In the Chapter 7 bankruptcy case of Krahn, Joseph A. and Kerri K.; In re, the bankruptcy court sustained a bankruptcy trustee's ruling that the debtors turnover $3,952 from their federal income tax refund.
The details of the bankruptcy case:
The debtors filed for Chapter 7 relief on Aug. 29, 2008. Their 2008 federal tax return showed no tax liability, but $6,916 in refundable credits including earned income credits of $4,216, additional child tax credits of $1,632, and excess withholdings of $1,068. After an IRS adjustment, the debtors received $6,149 on Feb. 13, 2009. The debtors' 2008 state tax return showed a $232 tax liability, but refundable credits of $1,291 including earned income credits of $717, a food sales tax refund of $156, and excess withholdings of $418. The debtors received a refund of $684 from the state on July 9, 2009. Both refunds were turned over to the debtors' counsel pending the court's determination of how much belonged to the bankruptcy estate.
The bankruptcy trustee in this case determined which portion of the debtors' tax refund should go to the bankruptcy estate by dividing it into prepetition and postpetition portions, with the postpetition portion going to the bankruptcy estate. The debtors called the bankruptcy trustee's methods unfair because the birth of a child and an injury of the debtor-husband caused the amount of the EIC to increase. But the bankruptcy court ruled in favor of the trustee saying that dividing the refund in such a manner was appropriate. The bankruptcy court ruled that the trustee could recover $3,952 of the tax refund minus any portion that was part of the sales tax refund on food.