Opinion ID: 163850
Heading Depth: 3
Heading Rank: 3

Heading: Hiding Income Through Excessive Tax Withholding

Text: 32 As an important matter of public policy, the BAP in this case also pointed out that adopting the Midkiffs' proposed rule would allow debtors to manipulate their tax returns to hide income. That is, by withholding excessive amounts of money from their paychecks in the final year of a bankruptcy plan and then receiving the excess as a tax refund after the plan is discharged, unscrupulous debtors could effectively cheat their creditors. Midkiff, 271 B.R. at 388. 33 Indeed, the Trustee here asserts that the Midkiffs were engaged in just that kind of chicanery: They requested a payoff amount from the Trustee in early March 2001; the Trustee sent a plan payoff letter dated March 6, 2001; the Trustee received the check for full prepayment six days later; and two days after that, on March 14, the Midkiffs signed and mailed their 2000 tax return to the IRS. This, the Trustee argues, strongly suggests that the Midkiffs were trying to close the plan before the 2000 tax refund was received, thus allowing them to keep the money. 34 While the timing of the Midkiffs' actions does offer grounds for suspicion, we need not express an opinion on the Midkiffs' motives in this case. Whether the Midkiffs were carrying out a nefarious plan or were entirely oblivious to the import of their actions, the Bankruptcy Court's response was appropriate. The rule that we adopt, moreover, will prevent future ill-motivated debtors from engaging in such a scheme. Even if that is not what the Midkiffs intended to do here, therefore, our decision today sets the most appropriate rule going forward. Where equity, efficiency, and the law all point in the same direction, we are comfortable in following that path. 35