Source: http://kirschenbaumesq.com/article/in-re-james-spina-debtor-case-no-8-09-71298-ast-chapter-7-united-states-bankruptcy-court-for-the-eastern-district-of-new-york416-br-92-2009-bankr-lexis-3048-bankr-l-rep-cchp81600-104-aftr2d-ria-6574
Timestamp: 2019-04-18 20:56:19+00:00

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Reference in effect in the Eastern District of New York.
inter alia, his Schedules and Statement of Financial Affairs ("SOFA").
prior to the Petition Date.
resolved on submissions, without an evidentiary hearing.
account with Capital One Bank. See attached statement.
and my wife being the homemaker.
The Trustee did not file additional briefing or submissions.
of the refund, less the Debtor's $ 2,500.00 exempt portion.
and withholding payments made during prepetition years." Carlson v.
issues arising under Â§ 541(a)(2)(A).
withholding rule; the income rule; and the 50/50 Rule referenced above.
re Kleinfeldt, 287 B.R. at 293.
percentage of the earnings of the spouses.
Districts of New York. See, e.g., In re Marciano, 372 B.R. 211 (Bankr.
history of financial management' suggests separate financial affairs." Id.
household expenses or educational expenses for their children).
the refund should be divided equally).
of the union. N.Y. Dom. REL. LAW Â§ 236 (McKinney 2009); see also Musso v.
Ostashko, 468 F.3d 99, 102 (2d. Cir. 2006); Marciano, 372 B.R. at 215.
the other." Marciano, 372 B.R. at 216 (quoting Barrow, 306 B.R. at 31).
pursuant to 11 U.S.C. Â§ 541." Marciano, 372 B.R. at 216.
benefit of any tax refund.
often consider the innocent spouse exception. See, e.g., Nihiser v.
Clarke-Lewis v. C.I.R., T.C. Summ. Op. 2008-14, 2008 WL 360715 (Tax Ct.
taxes she paid as a claim against the debtor's estate. Id. at 41-42.
opportunity to submit any further submissions on whether the Debtor or Ms.
Richard F. Artura, Esq., Phillips, Weiner, Artura & Cox, Lindenhurst, New York.
Kenneth Kirschenbaum, Esq., Kirschenbaum & Kirschenbaum, Garden City, New York.
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.
This Court has jurisdiction over this core proceeding pursuant to 28 U.S.C.Â§Â§ 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.
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. LAWÂ§ 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.
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.
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.
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.
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.
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 Â§ 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. Â§ 541." Marciano, 372 B.R. at 216.
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.
26 U.S.C. Â§ 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.
(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.
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).
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.
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 Â§ 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 Â§ 654(McKinney 1999)(making provisions of IRC Â§ 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. Â§Â§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 Â§ 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.
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.

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