11th Circuit concludes Bankruptcy Debtor’s Tax Refund is Exempt as T...

In a recent opinion (In re Uttermohlen), the Eleventh Circuit Court of Appeals ruled that a bankruptcy debtor’s tax refund can be claimed as exempt as “tenants by the entireties” property if the debtor’s spouse does not also file bankruptcy and if they have no joint unsecured debt.

On his Bankruptcy Schedule C, Mr. Uttermohlen listed as exempt his 2010 Tax Refund, in an amount to be determined, under Florida law. He later amended his Schedule C to claim that the amount was $10,668.00, and by definition was exempt as tenancy-by-the-entireties property (known as TBE exemption) under 11 U.S.C. § 522(b)(3)(B), as well as Florida law.

The Chapter 7 Bankruptcy Trustee objected to the claimed exemption on three grounds: (1) that the refunded tax contributions solely related to Uttermohlen’s income, business income, and losses; (2) that the non-filing spouse does not work outside the home; and, (3) that the 2010 Tax Refund is not tenancy-by-the-entireties property and should be apportioned according to each spouse’s income contribution.

The bankruptcy judge ruled in the debtor’s favor, finding that the tax refund was properly claimed as exempt using the TBE exemption.  The Chapter 7 trustee appealed to the District Court.  The District Court for the Middle District of Florida upheld the bankruptcy judge’s ruling, and the trustee appealed to the Eleventh Circuit Court of Appeals.  The judge’s in the 11th Circuit said:

In a well-reasoned, thorough opinion, the district court affirmed the ruling of the bankruptcy court. We have reviewed the record in this appeal, the briefs, and the arguments of counsel. Finding no error, we affirm the judgment of the district court.

So, in order to understand the reasoning of the 11th Circuit, we must discuss the decision of the District Court.

The District Court discussed the six characteristics of property held TBE:

1. Unity of Possession – Joint ownership and control of the property
2. Unity of Interest – The interests in the property must be identical
3. Unity of Title – The interests must have originated in the same instrument
4. Unity of Time – The interests must have been created simultaneously
5. Right of Survivorship – When one spouse dies, the surviving spouse becomes the sole owner of the property
6. Unity of Marriage – The parties must be married to one another at the time of creating the interests

In 2001, the Supreme Court of Florida held that Florida Law presumes property owned by a married couple is TBE absent some express intent to the contrary.  Beal Bank SSB v. Almand & Assoc., 780 So. 2d 45 (Fla 2001).  In other words, there is a rebuttable presumption, but the burden is upon the party seeking to disprove TBE.

The Chapter 7 trustee first argued that Mr. and Mrs. Uttermohlen’s tax refund lacked #2 – Unity of Interest – because of an older case that divided the spouses’ interests in a joint refund between then based upon each spouse’s tax witholdings.  The District court rejected that argument because the case cited by the trustee predates Beal Bank and because it was factually different than Uttermohlen’s case.

The District Court did point out one very narrow but important exception to TBE exemptions.  The 11th Circuit decision in In re Sinnreich, 391 F. 3d 1295 (11th Cir. 2004), identified a “unique power” held by the Internal Revenue Service (don’t cha know!) to attach a lien to TBE property.  Other than the IRS, nobody can defeat the Unity of Interest created by TBE!

Next, the Chapter 7 trustee argued that the refund lacked #s 1, 3 and 4 – Unity of Possession, Time and Title.  Essentially, the trustee’s position was that each spouse would pay to the IRS, as tax withholdings, different amounts at different times from different sources throughout the year.  It is only the joint tax return that converts these various funds into one “account.”  Therefore, a refund would not become eligible for TBE protection until the tax return is filed.  Since the Uttermohlens filed their taxes AFTER the bankruptcy petition was filed, there was no TBE exemption at the time of filing.

The District Court dismissed the trustee’s argument, holding that “the IRS’s treatment of tax payments cannot be used to defeat the presumption that the resulting refund is held TBE.”  The court pointed out that the reason for a tax refund may occur prior to filing the bankruptcy, concluding

Thus, a debtor possesses “an existing interest [in the refund] at the time of filing even though his enjoyment of that interest was postponed.” [cite omitted.]  It is under this very theory that a tax refund is included in the bankruptcy estate.

So, as long as (1) only one spouse files bankruptcy, (2) they have no joint debt and (3) they file a joint tax return, the tax refund is exempt in the 11th Circuit (Southeastern United States) as TBE.

In re Uttermohlens is an unreported opinion, but you can find it on the Eleventh Circuit Court of Appeals’ website.   Here is the District Court’s opinion.