owed. See N.Y. Tax Law § 651 (McKinney 1999).Either spouse may seek to employ the exceptions and limitations to this jointand several liability available under IRC Section 6015. See N.Y. Tax Law § 654(McKinney 1999)(making provisions of IRC § 6015 applicable for jointly filedstate income tax returns). Other states haves similar provisions. See, e.g., Inre James, 308 B.R. 569, 570-72 (Bankr. S.D. Ala. 2002)(applying Alabama taxcode, which paralleled IRC, and denying innocent spouse relief to a debtorclaiming she did not contribute income to the jointly filed return assessing taxliability).
Under the Bankruptcy Code, because spouses have joint and several liabilityfor the taxes due under joint returns, neither spouse has an allowable claim forsubrogation against the other for taxes paid, but may assert a contributionclaim for one-half of the sum paid to the taxing authorities. See 11 U.S.C. §§502, 509; see also In re Schuler, 354 B.R. 37, 41-42 (Bankr. W.D.N.Y. 2006)(discussing theories of subrogation and contribution under the Bankruptcy Codeand New York law). The Schuler court addressed these issues with respect to adeceased debtor's wife who sought reimbursement from the debtor's estate for thefull amount she paid toward the couple's joint tax liability. In re Schuler, 354B.R. at 41. The court found that the debtor's wife should have asserted herinnocent spouse defense to the taxing authorities prior to paying the obligationin full, and stated that the court "must apply the outcome [she] accepted in herdealings with the Internal Revenue Service." Id. The court further found thedebtor's wife had no right to subrogation and could only recover one-half of thetaxes she paid as a claim against the debtor's estate. Id. at 41-42.
Under the IRC, spouses filing joint returns share the burden of the taxliability, regardless of who generates the taxable income. Moreover, spouses mayfile jointly "even though one of the spouses has neither gross income nordeductions." IRC § 6013(a). Federal tax law provides a mechanism for one spouseto reduce or eliminate their joint and several tax liability under establishedIRC law and procedures. New York tax law mirrors federal tax law on theseissues. Federal bankruptcy law provides that neither spouse can assert asubrogation claim against the other in a bankruptcy case for any paid taxes, butone spouse can assert a contribution claim for one-half of the sum that has beenpaid to the taxing authorities. Given these principles, it seems entirelyconsistent for spouses who file joint returns to share equally in any tax refundreturn, regardless of who earned how much of the taxable income, and regardlessof who generated the claimed deductions. Thus, any tax refund presumptivelybelongs to the spouses equally. This outcome is consistent with Section 541(a)of the Bankruptcy Code, Sections 6013 and 6015 of the IRC, and Section 236 ofNew York Domestic Relations Law. However, the Trustee may rebut this presumptionif, had the taxes not been paid, the non-debtor spouse could have limited oravoided liability under the innocent spouse exception to the tax liability underSection 6015(b) of the IRC, or could have qualified for limited liability underSection 6015(c) for taxpayers no longer married or taxpayers legally separatedor not living together.
Conclusion
This case presented an issue of first impression in this district, and thisCourt's analysis is also one of first impression. This Court recognizes thebriefing and submissions of the parties addressed the 50/50 Rule and whether itshould be adopted by this Court. Therefore, the parties should be afforded theopportunity to submit any further submissions on whether the Debtor or Ms. Spinacould have avoided or reduced liability for the taxes owed on the 2008 taxreturns at issue, if those taxes had not been paid. Any supplemental submissionsshall be due twenty (20) days from entry of this opinion. Absent furtherbriefing, this Court will enter an order directing Debtor to turn $ 1,568.00over to the Trustee.
Dated: September 24, 2009
Central Islip, New York
/s/ Alan S. Trust
Alan S. Trust
United States Bankruptcy Judge