JAMES P. SMITH, Chief Judge.
Before the Court are cross-motions for summary judgment on the trustee's motion to compel turnover of certain tax credits and refunds. The material facts are not in dispute. The Court, having considered the record and the applicable law, now publishes this memorandum opinion.
"A motion for summary judgment should be granted when `the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.' Fed.R.Civ.P. 56(c) ... Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); see also Morisky v. Broward County, 80 F.3d 445, 447 (11th Cir.1996). On a summary judgment motion, the record and all reasonable inferences that can be drawn from it must be viewed in the light most favorable to the non-moving party. See Cast Steel [Products, Inc. v. Admiral Insurance Co.], 348 F.3d [1298] at 1301 [(11th Cir.2003)]." Midrash Sephardi, Inc. v. Town of Surfside, 366 F.3d 1214, 1223 (11th Cir.2004).
Although Rule 56 was completely rewritten in 2010, no change was made to the summary judgment standard itself or to the burdens imposed on movants and opponents. 10A Wright, Miller & Kane, Federal Practice and Procedure: Civil 3d, Text of Rule 56, n. 6 (Supp. 2014).
["The] filing of cross-motions [for summary judgment] does not establish that there is no material fact in issue and that a trial is therefore unnecessary. The Court must still make an independent evaluation as to the merits of each party's motion." Donovan v. District Lodge No. 100, International Assoc. of Machinists and Aerospace Workers, AFL-CIO, 666 F.2d 883, 886 (5th Cir. Unit B, 1982).
"The court must rule on each party's motion on an individual and separate basis, determining, for each side, whether a judgment may be entered in accordance with the Rule 56 standard. Both motions must be denied if the court finds that there is a genuine issue of material fact." 10A Wright, Miller, & Kane, Federal Practice and Procedure: Civil 3d, § 2720, pp. 335-36 (1998).
Debtor is a physical therapist who owns a business known as Rehab Specialists of South Georgia, Inc. ("Rehab Specialists"). Debtor's tax returns show that she receives income from her salary, investments, rental real estate, and S corporations.
For 2012, Debtor was entitled to a federal tax refund of $63,009.
Debtor filed her Chapter 7 case on June 27, 2013. Debtor disclosed the estimated tax payments that she had made on June 24 and 25, 2013 on her Statement of Financial Affairs. Debtor did not list her 2012 state refund, her 2013 estimated tax credits or her 2013 potential federal and state refunds as assets on her Schedule B.
On September 14, 2013, Debtor made a $4,000 payment on her 2013 federal estimated taxes. On April 15, 2014, Debtor filed her 2013 federal and state tax returns.
Salary $90,647 Income from rental real estate and S corporations $66,193 Adjusted gross income $147,653 Tax owed $25,438 Payments Withholding $12,502 Estimated Tax $40,7005 _____________ $53,202 Refund $27,764
Debtor's 2013 state return shows, in part, the following entries:
Tax owed $6,770 Payments Withholding $5,040
Estimated Tax $8,600 6 ____________ $13,640 Refund $6,870
Debtor has received her 2013 federal and state tax refunds. The refunds are currently held in her attorney's trust account pending further order of the Court.
In her amended motion for turnover, the trustee demands, pursuant to 11 U.S.C. § 542(a), that Debtor turn over the federal and state tax credits arising from the 2013 estimated tax payments that Debtor made before filing her Chapter 7 case. The federal prepetition tax credits totaled $36,700 and the state tax credits totaled $6,600. In her motion for summary judgment, the trustee alternatively asks for turnover of a portion of the 2013 tax refunds. Debtor is willing to pay over a portion of the 2013 refunds, but disagrees with the method of calculating the proper amount as proposed by the trustee.
The trustee contends that the tax credits are property of the estate, within the "control of the debtor" for purposes of 11 U.S.C. § 542(a), and are therefore subject to turnover. Debtor disputes that the tax credits are property of the estate. Alternatively, Debtor argues that the tax credits are not within her "control" because, pursuant to Rev. Rul. 54-149, 1954-1 CB 159-60,
Neither the Eleventh Circuit Court of Appeals nor any district court or bankruptcy court within the Eleventh Circuit has published a decision on this issue. The Ninth Circuit and Tenth Circuit have each published decisions, but reached opposite conclusions.
The trustee relies on the Ninth Circuit case of Nichols v. Birdsell, 491 F.3d 987 (9th Cir.2007). There, the debtors elected to have their 2001 tax refund applied to their 2002 tax liability. Sixteen days later, the debtors filed bankruptcy. The trustee sought turnover of the tax credits. The debtors argued that their election to apply the prior year's refund to the next year's tax liability was an irrevocable election under 26 U.S.C. § 6513(d). The Ninth Circuit held that 11 U.S.C. § 541(a) defines property of the estate as "all legal or equitable interests of the debtor in property as of the commencement of the case." The court further noted that:
Id. at 990. Accordingly, the court held that the tax credits were property of the estate and ordered turnover.
Id. at 1156.
Having found that the estate's interest in the tax credits was so limited, the court then turned to whether turnover was appropriate. The court held:
Id. at 1157. However, the court noted that the circumstances may have changed due to the passage of time.
Id. at 1158.
With respect to the Nichols case, the court held:
Id. at 1158-59.
A similar result was reached in the case of Kuntz v. United States (In re Halle), 132 B.R. 186 (Bankr.D.Colo.1991). In that case, six weeks before filing bankruptcy, the debtor made estimated tax payments to the IRS of $73,500 toward his 1987 tax liability. Subsequently, the IRS accessed debtor his 1987 tax liability, applied the prepetition estimated payments to the liability and refunded a small amount to the debtor. The trustee filed suit against the IRS seeking, in part, turnover of the estimated payments.
The bankruptcy court noted the limited interest of the debtor in the estimated payments pursuant to Rev. Rul. 54-149, 1954-1 CB 159-60. The court held:
Id. at 189. Accordingly, the court held that the trustee had no right to recover the estimated payments from the IRS.
The Eleventh Circuit has recognized that the trustee succeeds only to the title and rights in the property that the debtor possessed prepetition. Raborn v. Menotte (In re Raborn), 470 F.3d 1319, 1323 (11th Cir.2006). The only interest which Debtor had in the prepetition estimated payments was the right to a refund after filing her tax return. The trustee succeeds to no greater right. Accordingly, this Court agrees with the reasoning of the Tenth Circuit in Graves and holds that the trustee is not entitled to turnover of the prepetition tax payments.
The trustee contends, and Debtor concedes, that the prepetition portion of the tax refund which Debtor received after filing the petition is property of the estate. Doan v. Hudgins (In re Doan), 672 F.2d 831, 833 (11th Cir.1982). However, the parties disagree as to how to calculate the portion of the refund attributable to the prepetition period.
The trustee argues:
Trustee's Brief in Support of Motion for Summary Judgment, p. 8, (Docket No. 96). The trustee makes a similar argument with respect to the state refund.
Debtor on the other hand contends that the refunds should be prorated to the date of filing based on the number of calendar days before and after the petition date. Debtor filed her petition on June 27, 2013, the 177th day of the year. Therefore, Debtor argues that the trustee is only entitled to $13,463.64 of the federal tax return (177/365 × $27,764 = $13,463.64).
Due to the timing and amounts of the prepetition estimated payments, there is some logic to the methodology proposed by the trustee. However, the difficulty this Court has with adopting that methodology is that it does not take into account other factors which determine the amount of a debtor's refund.
The amount of a tax refund is a function of a number of components, including the amount of income, the amount of tax payments, and a taxpayer's deductions and credits. Each of these components may be earned or accrue at different times during a tax year. For instance, some deductions may accrue solely prepetition or solely postpetition. Others may accrue evenly throughout the tax year. Thus, whether a refund relates to prepetition or postpetition earnings will not only be based on the amount of each component, but on the timing over which each component is earned or accrued.
In this case, the evidence introduced by the trustee includes Debtor's 2013 state and federal tax returns. It is admitted her salary income accrued evenly throughout the year. However, although the tax returns show the amount of income from other sources (investments, rents, etc.), tax credits and deductions, the Court has no evidence as to the timing over which these amounts were earned or accrued. Accordingly, there is no way of determining whether the refunds truly relate to prepetition or postpetition earnings.
The court in the case of In re Trickett, 391 B.R. 657 (Bankr.D.Mass.2008) recognized this problem in holding:
Id. at 661 (emphasis in the original) (footnotes and citations omitted).
The Court recognizes that there may be instances in which the pro rata by days method is not appropriate. For instance, if a debtor prepaid one hundred percent of her estimated tax liability on the first day of the tax year and immediately thereafter filed bankruptcy, before earning any income, the pro rata by days method would not be appropriate. There may be other exceptional cases requiring a different result. However, this is not such a case. Thus, except in such exceptional cases, the Court adopts the pro rata by days method of allocating the tax refund. Accordingly, the trustee is entitled to recover from Debtor $13,463.64 of the 2013 federal tax return and $3,331.48 of the 2013 Georgia tax return.
For the reasons stated herein, the trustee's motion for summary judgment with respect to the prepetition tax credits is denied. The trustee's motion for summary judgment with respect to the tax refunds is granted in part and denied in part. Finally, the Debtor's motion for summary judgment is granted. A separate order will be entered consistent with this memorandum opinion.
