In re Shultz

509 B.R. 190

In re Charles F. SHULTZ, Sr., and Chrystal L. Shultz, Debtors.

No. 12–23409 jpk.

United States Bankruptcy Court,

N.D. Indiana,

Hammond Division.

Signed March 28, 2014.

Frederick L. Carpenter, Sheila A. Ramacci, Highland, IN, for Trustee.

Daniel L. Freeland, Highland, IN, Trustee.

Miguel F. Martinez, Jason R. Moseley, The Law Offices of Jason R. Moseley, Merrillville, IN, for Debtors.

MEMORANDUM OF DECISION AND ORDER IN CONTESTED MATTER CONCERNING REOPENING OF THE CHAPTER 7 CASE IN RELATION TO ADMINISTRATION OF A TAX REFUND

J. PHILIP KLINGEBERGER, Bankruptcy Judge.

The Chapter 7 case of Charles F. Shultz, Sr., and Chrystal L. Shultz (“collectively: Shultz”) began and was initially closed innocuously enough. The case was initiated by a Voluntary Petition filed on September 6, 2012. Daniel L. Freeland was appointed the interim Trustee at the inception of the case, and after conducting the Section 341 meeting, on October 3, 2012, he became the permanent Chapter 7 Trustee (“Trustee”). On November 26, 2012, the Trustee filed a Report of No Distribution, and on January 16, 2013, the Court entered an Order Approving Trustee's Report of No Distribution and Closing Estate. At that time, the case appeared to be a routine “no asset” case in which the debtors received their discharge and went on their happy way to their post-bankruptcy life.

But then, the case became something other than routine. Among their post-bankruptcy life activities, Shultz filed their 2012 Form 1040–A federal income tax return. In that return the debtors claimed an earned income credit of $883.00 and a general income tax refund of $7,768.00. The return was apparently routinely processed by the Internal Revenue Service, and the earned income credit and general income tax refund claimed by Shultz was allowed as a tax refund to Schultz. However, the tax refund was not transmitted to Shultz, but rather was sent to the Trustee pursuant to an Application and Authorization for Internal Revenue Service Refund Turnover to Chapter 7 Bankruptcy Trustee Pursuant to 11 U.S.C. § 542 which the Trustee had filed with the Internal Revenue Service on October 3, 2012. Upon receiving the tax refund, on April 25, 2013, the Trustee filed the Record No. 26 Application to Reopen Estate with Deferred Fee, seeking to reopen the estate to administer the portion of the 2012 income tax refund which the Trustee asserted was available for distribution to creditors in the Chapter 7 case. On May 22, 2013, Shultz filed their Record No. 40 objection to the Trustee's Record No. 26 motion. In that objection, Shultz asserted that by operation of applicable law the closing of the Chapter 7 case resulted in abandonment to them of the entirety of the 2012 federal income tax refund, including the portion of the general income tax refund which would have been available for administration in the Chapter 7 case had the case not been closed. The Trustee meanwhile pro-rated the general tax refund, and dealt with the earned income credit: of the $7,768.00 received by the Trustee from the Internal Revenue Service, the Trustee retained $5,094.61, and returned $2,673.39 to Shultz, of which $1,790.39 was their share of the pro-rated general income tax refund and $883.00 was the earned income credit.¹ The Trustee contends that applicable law and rules must result in a determination that the portion of the tax refund which he retained for administration was not abandoned to the debtors and is subject to administration in the reopened case.

On April 26, 2013, as record entry No. 27, the court entered its routine order which reopened the Chapter 7 case in response to the Trustee's Record No. 26 motion. Thus, at the time the Record No. 40 objection to reopening was filed by Shultz, the case had already been reopened. By Record No. 42, the court scheduled a hearing with respect to the substantive issues raised by Shultz in their objection, and as a result of that hearing an order was entered as Record No. 49, which states:

Docket Entry: Hearing held on 6/21/13 RE: (related document(s)40 Objection filed by Charles F Shultz and Chrystal L Shultz to 26 Motion to Reopen Case filed by Daniel L. Freeland. APPEARANCES: Atty. Martinez on behalf of Debtors and Atty. Freeland on behalf of Trustee. It is ORDERED: (1) The debtors and the trustee shall file a stipulation of facts by July 25, 2013—the stipulation shall include the parties stipulation as to all issues submitted to the court for final determination of the matter and all documents necessary to complete the factual stipulation. The stipulation shall constitute the ENTIRE RECORD upon which the court will determine the matter. (2) Each party shall submit a legal memorandum by September 30, 2013, there will be no replies. (pg) (Entered: 06/27/2013)

As will be addressed below, reopening of the case is an administrative matter which has no substantive significance, and the contested matter in this case does not involve whether or not the case should have been reopened, but rather concerns the substantive issues which relate to whether or not the portion of the 2012 federal income tax refund sought to be retained by the Trustee is subject to administration in this case or must be returned to Shultz because it was abandoned by the initial closing of the case. The Stipulated Statement of Facts provided for by the Record No. 49 order was filed on July 25, 2013, and the respective legal memoranda of the parties were filed in accordance with that docket entry.

The court has full constitutional and statutory authority and jurisdiction to enter a final judgment with respect to the contested matter.

I. ISSUE ADDRESSED

Under the circumstances of Case No. 12–23409, did the closing of the Chapter 7 case by the Record No. 23 order entered on January 16, 2013, result in irrevocable abandonment of the entirety of the 2012 federal income tax refund to Shultz, or conversely may the allocable portion of that federal income tax refund retained by the Trustee still be administered by the Trustee despite the initial case closing.

II. FACTUAL RECORD

The entirety of the facts stated in the Record No. 51 Stipulated Statement of Facts is the following:

1. On September 6, 2012, Debtors, Charles and Chrystal Shultz filed, a voluntary joint Chapter 7 petition in the United States Bankruptcy Court, Northern District of Indiana, Hammond Division. The Chapter 7 Petition, Schedules, and Statement of Financial Affairs are attached hereto as Exhibit “A”. [not attached to this memorandum].

2. At that time Daniel L. Freeland was appointed the interim Trustee.

3. On October 3, 2012 the required 11 U.S.C. § 341 meeting was held, at which time by operation of law, Daniel L. Freeland became the permanent Trustee.

4. At the § 341 meeting the Debtors provided their tax returns for the 2010 and 2011 tax years. Debtors did not provide any information in regards to the 2012 tax year, as the taxes had yet to be filed.

5. On October 3, 2012 the Trustee, based upon the information attained at the § 341 meeting, filed an Application and Authorization for Internal Revenue Service Refund Turnover to Chapter 7 Bankruptcy Trustee Pursuant to 11 U.S.C. § 542 which is attached hereto as Exhibit “B”. [not attached to this memorandum].

6. That the amount of the refund was unknown on November 26,2012, when the Trustee filed a Report of No Distribution with the Court. The Trustee maintains that it was not his intention to abandon the tax refund by doing so.

7. The Trustee maintains that the Report of No Distribution was filed, since the tax return was not ascertainable and the Trustee did not want to hold up the Debtor's discharge. The Debtor can neither confirm nor deny the Trustee's motives or intent.

8. On January 16, 2013, the Court entered an Order Approving Trustee's Report of No Distribution and Closing Estate.

9. On February 15, 2013, Debtors, through the use of the tax preparer, HRB Tax Group Inc. in Lake Station, Indiana prepared and filed their 2012 tax return.

10. The Debtors filed an Internal Revenue Service Form 1040A. Copies of the 2012 tax return are attached hereto as Exhibit “C”. [not attached to this memorandum].

11. The Debtors listed an Earned Income Credit amount of $883.00 on their 2012 tax return.

12. The amount of the refund listed on the 2012 Form 1040A was $7,768.00 which was the amount that was refunded by the IRS.

13. In the Debtors' Chapter 7 filing they included on Schedule B–Personal Property and Schedule C–Property Claimed as Exempt an asset described as “Earned Income Credit Portion of Current Year's Income Tax Refund.”

14. The “Earned Income Credit Portion of Current Year's Income Tax Refund” is the only item that references an exclusion of any tax credit/refund.

15. A tax refund is an asset of a Bankruptcy Estate that is subject to administration.

16. Upon the Trustee receiving Debtor's 2012 tax returns and the tax refund, the Trustee, on April 25, 2013, filed an Application to Reopen Estate with Deferred Fee (“Motion”).

17. Trustee filed the application because the tax refund amount was now known and could be administered.

18. The Trustee pro-rated the tax refund to the bankruptcy estate in the amount of $5094.61. Trustee received the $7,768.00 from the Internal Revenue Service and maintains $5,094.61 of which is Property of the Bankruptcy Estate in order to efficiently administer the tax refund. The Trustee returned to the Debtor's $2,673.39 of which $1,790.39 was Post–Petition Earnings and $883.00 was Earned Income Credit Exemption. Copies of the calculations are attached hereto as Exhibit “D”. [not attached to this memorandum].

19. The motion referred to the refund as a substantial asset that warranted reopening the estate.

20. On April 26, 2013 the Court granted the Trustee's Motion.

21. On May 22, 2013 the Debtors filed an objection to the Application to Reopen Estate with Deferred Fee on grounds that the refund was abandoned by the Trustee under ...