In re Farnsworth

558 B.R. 375

In re: Daren Robert Farnsworth and Michele Farnsworth, Debtors.

Bankruptcy Case No. 15-40724-JDP

United States Bankruptcy Court, D. Idaho.

Signed October 11, 2016

Ryan E. Farnsworth, Idaho Falls, Idaho, Attorney for Debtors.

R. Sam Hopkins, Pocatello, Idaho, Chapter 7 Trustee.

MEMORANDUM OF DECISION

Honorable Jim D. Pappas, United States Bankruptcy Judge

Introduction

In this chapter 7¹ case, the Court is asked to revisit an exemption ruling it made in 2001. In doing so, the Court determines that, based upon changes made to the Federal tax laws, a different result is now required.²

Facts

On July 23, 2015, Daren Robert Farnsworth and Michele Farnsworth (“Debtors”) filed a chapter 7 bankruptcy petition. Dkt. No. 1. When they filed their return for tax year 2015, Debtors were entitled to receive a Federal tax refund, $2,831 of which was attributable to an Earned Income Credit, and $4,000 of which was attributable to an Additional Child Tax Credit (“ACTC”). Stipulated Facts at ¶¶ 2-3, and Ex. A ( 2015 U.S. Individual Tax Return), Dkt. No. 36. On May 24, 2016, Debtors amended their bankruptcy schedules to include the 2015 federal and state tax refunds, and to claim the Earned Income Credit and the ACTC exempt under Idaho Code § 11-603(4). Dkt. No. 27.

Chapter 7 trustee R. Sam Hopkins (“Trustee”) objected to the exemption Debtors claimed relating to the $4,000 ACTC, relying upon case law from this Court. Dkt. No. 29.³ Debtors responded to the objection and the Court conducted a hearing on August 9, 2016. Dkt. Nos. 30, 38–39. At the conclusion of the hearing, the Court asked the parties to submit supplemental briefing, and they did so. Dkt. Nos. 44, 45. Trustee's objection was taken under advisement. This Memorandum resolves the issues raised by the objection.

Analysis and Disposition

A. The ACTC As Originally Enacted

In 1997, Congress created the Child Tax Credit (“CTC”) to “reduce the individual income tax burden of [families with dependent children, to] better recognize the financial responsibilities of raising dependent children, and [to] promote family values.” H.R. Rep. 105-148, at 310 (1997), 1997 U.S.C.C.A.N. 678, 704, codified at 26 U.S.C. § 24. With its enactment, parents whose income fell below a threshold could claim on their federal tax return a nonrefundable credit against their tax liability of $500 per qualifying child. Id . Originally, the CTC was only available to qualifying taxpayers with modified adjusted gross incomes of at least $10,000, and the benefit of the credit began to phase out when married taxpayers reached a modified adjusted gross income of $110,000. Id .

In the same legislation, a second credit was established, the ACTC. Under this law, taxpayers with three or more children could receive a partial refund of the credit once their tax liability was reduced to zero. Originally, the ACTC was limited to 10% of a taxpayer's “earned income” over $10,000. Id .

B. Steinmetz and Exemption of ACTC Refunds

In early 2001, this Court was asked to decide the same issue that is before the Court today: whether the ACTC is a “public assistance” benefit exemptible under Idaho Code § 11–603(4), which protects “[b]enefits the individual is entitled to receive under federal, state, or local public assistance legislation[.]” See In re Steinmetz , 261 B.R. 32 (Bankr. D. Idaho 2001). In its ruling, to decide whether the portion of the debtors' federal tax refund attributable to the ACTC was public assistance, the Court employed a three-part inquiry developed in prior case law. The Court asked:

[f]irst, what is the purpose and policy of the tax credit, as enunciated by the courts or established by legislative history and in particular is that policy one of “public assistance” as found in [In re Jones , 107 B.R. 751 (Bankr. D. Idaho 1989) ]. Second, what is the nature of the debtor/taxpayer's access to the credit, i.e., is it a refundable credit. Third, when and at what income levels is the credit phased down and/or eliminated.

In re Steinmetz , 261 B.R. at 33 (quoting In re Crampton , 249 B.R. 215, 217–18, (Bankr. D. Idaho 2000) ; see also, In re Dever , 250 B.R. 701, 704 (Bankr. D. Idaho 2000) ).

In Steinmetz, the Court first considered the purpose and policy underlying the ACTC. At the time of the statute's enactment, there was nothing in the available legislative history explaining the reasons why Congress established the ACTC. However, there were statements of Congressional intent provided for the CTC, created in the same legislation as ACTC. Congress's stated intent for the CTC was to reduce tax liability to reflect a family's reduced ability to pay taxes as family size increased, even for those families with significant annual income. In re Steinmetz , 261 B.R. at 34 (citing Dever , 250 B.R. at 705, quoting H.R. Rep. 105-148, at 309-10 (1997)). And since the refundable ACTC was available to taxpayers with significant incomes, the Court found in Steinmetz that the ACTC was not specifically intended to benefit only low income households. In re Steinmetz , 261 B.R. at 34. Because fairly affluent taxpayers were eligible for the ACTC, this factor weighed against permitting the exemption.

The Court concluded that the second consideration, focusing on the taxpayer's access to the credit, weighed in favor of the ACTC being exempt. Unlike the CTC, which is a nonrefundable credit, under the ACTC, a taxpayer is entitled to a payment of either the amount of the CTC, or that portion of it that is equal to the amount of taxes paid which exceed the earned income credit, whichever is less. In re Steinmetz , 261 B.R. at 34–35 (citing 26 U.S.C. § 24(d) ).

Because the ACTC is refundable, and therefore available to help families meet their daily needs, this factor suggested the credit should be exemptible.

The third factor considered in In re Steinmetz examined the income levels at which the amount of the credit was reduced or eliminated. In the original law, for married taxpayers filing a joint return, the ACTC began to phase out when their modified adjusted gross income reached $110,000. Id . at 29 (citing 26 U.S.C. § 24(b)(2)(A) ). This Court observed that this “high threshold employed by Congress before the additional child tax credit begins to phase out indicates this credit was meant to apply to large families at a variety of income levels, and that the credit was not targeted to assist only lower-income families.” Id .

Ultimately, this Court concluded that “[a]lthough the additional child tax credit may be refundable, the high income threshold adopted by Congress before the credit starts to phase out clearly indicates the credit was not intended as a form of public assistance legislation.” Id. at 30.

C. Amendments to the ACTC

Since its enactment, the ACTC has undergone important changes. It is these amendments, Debtors contend, that render this Court's holding in Steinmetz, which denied the exemption, worthy of reconsideration.

First of all, in 2001, the ACTC was made available to all taxpayers with qualifying children, rather than only to those with three or more children. Economic Growth and Tax Relief Reconciliation Act of 2001, Pub. L. No. 107-16, § 201, 115 Stat. 38, 45-47. That legislation⁴ also increased the refundable portion of the credit to 15% over the $10,000 “earned income” threshold beginning in 2005. Id . This increase was later accelerated to take effect in 2004. See Working Families Tax Relief Act of 2004, Pub. L. No. 108-311, §§ 101-02, 118 Stat. 1166, 1167-68.

In 2008, Congress reduced the threshold amount required for eligibility for the ACTC from $10,000 in earned income down to $8,500. Emergency Economic Stabilization—Energy Improvement and Extension—Tax Extenders and Alternative Minimum Tax Relief, Pub. L. No. 110–343, § 501, 122 Stat. 3765, 3876 (2008). The following year, Congress again reduced the minimum earned income threshold to $3,000 for the 2009 and 2010 tax years. American Recovery and Reinvestment Act of 2009, Pub. L. No. 111–5, § 1003, 123 Stat. 115, 313. The $3,000 minimum threshold was then extended for use in the 2011 and 2012 tax years, and later through 2017.⁵

The purpose behind these amendments to the ACTC was, at least in part, to benefit low-income families. As the Eighth Circuit observed in a recent decision concerning this issue:

Numerous senators recognized and commented on the benefits of the 2001 amendments for low-income taxpayers. One senator described the refundability change as “a key to helping children in low-income families.” 147 Cong. Rec. S5770-01 (statement of Sen. Boxer). Another defended the “new refundable per child tax credit for low-income, working families.” Id . (statement of Sen. Snowe). She explained the legislation's effect:

In its original form, the tax relief plan would not have reached all full-time workers—the tax reduction would have disappeared for wage-earners with net incomes of less than about $22,000. Indeed, without refundability, there are almost 16 million children whose families would not benefit from the doubling of the Child Tax Credit.

Id . And another echoed these sentiments: “Together we have stood fast in our insistence that the child tax credit should be refundable so hard-working, low-income families would receive a tax cut.” Id . (statement of Sen. Lincoln). Others similarly lauded the benefits of the refundable credit to low-income families. See id. (statement of Sen. Grassley) (“The child credit expansion to low-income families is immediate. Over 16 million more children will be helped by the provisions of this bill.”); Id . (statement of Sen. Wellstone) (describing the child credit expansion and explaining that “half a million children will be lifted out of poverty”); 147 Cong. Rec. S5028-01 (statement of Sen. Baucus) (“We increase the amount of the [child tax] credit that is partly refundable so lower income families can benefit from the credit as well.”).

Hardy v. Fink (In re Hardy) , 787 F.3d 1189, 1194–95 (8th Cir. 2015).

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