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Tax refund not exempt from estate

By: David Ziemer, [email protected]//November 4, 2010//

Tax refund not exempt from estate

By: David Ziemer, [email protected]//November 4, 2010//

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Before filing bankruptcy for a client, attorneys should inquire whether the client is expecting a tax refund. If so, it might be best to wait until after the client receives it before filing.

On Aug. 27, U.S. Bankruptcy Judge Thomas S. Utschig held that an expected refund is not a “depository account” that the debtor can claim as exempt from the estate.

Paul and Donna Lark filed for bankruptcy in January of this year. They chose to use the Wisconsin exemption statutes, because the equity in their home exceeded the amount that could be protected under 11 U.S.C. 522(d).

Among their assets were 2009 federal and state tax refunds they expected to receive. They claimed the refunds as exempt assets under sec. 815.18(3)(k), which lets debtors exempt up to $5,000 worth of “depository accounts.”

The Chapter 7 trustee objected, arguing that an expected tax refund is not a depository account, defined in the statute as “a certificate of deposit, demand, negotiated order of withdrawal, savings, share, time or like account maintained with a bank, credit union, insurance company, savings bank, savings and loan association, securities broker or dealer or like organization.”

Judge Utschig agreed with the trustee that if funds are not in the possession or under the control of the debtor on the filing date, the debtor cannot exempt the right to receive the funds as a “depository account.”

The Larks argued that the funds should be exempt, pursuant to the rule of statutory construction that Wisconsin’s exemption laws should be construed broadly.

The court acknowledged that rule, but found the statute unambiguously does not include anticipated tax refunds.

Judge Utschig wrote, “Notwithstanding the debtors’ suggestion that the legislature wished to allow Wisconsin citizens to shield certain amounts, the statute does not provide a blanket exemption of $5,000.00 from the claims of creditors regardless of where (or how) those funds are held. Instead, it offers a far narrower protection; namely, it protects debtors who opt to place their funds with a financial institution in something that resembles a bank account.”

The court added, “It is not the amount in question which is important for purposes of the exemption; it is that the money is held in a financial account which the debtor can access.”

Because the funds were not in such an account on the date the bankruptcy petition was filed, the court held they could not be exempt assets pursuant to sec. 815.18(3)(k).

David Ziemer can be reached at [email protected].

What the Court Held

Case: In re Lark, No. 10-10101-7

Issue: Can a tax refund be exempted from a bankruptcy estate as a “depository account”?

Holding: No. The money must be held in a financial account that the debtor can access.

Attorneys: For Debtors: Lucy A. Bjork, Menomonie; Trustee: Christopher M. Seelen, Randi L. Osberg, Eau Claire

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