Opinion ID: 445717
Heading Depth: 1
Heading Rank: 3

Heading: earned income credit withholding

Text: 10 As noted above, 42 U.S.C. Sec. 664(a) authorizes the Secretary of the Treasury to withhold refunds of federal taxes paid which are due to an obligated spouse. In addition, 26 U.S.C. Sec. 6402(c) provides that the amount of any overpayment to be refunded to the person making the overpayment shall be reduced by the amount of past-due child support. Rucker asserts that the earned income credit is neither a refund of federal taxes nor an overpayment within the meaning of these two statutory provisions, and thus is not subject to withholding in the intercept program. 11 The earned income credit is a benefit available to certain families with dependent children and with an earned family income of less than $10,000 per year. See 26 U.S.C. Sec. 43 (1982). The maximum credit allowed is $500. It is reduced proportionately as the adjusted gross family income increases above $6000, dropping to zero at $10,000. It was designed to provide relief to low income families who pay little or no income tax, and it was intended to provide an incentive for low income people to work rather than to receive federal assistance. See S.Rep. No. 94-36, 94th Cong., 1st Sess. 11 (1975), reprinted in 1975 U.S.Code Cong. & Ad.News 54, 63-64. While the credit benefits are distributed through the tax refund process, a recipient need not have owed or paid any taxes to be eligible. See Nelson, 731 F.2d at 109; In re Searles, 445 F.Supp. 749, 752-53 (D.Conn.1978). A refund of federal taxes is a repayment of money paid by a taxpayer in excess of that taxpayer's liability. Although the earned income credit is given effect through the income tax return, the credit is not a tax refund because eligibility for the credit is not contingent upon payment of any federal income tax. Id.; In re Hurles, 31 B.R. 179, 180 (Bankr.S.D.Ohio 1983). Section 664(a), which authorizes interception only of refunds of federal taxes paid, does not itself authorize interception of the earned income credit. 12 Defendants argue, however, that while section 664(a) may not authorize the withholding of earned income credits, such withholding is expressly authorized by section 6402(c) of the Internal Revenue Code because the earned income credit is an overpayment subject to interception. They point out that section 6401 of the Internal Revenue Code, 26 U.S.C. Sec. 6401, defines overpayment to include the excess of an earned income credit over tax liability, and that this excess exists even when there is no tax liability. 8 Rucker counters that because section 6402(c) only authorizes an offset against an overpayment to be refunded to the person making the overpayment, the earned income credit is not an overpayment that can be withheld under section 6402(c). 13 Courts that have faced this issue have reached conflicting results. Compare Nelson, 731 F.2d at 111-12 (the earned income credit is not subject to interception under 26 U.S.C. Sec. 6402(c)) with Coughlin, 584 F.Supp. at 706-07 (26 U.S.C. Sec. 6402(c) authorizes interception of the earned income credit), and Sorenson, 557 F.Supp. at 733-34 (W.D.Wash.1983) (same). For the reasons set forth below, we believe the Second Circuit's decision in Nelson is the better view. 14 As the Nelson court notes, the term overpayment, broadly defined in section 6401 but limited in section 6402 by the phrase to be refunded to the person making the overpayment, is ambiguous with regard to the earned income credit. Section 6401 is a general provision in the chapter on Abatements, Credits, and Refunds of the Internal Revenue Code, governing the tax refund process. See Nelson, 731 F.2d at 111. Section 6402(c) and section 664(a), on the other hand, were both enacted as part of the Omnibus Act, which established the tax intercept program. Id. Interpreting the term overpayment in section 6402(c) so as not to include the earned income credit results in consistency with section 664(a) which authorizes only withholding of federal tax refunds. Moreover, we believe that this interpretation furthers the congressional purpose in enacting the earned income credit. Reducing the amount of the earned income credit due to a low income working family would reduce the family members' incentive to work, and would frustrate the congressional goals of providing relief to low income families, encouraging work, reducing dependence on federal assistance, and stimulating the economy. See id. at 111-12; cf., In re Searles, 455 F.Supp. at 752-53 (discussing the adverse effects of including the credit in a bankrupt's property). 15 Defendants claim and the district court agreed, that the tax intercept program's goal of enforcing child support obligations should take priority over the policies underlying the earned income credit. See Rucker, 555 F.Supp. at 1053. We are not persuaded. The intercepted funds are not paid to support the obligated taxpayer's child but to reimburse a state for its support of that child in the past. The earned income credit, on the other hand, directly benefits the dependent children of the low income taxpayer. In the absence of evidence that Congress intended such a substantial cutback on the earned income credit program, we interpret the intercept legislation before us so as to avoid both conflict between the provisions of the Omnibus Act and a result clearly at odds with the goals of the earned income credit program. We hold that 26 U.S.C. Sec. 6402 and 42 U.S.C. Sec. 664 do not authorize the withholding of any portion of the earned income credit due an otherwise eligible recipient. 16 The judgment is reversed and remanded to the district court for further proceedings.