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Timestamp: 2019-05-19 17:08:38
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Matched Legal Cases: ['§ 13', '§ 13', '§ 24', '§ 13', '§ 13', '§ 13']

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Tenth Circuit: Nonrefundable Portion of Child Tax Credit is Not Exempt from Bankruptcy Under Colorado Law
October 25, 2012 By Heidi Ray Leave a Comment
The Tenth Circuit Court of Appeals issued its opinion in In re Borgman on Tuesday, October 23, 2012.
Appellees Vernon and Elyse Dunckley (“the Dunckleys”) and Appellee Richard Borgman (“Borgman”) (collectively, the “Debtors”) each filed for Chapter 7 bankruptcy in October 2009. The Debtors listed their prospective tax refunds, including child tax credit, as exempt property on their bankruptcy petitions, citing C.R. S. § 13-54-102(1)(o). The Dunckleys received a tax refund in the amount of $4,261. Borgman received a tax refund in the amount of $3,770.
In a Chapter 7 bankruptcy, a debtor’s property is liquidated and the proceeds distributed to creditors. But a debtor may claim certain property as exempt from liquidation and sale. Colorado has codified its own exempt property rules. The relevant Colorado statute exempts a wide range of personal property, including, the full amount of any federal or state income tax refund attributed to an earned income tax credit or a child tax credit. C.R.S. “§ 13-54-102(1)(o).
Under the Internal Revenue Code, a taxpayer with minor children may claim a child tax credit (“CTC”) of $1,000 for each qualifying child. The Internal Revenue Code distinguishes between “nonrefundable credits,” “refundable credits.” “Nonrefundable” means it can only reduce tax liability to the extent that tax liability exists. For example, if a taxpayer had $750 of total tax liability and one qualifying child, she could use $750 of the $1,000 CTC to reduce her tax liability to zero, but she would not be entitled to have the remaining $250 paid to her. For certain taxpayers with earned income, however, a portion of the $1,000 Credit that exceeds the tax liability is refundable. This component is called the additional child tax credit. If a taxpayer in this example qualified for the Additional CTC, not only would $750 of the nonrefundable CTC reduce her tax liability, to zero, but she could also receive some or all of the $250 difference as a refund.
The Dunckleys claimed an exemption of $2,000 from the bankruptcy estate, equivalent to the $2,000 nonrefundable CTC. Likewise, Borgman sought to exempt $818 from his bankruptcy estate, corresponding to the nonrefundable portion of the CTC on his tax return. The Trustee objected to each of these claims, on the grounds that the Debtors were claiming an exemption on a child tax credit which is related to a non-refundable portion credited against the amount of tax owed. The Bankruptcy Judge disallowed both exemptions and the Debtors appealed to the Bankruptcy Appellate Panel, which reversed. The Trustee appealed to the Tenth Circuit.
This appeal presents the question of whether the amount of a federal tax refund equivalent to the nonrefundable portion of the child tax credit of 26 U.S.C. § 24(a) is exempt from a bankruptcy debtor’s estate under Colorado Revised Statutes § 13-54-102(1)(o). That statute exempts from a bankruptcy estate the full amount of any federal or state income tax refund attributed to an earned income tax credit or a child tax credit.
The Tenth Circuit stated that it is axiomatic that a refund attributed to a child tax credit must first be a “refund,” and that the nonrefundable portion of the Child Tax Credit — i.e., the portion claimed in the “tax and credits” section of Form 1040—never gives rise to a “refund.” A reduction in tax liability, standing alone, will never result in a refund. Accordingly, the nonrefundable portion of the CTC is outside the scope of § 13-54-102(1)(o).
Further, the disputed refunds were not “attributed to” the Child Tax Credit. In light of the fact that a refund depends first upon a payment, it cannot be said that the refunds were “attributed to” the nonrefundable portion of the CTC. The Dunckleys’ refund was “attributed to” the fact that they had $8,447 in withholding, as against total tax liability of $4,186. Borgman’s refund was “attributed to” the fact that he had $1,328 in withholding, a $400 Making Work Pay credit, a $1,860 earned income tax credit, and a $182 Additional CTC, against total tax liability of zero.
In sum, the Tenth Circuit held that the nonrefundable portion of the child tax credit cannot give rise to a “refund,” and is not included in the full amount of a federal income tax refund attributed to a child tax credit under Colorado Revised Statutes § 13-54-102(1)(o). It is therefore not exempt from the bankruptcy estate, as the Bankruptcy Court correctly held.
The order of the Bankruptcy Appellate Panel is REVERSED and the orders of the Bankruptcy Court are REINSTATED disallowing the claimed exemptions.
Filed Under: Case Law Tagged With: 10th Circuit, bankruptcy law, collections, Internal Revenue Code, taxation law, Tenth Circuit