In re Fishbein, Bankruptcy No. 99-1-0622-PM

245 B.R. 36 (2000)

In re Gary and Karen FISHBEIN, Debtors In re Charles T. Ekoko, Debtor.

Bankruptcy Nos. 99-1-0622-PM, 99-1-1621-DK.

United States Bankruptcy Court, D. Maryland, at Greenbelt.

February 8, 2000.

John L. Dowling, Silver Spring, MD, for Debtors.

Paul-Michael Sweeney, Silver Spring, MD, Chapter 7 Trustee.

MEMORANDUM OF OPINION

DUNCAN W. KEIR, Bankruptcy Judge.

In each of the above captioned cases, objections have been filed challenging exemptions of certain tax refunds claimed by the respective debtors. In each case there is no dispute of fact. The legal issue is may a debtor exempt post-petition tax refunds due on pre-petition earned income, as "disposable wages." For the reasons set forth below, the court finds that such refunds are not wages, and therefore cannot be exempted under the Maryland exemption applicable to wages.

The court held a combined hearing on May 20, 1999, and the parties have also submitted memoranda for consideration.¹ The stipulated facts are as follows: Debtors Gary and Karen Fishbein filed their joint petition on January 19, 1999. On Schedule C of their petition they listed "Expected Tax Refunds" in the amount of $5,400, and relied on a provision of Maryland's wage garnishment statute, Md.Code Ann., Comm. Law II, § 15-601.1 (1990 Repl.Vol.), (hereinafter, "C.L.II"), to exempt 75%, or $4,050.00, of the that amount.² Likewise, when debtor Charles Ekoku filed his petition on February 11, 1999, he also relied upon C.L. II § 15-601.1 to exempt $2,625.00, which was 75% of his expected state and federal tax refunds. As to both the Fishbeins and Mr. Ekoku, the expected refunds represented excess wage withholding tendered by their employers to the federal and state taxing authorities over the tax year immediately prior to the filing of their petitions in bankruptcy.

Commercial Law II § 15-601.1 provides as follows:

(a) Disposable wages. — In this section "disposable wages" means the part of wages that remain after deduction of any amount required to be withheld by law.

(b) . . . The following are exempt from attachment:

(1) . . . the greater of:

(i) The product of $145 multiplied by the number of weeks in which wages due were earned; or

(ii) 75 percent of the disposable wages due. . . .

The gravamen of debtors' argument is that income tax refunds should be termed "disposable wages" because such refunds represent an overage in the "amount of taxes required to be withheld by federal and state tax law." In other words, according to debtors, the refunded amounts should never have been collected in the first place, and, by logic, such funds must be "disposable wages." The debtors are incorrect.

The argument put forth by the debtors suffers from the faulty premise that it is the employee's ultimate tax liability that matters in determining "disposable wages" under C.L. II § 15-601.1. According to the language of the statute, however, the amount of "disposable wages" is calculated from that portion of the employee's wages remaining "after deduction of any amount required to be withheld by law." Id. (emphasis supplied).

In the case of income taxes, the amount an employer is legally required to withhold from employee wages is not directly related to the employee's ultimate tax obligation, but is instead pre-determined in accordance with tax tables and information supplied by the employee.³ See, 26 U.S.C.A. § 3402(a)(1)(West 1999)("Every employer making payment of wages shall deduct and withhold upon such wages a tax determined in accordance with tables or computational procedures prescribed by the Secretary.")(emphasis supplied); Md. Code Ann., Tax-General, § 10-908(a)(1997 Repl.Vol.)("An employer shall withhold from the wages of an individual the amount indicated in the income tax withholding tables or income tax percentage withholding schedules that the Comptroller prepares.")(emphasis supplied).

The debtors have supplied no authority, and this court has found none, that would suggest a contrary interpretation. Accordingly, because the employer is required by law to deduct pre-calculated federal and state withholding amounts from an employee's wages, no portion of the amount deducted can be termed "disposable wages" under C.L. II § 15-601.1, even if a portion is later refunded to the debtor.

The debtors' argument is also at odds with existing case law on this issue. It has long been the rule that a tax refund due on wages earned pre-petition is "`sufficiently rooted in the prebankruptcy past' to be defined as `property' under s 70a(5) of the Bankruptcy Act⁴." Kokoszka v. Belford, 417 U.S. 642, 648, 94 S.Ct. 2431, 41 L.Ed.2d 374 (1974). Accordingly, the funds cannot be "wages" of any kind. As noted in Kokoszka:

Since a `tax refund is not the weekly or other periodic income required by a wage earner for his basic support, to deprive him of it will not hinder his ability to make a fresh start unhampered by the pressure of preexisting debt,\'. . . . `Just because some property interest had its source in wages . . . does not give it special protection, for to do so would exempt from the bankrupt estate most of the property owned by many bankrupts, such as savings accounts and automobiles which had their origin in wages.\'

Id. at 648, 94 S.Ct. 2431 (quoting In re Kokoszka, 479 F.2d 990, 995 (2nd Cir. 1973)). See also, Wallerstedt v. Sosne (In re Wallerstedt), 930 F.2d 630, 632 (8th Cir.1991)(relying on the reasoning set forth in Kokoszka to find that the Missouri garnishment statute does not apply to tax refunds); Dickerson v. Manchester (In re Dickerson), 227 B.R. 742, 746 (10th Cir. BAP 1998)("It is well established that tax overpayments are not considered `earnings'"). Indeed, as expressly stated by this court in In re Verill, 17 B.R. 652, 654 (Bankr.D.Md.1982): "Income tax withholding is simply not wages . . . but a debt due the bankrupt that is related to the amount of wages earned."

Debtors maintain, however, that Verill is no longer good law because C.L. II § 15-601 has been amended since that case was decided to exempt "disposable wages" from attachment as opposed to "wages in general." Debtors reason that the general tenet that Maryland exemptions are to be liberally construed in favor of the debtor, see, In re Butcher, 189 B.R. 357, 369 (Bankr.D.Md.1995), supports their interpretation that the statute was amended to afford a bankrupt debtor an exemption from attachment of a portion of his tax returns. The court has found no legislative history, or Maryland case law that would support the interpretation offered by the debtor. Moreover, the statutory change is not relevant to the analysis made in Verill.

Under C.L. II § 15-601(c), "wages" are "all monetary remuneration paid to any employee for his employment." This definition was in effect at the time Verill was decided, and it is the definition in effect today. By subjecting disposable wages to attachment, C.L. § 15-601.1(a) clarifies that the attachment calculation is to be applied only to funds that the debtor actually has in hand, as opposed to his or her "gross" wages from which...