United States Bankruptcy Appellate Panel

FOR THE EIGHTH CIRCUIT

No. 05-6034WM

In re: *

Matthew A. and Angela V. Law, *

*

Debtors. *

* Appeal from the United States

Matthew A. and Angela V. Law, * Bankruptcy Court for the 

* Western District of Missouri

Debtors - Appellants. *

*

v. *

*

David C. Stover, *

*

Trustee - Appellee. *

No. 05-6037WM

In re: *

Tammy Kathleen Brouse, *

*

Debtor. *

* Appeal from the United States

Tammy Kathleen Brouse, * Bankruptcy Court for the 

* Western District of Missouri

Debtor - Appellant. *

*

v. *

*

David C. Stover, *

*

Trustee - Appellee. *
1

The opinion and order in the Law case were entered by the Honorable Jerry W.

Venters, Chief Judge of the United States Bankruptcy Court for the Western District

of Missouri.

The order in the Brouse case was entered by the Honorable Arthur B.

Federman, United States Bankruptcy Judge for the Western District of Missouri.

2

Submitted: December 20, 2005

Filed: January 26, 2006

Before SCHERMER, MAHONEY, and McDONALD, Bankruptcy Judges.

MAHONEY, Bankruptcy Judge.

This is an appeal from orders of the bankruptcy court1

 entered on June 27, 2005,

and June 29, 2005, in each of these cases sustaining the objection of David C. Stover,

Chapter 7 Trustee, to the debtors’ claim of exemption in the portions of their federal

tax refunds attributable to the federal child tax credit. For the reasons stated below, we

affirm.

I. Standard of Review

The court's factual findings are reviewed for clear error and its legal conclusions

are reviewed de novo. Apex Oil Co. v. Sparks (In re Apex Oil Co.), 406 F.3d 538, 541

(8th Cir. 2005). The issue of what constitutes property of the bankruptcy estate is a

question of law. Nelson v. Ramette (In re Nelson), 322 F.3d 541, 544 (8th Cir. 2003);

Drewes v. Vote (In re Vote), 276 F.3d 1024, 1026 (8th Cir. 2002).

An appellate court may affirm on any basis supported by the record, even if that

ground was not considered by the trial court. Rodgers v. U.S. Bank, 417 F.3d 845, 853
3

n.6 (8th Cir. 2005); Power Equip. Co. v. Case Credit Corp. (In re Power Equip. Co.),

309 B.R. 552, 559 (B.A.P. 8th Cir. 2004).

II. Background

The Laws and Ms. Brouse filed Chapter 7 petitions on October 25, 2004. After

filing their 2004 income tax returns, they filed amended bankruptcy schedules B and

C to disclose their income tax refunds and to allocate the bankruptcy estate’s share of

those refunds. Under Missouri law, tax refunds arising from an overpayment of taxes

or from the federal earned income credit are property of the estate and are not

considered exempt. Wallerstedt v. Sosne (In re Wallerstedt), 930 F.2d 630 (8th Cir.

1991); In re Demars, 279 B.R. 548 (Bankr. W.D. Mo. 2002); In re Goertz, 202 B.R.

614 (Bankr. W.D. Mo. 1996). The debtors here each take the position that the portion

of their federal tax refunds attributable to the child tax credit is not property of the

estate, and they subtracted that amount from the refunds before calculating the amount

to be turned over to the bankruptcy trustee.

In each case, the trustee objected, asserting that the amount of the refund

resulting from the child tax credit is indeed property of the bankruptcy estate. A

hearing was held in each case, and a memorandum opinion and order were entered in

the Law case holding that the refundable portion of the child tax credit is property of

the bankruptcy estate. Two days later, an order was entered in the Brouse case

concurring in that holding and sustaining the trustee’s objection. The debtors then

filed these appeals, which were argued together.
4

III. Discussion

The bankruptcy estate that comes into effect upon the filing of a bankruptcy

petition consists primarily of “all legal or equitable interests of the debtor in property

as of the commencement of the case.” 11 U.S.C. § 541(a)(1). Property of the estate

includes contingent interests in future payments. Potter v. Drewes (In re Potter), 228

B.R. 422 (B.A.P. 8th Cir. 1999); In re Yonikus, 996 F.2d 866 (7th Cir.1993). On that

basis, tax refunds are considered property of the bankruptcy estate. See, e.g.,

Wallerstedt, 930 F.2d 630; Barowsky v. Serelson (In re Barowsky), 946 F.2d 1516

(10th Cir. 1991); Doan v. Hudgins (In re Doan), 672 F.2d 831 (11th Cir. 1982).

The child tax credit (“CTC”) was enacted in 1997 to give parents of dependent

children a financial break. It allows parents with an adjusted gross income below a

threshold amount to claim a $1,000 tax credit for each child under the age of 17. The

credit is reduced to zero on a graduating scale for families whose income is above the

threshold amount. The credit is refundable to the taxpayer to the extent it exceeds tax

liability. See 26 U.S.C. § 24.

The trial court’s decision that the refundable amount of the CTC is property of

the estate is based on Sorenson v. Secretary of the Treasury of the United States, 475

U.S. 851 (1986), in which the Supreme Court characterized an excess earned-income

tax credit (“EITC”) as an overpayment to be refunded, just like a tax refund. Because

the bankruptcy court usually treats tax refunds as property of the bankruptcy estate

pursuant to Wallerstedt, 930 F.2d 630, it extended the Sorenson rationale to CTCs on

the basis that refundability of the tax credit is the proper focus of the analysis. 

Sorenson was not a bankruptcy case. Its context was a challenge to a provision

in the Social Security Act which directed the Secretary of the Treasury to intercept tax

refunds payable to people who are behind on their child-support obligations. The
5

plaintiff argued that EITCs are different than normal tax refunds and should be treated

differently by being excluded from enforcement of the interception law.

The issue in Sorenson was the narrow question of how two procedural

mechanisms — the EITC delivery system and the tax-intercept system — intersected.

In its decision, the Supreme Court focused on sections 6401 and 6402 of the Internal

Revenue Code, where EITCs which exceed a person’s tax liability are defined as

overpayments and overpayments are to be disbursed via income tax refunds, and

stated that an overpayment arising from an excess EITC should be treated the same

as an overpayment arising in any other manner. Sorenson, 475 U.S. at 859-60. After

discussing both statutory construction and policy reasons for its decision, the Court

affirmed the decision that EITCs are subject to intercept.

The debtors rely on the case of In re Schwarz, 314 B.R. 433 (Bankr. D. Neb.

2004), which held that CTCs are not property of the bankruptcy estate because they

are distinguishable from EITCs. The primary distinction noted is the dissimilar

treatment of the two types of credits by the Internal Revenue Code.

Only four cases other than Schwarz — all decided prior to Schwarz — have

discussed the CTC in a bankruptcy context. Those cases are In re Dever, 250 B.R. 701

(Bankr. D. Idaho 2000); In re Steinmetz, 261 B.R. 32 (Bankr. D. Idaho 2001); In re

Beltz, 263 B.R. 525 (Bankr. W.D. Ky. 2001); and In re Koch, 299 B.R. 523 (Bankr.

C.D. Ill. 2003). They approached the question from the perspective of whether the

CTC is exemptible as a public assistance benefit, and assumed, before even reaching

the question of exemption, that the tax credits are property of the bankruptcy estate.
2

 The EITC’s purpose was to provide economic relief to low-income working

people, Sorenson, 475 U.S. at 864, while the CTC’s was to reduce the tax burden on

working parents and promote family values. H.R. Rep. 105-148, at 310 (1997); S.

Rep. 105-33, at 3 (1997).

3

Chapter 1 of subtitle A of the Internal Revenue Code (26 U.S.C.) addresses

normal taxes and surtaxes; subchapter A deals with determination of tax liability; part

IV covers credits against tax; and subpart C encompasses refundable credits. That is

where the EITC is found. In contrast, the CTC is classified in subpart A of part IV,

under nonrefundable personal credits. It was later amended to include refundability

for excess credits, so its codification as a “nonrefundable credit” is not entirely

accurate.

6

These cases all distinguish the legislative policies behind the EITC and the

CTC. The two laws were enacted in different decades for different reasons2

. They

were codified in different parts of the Internal Revenue Code3

. This is significant

because the tax code treats them differently as a result. In 26 U.S.C. § 6401, which

defines amounts treated as overpayments, certain excess credits are to be considered

overpayments. Specifically,

If the amount allowable as credits under subpart C of part IV of

subchapter A of chapter 1 (relating to refundable credits) exceeds the tax

imposed by subtitle A (reduced by the credits allowable under subparts

A, B, D, G, and H of such part IV), the amount of such excess shall be

considered an overpayment.

26 U.S.C. § 6401(b)(1).

The refundable credits of subpart C include the EITC. As noted in footnote 2, the CTC

is found in subpart A. By the terms of § 6401, excess CTCs are not considered tax

overpayments. This in itself removes the CTC from the realm of Sorenson and

indicates that it requires analysis from a different perspective.
7

The debtor advances an argument, following Schwarz, that the CTC is allowed

only for tax years consisting of 12 months and is thereby distinguishable from the

EITC. The trustee notes that the CTC statute and the EITC statute contain exactly the

same language in that regard: “Except in the case of a taxable year closed by reason

of the death of the taxpayer, no credit shall be allowable under this section in the case

of a taxable year covering a period of less than 12 months.” 26 U.S.C. §§ 24(f) and

32(e). In Schwarz, part of the opinion’s focus was on the distinction that permits the

EITC to be apportioned throughout the year so the taxpayer receives advances on the

credit in his or her paycheck, while the CTC has no such provision. The trustee here

argues that is a distinction without a difference, pursuant to Williamson v. Jones (In

re Montgomery), 224 F.3d 1193, 1194-95 (10th Cir. 2000). Montgomery held “In

light of the consistent authority holding that section 541 applies to contingent

interests, the fact that a debtor's interest in an EIC is not finalized until the end of the

tax year is not an impediment to its inclusion in the bankruptcy estate.” 224 F.3d at

1195 (citing Barowsky v. Serelson (In re Barowsky), 946 F.2d 1516, 1518-19 (10th

Cir. 1991) and Potter v. Drewes (In re Potter), 228 B.R. 422, 423-24 (B.A.P. 8th Cir.

1999)).

All of the statutory differences between the EITC and the CTC noted above are

significant for tax purposes, but not for bankruptcy purposes. From a bankruptcy point

of view, both types of credits are contingent interests on the petition date. For that

reason, and despite the distinctions between them, they become property of the

bankruptcy estate. 

In light of our detailed review of the statutory differences relied on in Schwarz,

we find that the differences are not significant for purposes of the question before the

court, i.e., what constitutes property of the estate. To that extent, we find that Schwarz

was not properly decided.

The orders of the bankruptcy court are hereby affirmed.