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October 31, 2008

10th Circuit BAP Rules on Turnover of Tax Refunds

In re Graves,  --- B.R.  ---, 2008 WL ----------- (10th Cir. BAP, October, 2008)

Issue:   Is turnover the proper remedy where the debtor applies a tax refund to future taxes?                   

Holding:    No. 

The chapter 7 debtors filed their 2006 tax return in July 2007.  They were entitled to a refund of about $3,000.  They elected on the return to have the refund applied to their 2007 tax obligations, not yet determined.  They filed chapter 7 on September 20, 2007.  The trustee filed a motion demanding turnover of the refund.  The bankruptcy court denied the motion. 

The BAP affirmed.  “This appeal exemplifies the concept that ‘you cannot get blood out of a turnip.’  The Trustee seeks to obtain from the Debtors that which they simply do not have: the amount they could have received from the IRS in 2007, but did not.”  “In 1948, the United States Supreme Court defined the pre- Bankruptcy Code turnover power, noting that ‘the primary condition of  [turnover] relief is possession of existing chattels or their proceeds capable of being surrendered by the person ordered to do so.’”  Citing Maggio v. Zeitz (In re Luma Camera Serv., Inc.), 333 U.S. 56, 64 (1948).    "Turnover is a remedy that is specifically limited by § 542 to ‘property that the trustee may use, sell, or lease,’ and is in the turnover target’s possession or control during the bankruptcy case.  A contingent reversionary interest in funds held by another is simply not something that is in the debtor’s possession that can be turned over to the trustee.”  “When the petition was filed in this case, the Debtors had no current right to possession of the pre-paid taxes.”

The court commented that it was not ruling on the propriety of the debtors' conduct in making this refund non-available.  It seems like it might result in a Section 727 complaint for transfering property with actual intent etc. 

October 31, 2008 in Other Circuit Briefs | Permalink

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