            United States Bankruptcy Appellate Panel
                        FOR THE EIGHTH CIRCUIT


                                No. 05-6034WM


In re:                                *
Matthew A. and Angela V. Law,         *
                                      *
      Debtors.                        *
                                      *         Appeal from the United States
Matthew A. and Angela V. Law,         *         Bankruptcy Court for the
                                      *         Western District of Missouri
      Debtors - Appellants.           *
                                      *
            v.                        *
                                      *
David C. Stover,                      *
                                      *
      Trustee - Appellee.             *


                                No. 05-6037WM


In re:                                *
Tammy Kathleen Brouse,                *
                                      *
      Debtor.                         *
                                      *         Appeal from the United States
Tammy Kathleen Brouse,                *         Bankruptcy Court for the
                                      *         Western District of Missouri
      Debtor - Appellant.             *
                                      *
            v.                        *
                                      *
David C. Stover,                      *
                                      *
      Trustee - Appellee.             *
                           Submitted: December 20, 2005
                              Filed: January 26, 2006



Before SCHERMER, MAHONEY, and McDONALD, Bankruptcy Judges.


MAHONEY, Bankruptcy Judge.

       This is an appeal from orders of the bankruptcy court1 entered on June 27, 2005,
and June 29, 2005, in each of these cases sustaining the objection of David C. Stover,
Chapter 7 Trustee, to the debtors’ claim of exemption in the portions of their federal
tax refunds attributable to the federal child tax credit. For the reasons stated below, we
affirm.

                                I. Standard of Review

       The court's factual findings are reviewed for clear error and its legal conclusions
are reviewed de novo. Apex Oil Co. v. Sparks (In re Apex Oil Co.), 406 F.3d 538, 541
(8th Cir. 2005). The issue of what constitutes property of the bankruptcy estate is a
question of law. Nelson v. Ramette (In re Nelson), 322 F.3d 541, 544 (8th Cir. 2003);
Drewes v. Vote (In re Vote), 276 F.3d 1024, 1026 (8th Cir. 2002).

     An appellate court may affirm on any basis supported by the record, even if that
ground was not considered by the trial court. Rodgers v. U.S. Bank, 417 F.3d 845, 853


      1
       The opinion and order in the Law case were entered by the Honorable Jerry W.
Venters, Chief Judge of the United States Bankruptcy Court for the Western District
of Missouri.
      The order in the Brouse case was entered by the Honorable Arthur B.
Federman, United States Bankruptcy Judge for the Western District of Missouri.

                                            2
n.6 (8th Cir. 2005); Power Equip. Co. v. Case Credit Corp. (In re Power Equip. Co.),
309 B.R. 552, 559 (B.A.P. 8th Cir. 2004).

                                   II. Background

        The Laws and Ms. Brouse filed Chapter 7 petitions on October 25, 2004. After
filing their 2004 income tax returns, they filed amended bankruptcy schedules B and
C to disclose their income tax refunds and to allocate the bankruptcy estate’s share of
those refunds. Under Missouri law, tax refunds arising from an overpayment of taxes
or from the federal earned income credit are property of the estate and are not
considered exempt. Wallerstedt v. Sosne (In re Wallerstedt), 930 F.2d 630 (8th Cir.
1991); In re Demars, 279 B.R. 548 (Bankr. W.D. Mo. 2002); In re Goertz, 202 B.R.
614 (Bankr. W.D. Mo. 1996). The debtors here each take the position that the portion
of their federal tax refunds attributable to the child tax credit is not property of the
estate, and they subtracted that amount from the refunds before calculating the amount
to be turned over to the bankruptcy trustee.

       In each case, the trustee objected, asserting that the amount of the refund
resulting from the child tax credit is indeed property of the bankruptcy estate. A
hearing was held in each case, and a memorandum opinion and order were entered in
the Law case holding that the refundable portion of the child tax credit is property of
the bankruptcy estate. Two days later, an order was entered in the Brouse case
concurring in that holding and sustaining the trustee’s objection. The debtors then
filed these appeals, which were argued together.




                                           3
                                    III. Discussion

       The bankruptcy estate that comes into effect upon the filing of a bankruptcy
petition consists primarily of “all legal or equitable interests of the debtor in property
as of the commencement of the case.” 11 U.S.C. § 541(a)(1). Property of the estate
includes contingent interests in future payments. Potter v. Drewes (In re Potter), 228
B.R. 422 (B.A.P. 8th Cir. 1999); In re Yonikus, 996 F.2d 866 (7th Cir.1993). On that
basis, tax refunds are considered property of the bankruptcy estate. See, e.g.,
Wallerstedt, 930 F.2d 630; Barowsky v. Serelson (In re Barowsky), 946 F.2d 1516
(10th Cir. 1991); Doan v. Hudgins (In re Doan), 672 F.2d 831 (11th Cir. 1982).

        The child tax credit (“CTC”) was enacted in 1997 to give parents of dependent
children a financial break. It allows parents with an adjusted gross income below a
threshold amount to claim a $1,000 tax credit for each child under the age of 17. The
credit is reduced to zero on a graduating scale for families whose income is above the
threshold amount. The credit is refundable to the taxpayer to the extent it exceeds tax
liability. See 26 U.S.C. § 24.

       The trial court’s decision that the refundable amount of the CTC is property of
the estate is based on Sorenson v. Secretary of the Treasury of the United States, 475
U.S. 851 (1986), in which the Supreme Court characterized an excess earned-income
tax credit (“EITC”) as an overpayment to be refunded, just like a tax refund. Because
the bankruptcy court usually treats tax refunds as property of the bankruptcy estate
pursuant to Wallerstedt, 930 F.2d 630, it extended the Sorenson rationale to CTCs on
the basis that refundability of the tax credit is the proper focus of the analysis.

       Sorenson was not a bankruptcy case. Its context was a challenge to a provision
in the Social Security Act which directed the Secretary of the Treasury to intercept tax
refunds payable to people who are behind on their child-support obligations. The



                                            4
plaintiff argued that EITCs are different than normal tax refunds and should be treated
differently by being excluded from enforcement of the interception law.

        The issue in Sorenson was the narrow question of how two procedural
mechanisms — the EITC delivery system and the tax-intercept system — intersected.
In its decision, the Supreme Court focused on sections 6401 and 6402 of the Internal
Revenue Code, where EITCs which exceed a person’s tax liability are defined as
overpayments and overpayments are to be disbursed via income tax refunds, and
stated that an overpayment arising from an excess EITC should be treated the same
as an overpayment arising in any other manner. Sorenson, 475 U.S. at 859-60. After
discussing both statutory construction and policy reasons for its decision, the Court
affirmed the decision that EITCs are subject to intercept.

      The debtors rely on the case of In re Schwarz, 314 B.R. 433 (Bankr. D. Neb.
2004), which held that CTCs are not property of the bankruptcy estate because they
are distinguishable from EITCs. The primary distinction noted is the dissimilar
treatment of the two types of credits by the Internal Revenue Code.

       Only four cases other than Schwarz — all decided prior to Schwarz — have
discussed the CTC in a bankruptcy context. Those cases are In re Dever, 250 B.R. 701
(Bankr. D. Idaho 2000); In re Steinmetz, 261 B.R. 32 (Bankr. D. Idaho 2001); In re
Beltz, 263 B.R. 525 (Bankr. W.D. Ky. 2001); and In re Koch, 299 B.R. 523 (Bankr.
C.D. Ill. 2003). They approached the question from the perspective of whether the
CTC is exemptible as a public assistance benefit, and assumed, before even reaching
the question of exemption, that the tax credits are property of the bankruptcy estate.




                                          5
      These cases all distinguish the legislative policies behind the EITC and the
CTC. The two laws were enacted in different decades for different reasons2. They
were codified in different parts of the Internal Revenue Code3. This is significant
because the tax code treats them differently as a result. In 26 U.S.C. § 6401, which
defines amounts treated as overpayments, certain excess credits are to be considered
overpayments. Specifically,

      If the amount allowable as credits under subpart C of part IV of
      subchapter A of chapter 1 (relating to refundable credits) exceeds the tax
      imposed by subtitle A (reduced by the credits allowable under subparts
      A, B, D, G, and H of such part IV), the amount of such excess shall be
      considered an overpayment.

26 U.S.C. § 6401(b)(1).

The refundable credits of subpart C include the EITC. As noted in footnote 2, the CTC
is found in subpart A. By the terms of § 6401, excess CTCs are not considered tax
overpayments. This in itself removes the CTC from the realm of Sorenson and
indicates that it requires analysis from a different perspective.




      2
        The EITC’s purpose was to provide economic relief to low-income working
people, Sorenson, 475 U.S. at 864, while the CTC’s was to reduce the tax burden on
working parents and promote family values. H.R. Rep. 105-148, at 310 (1997); S.
Rep. 105-33, at 3 (1997).
      3
       Chapter 1 of subtitle A of the Internal Revenue Code (26 U.S.C.) addresses
normal taxes and surtaxes; subchapter A deals with determination of tax liability; part
IV covers credits against tax; and subpart C encompasses refundable credits. That is
where the EITC is found. In contrast, the CTC is classified in subpart A of part IV,
under nonrefundable personal credits. It was later amended to include refundability
for excess credits, so its codification as a “nonrefundable credit” is not entirely
accurate.

                                          6
       The debtor advances an argument, following Schwarz, that the CTC is allowed
only for tax years consisting of 12 months and is thereby distinguishable from the
EITC. The trustee notes that the CTC statute and the EITC statute contain exactly the
same language in that regard: “Except in the case of a taxable year closed by reason
of the death of the taxpayer, no credit shall be allowable under this section in the case
of a taxable year covering a period of less than 12 months.” 26 U.S.C. §§ 24(f) and
32(e). In Schwarz, part of the opinion’s focus was on the distinction that permits the
EITC to be apportioned throughout the year so the taxpayer receives advances on the
credit in his or her paycheck, while the CTC has no such provision. The trustee here
argues that is a distinction without a difference, pursuant to Williamson v. Jones (In
re Montgomery), 224 F.3d 1193, 1194-95 (10th Cir. 2000). Montgomery held “In
light of the consistent authority holding that section 541 applies to contingent
interests, the fact that a debtor's interest in an EIC is not finalized until the end of the
tax year is not an impediment to its inclusion in the bankruptcy estate.” 224 F.3d at
1195 (citing Barowsky v. Serelson (In re Barowsky), 946 F.2d 1516, 1518-19 (10th
Cir. 1991) and Potter v. Drewes (In re Potter), 228 B.R. 422, 423-24 (B.A.P. 8th Cir.
1999)).

       All of the statutory differences between the EITC and the CTC noted above are
significant for tax purposes, but not for bankruptcy purposes. From a bankruptcy point
of view, both types of credits are contingent interests on the petition date. For that
reason, and despite the distinctions between them, they become property of the
bankruptcy estate.

       In light of our detailed review of the statutory differences relied on in Schwarz,
we find that the differences are not significant for purposes of the question before the
court, i.e., what constitutes property of the estate. To that extent, we find that Schwarz
was not properly decided.

       The orders of the bankruptcy court are hereby affirmed.




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