Opinion ID: 810700
Heading Depth: 2
Heading Rank: 1

Heading: Relevant Bankruptcy and Tax Code provisions

Text: Filing a petition for bankruptcy creates a bankruptcy estate by operation of law. See 11 U.S.C. § 541(a). The estate comprises “property,” broadly defined to include “all legal or equitable interests of the debtor in property as of the commencement of the case.” Id. § 541(a)(1). An income tax refund is included in this expansive definition of “property.” See Kokoszka v. Belford, 417 U.S. 642, 648 (1974); In re Barowsky, 946 F.2d 1516, 1517 (10th Cir. 1991). In a Chapter 7 bankruptcy, a debtor’s property is liquidated and the proceeds distributed to creditors. See United States v. Edwards, 595 F.3d 1004, 1009 n.1 (9th Cir. 2010). But a Chapter 7 bankruptcy debtor may claim certain property as exempt from liquidation and sale. See 11 U.S.C. § 522(b)(2), (d). The Bankruptcy Code provides default rules defining exempt property, but states may opt out of these default rules and create their own. See id. § 522(b)(2). Colorado has taken this route and codified its own exempt property rules. See Colo. Rev. Stat. § 13-54-107. The relevant Colorado statute exempts a wide range of personal property, including, as pertinent to this appeal, “[t]he full amount of any federal or state income tax refund attributed to an earned income tax credit or a child tax credit.” Id. § 13-54-102(1)(o) (hereinafter “§ 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. See 26 U.S.C. § 24(a). The CTC is claimed in the section of the Internal Revenue Service Form 1040 (“Form 1040”) 3 devoted to “Tax and Credits.”1 As pertinent to this case, the Internal Revenue Code distinguishes between “nonrefundable credits,” codified at 26 U.S.C. §§ 21-26 (also called “Subpart A”) and “refundable credits,” codified at 26 U.S.C. §§ 31-37 (also called “Subpart C”). The CTC is a “nonrefundable credit” codified in Subpart A. See 26 U.S.C. § 24. “Nonrefundable” means it can only reduce tax liability to the extent that tax liability exists. See id. §§ 24(b)(3), 26(a). Thus, 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. In this regard, the CTC is unlike the “refundable” tax credits codified in Subpart C, for example the earned income tax credit, which are treated as tax payments by the taxpayer and can thus result in a tax refund to the extent that they exceed tax liability. See id. § 32 (governing the earned income tax credit); id. § 6401(b)(1) (treating excess credits under Subpart C as “overpayments”). For certain taxpayers with earned income, however, a portion of the $1,000 CTC that exceeds actual tax liability is refundable. See id. § 24(d)(1) (treating a portion of the CTC, in some cases, as if it were a refundable Subpart C credit). The refundable component is called the “additional child tax credit” (“Additional CTC”) and it is claimed in the section of the Form 1040 devoted to “Payments.”2 The actual calculations that go into determining eligibility for, and the amount of, the Additional CTC are complex and 1 For tax year 2009, the CTC was claimed on line 51 of the Form 1040. 2 For tax year 2009, the Additional CTC was claimed on line 65 of the Form 1040. 4 beyond the scope of this appeal. For present purposes, it is enough to observe that in some cases, for certain taxpayers, the CTC has both a “nonrefundable” and a “refundable” component. Thus, if a taxpayer in the example above 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.