Summary
holding that an adoption tax credit was properly exempted for the support of both the debtor and dependents
Summary of this case from In re RobertsOpinion
Case No. 12-30711
12-18-2012
In re: MICHELLE RENA SMITH, Debtor
This document has been electronically entered in the records of the United States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
______________________
Lawrence S. Walter
United States Bankruptcy Judge
Judge L. S. Walter
Chapter 7
DECISION AND ORDER OF THE COURT:
1) DENYING TRUSTEE'S MOTION TO COMPEL [DOC. 20]; - AND
2) OVERRULING TRUSTEE'S OBJECTION TO DEBTOR'S CLAIM OF
EXEMPTION [DOC. 24]
This matter is before the court on Chapter 7 Trustee Ruth Sloan ("Trustee")'s Motion to Compel Turnover of Property [Doc. 20]; Debtor Michelle Rena Smith ("Debtor")'s Response thereto [Doc. 26]; Trustee's Objection to Debtor's Claim of Exemption [Doc. 24]; and Debtor's Response thereto [Doc. 31]. In the objection, the Trustee argues that the Debtor is not entitled to claim an exemption in and retain that portion of her 2011 federal income tax refund resulting from a credit for adoption expenses she claimed pursuant to 26 U.S.C. § 36C (hereinafter "adoption tax credit") because there is no allowable exemption for the credit under Ohio law. The Debtor responds arguing that the exemption is permitted pursuant to Ohio Rev. Code § 2329.66(A)(11).
On September 25, 2012, the court held a hearing on the matter. Following the hearing, the court provided additional time for the filing of supplemental briefs. The Debtor filed a supplemental brief on October 26, 2012 [Doc. 43]. The Trustee chose not to engage in additional briefing [Doc. 42]. The matter is now ready to be determined.
FINDINGS OF FACT
The Debtor filed a Chapter 7 bankruptcy petition on February 20, 2012 listing assets totaling $39,698.45 and liabilities totaling $244,008.74. Prior to her bankruptcy filing, the Debtor filed her 2011 income tax return with the IRS [Ex. A]. On the return, Debtor claimed a $26,720 adoption tax credit for two children with special needs whom she adopted in 2011 [Id.].
After the Debtor revealed at the § 341 meeting of creditors that she expected to receive a significant tax refund, the Trustee filed a motion to compel turnover of the non-exempt portion of the refund on June 12, 2012 [Doc. 20]. On the same date, the Debtor amended her Schedule C claiming an exemption in the tax refund [Doc. 21]. She cited Ohio Rev. Code §2329.66(A)(11) as authority for exempting the portion resulting from the adoption tax credit [Id.]. This filing prompted the Trustee to object to the exemption on June 25, 2012 [Doc. 24].
At the hearing, the Debtor testified that she had not received the tax refund and that the IRS informed her that she may not receive the full amount [Transcript from Sept. 25, 2012 Hearing ("Tr."), p. 49]. However, according to the Trustee, the check was released on June 4, 2012 so there is an unresolved question as to where the funds are currently located [Tr., p. 58].
At the hearing held on September 25, 2012, the Debtor testified about her background. The Debtor is 44 years old and has a Master's Degree from the University of Cincinnati in social work [Transcript from Sept. 25, 2012 Hearing ("Tr."), p. 32]. She has worked for Montgomery County Children's Services for the last four years [Id.]. She makes approximately $44,000 a year working a 40 hour work week. [Tr., p. 33]. She is single and currently has six minor children in her household between the ages of 10 and 17; three are biological daughters and three are foster / adopted children [Tr., pp. 35-36, 43].
The Debtor also discussed the nature of the adoption of the two children that led to the adoption tax credit. The two children were placed in her home in January of 201l and had experienced neglect and abuse in their prior setting [Tr., p. 44]. The children have physical and psychological challenges [Tr. p. 44-45] and require medical and psychiatric care [Tr., p. 45-46]. The adoption was finalized on November 19, 2011 [Tr., p. 43].
Also relevant to the court's analysis is the Debtor's testimony relating to her budget and financial needs. Her current take home pay is approximately $2,800-2,900 per month [Tr., p. 42; Ex. B, Schedule I]. That amount includes cash assistance from the state for one of the foster children [Tr., pp. 36, 42; Ex. B, Schedule I].
Her current expenditures at the date of the petition filing were $2,830 per month [Ex. B, Schedule J]. However, those expenditures have risen since the filing date. The Debtor testified that her rent increased from $1050 to $1,500 per month and the need for a new car, following the repossession of her former vehicle, caused her car payment to rise from $340 to $410 [Tr., p. 37, 40]. Because of the additional children in her household since the date of filing, her food and other household expenses have also increased [Tr., p. 38-39].
LEGAL ANALYSIS
At issue is the Trustee's objection to the Debtor's claimed exemption of $26,720 in a tax refund pursuant to Ohio Rev. Code § 2329.66(A)(11). The Debtor states that this portion of the tax refund is attributable to a federal tax credit for adoption expenses associated with the adoption of her disabled children. She asserts that the adoption tax credit is an "allowance" that is reasonably necessary for the support of her and her family and, consequently, exempt under this provision of Ohio's exemption statute.
At the outset, it is important to note that the Trustee, as the objecting party, bears the burden of proving that the Debtor's exemption is not properly claimed. Fed. R. Bankr. P. 4003(c). Furthermore, "'Ohio exemptions provisions are to be construed liberally in favor of the debtor and a debtor's dependents and any doubt in interpretation should be in favor of granting the exemption.'" In re Jackson, 348 B.R. 771, 772 (Bankr. S.D. Ohio 2006) (further citations omitted).
The Trustee objects to the Debtor's exemption for the adoption tax credit pursuant to Ohio Rev. Code § 2329.66(A)(11), a provision which provides:
(A) Every person who is domiciled in this state may hold property exempt from execution, garnishment, attachment, or sale to satisfy a judgment or order, as follows:Ohio Rev. Code § 2329.66(A)(11). The Trustee argues that the adoption tax credit does not fall under the language of this provision because the Debtor does not have "a right to receive" the tax credit and it is not an "allowance" intended as support. For the reasons that follow, the court disagrees with the Trustee's position.
* * *
(11) The person's right to receive spousal support, child support, an allowance, or other maintenance to the extent
reasonably necessary for the support of the person and any of the person's dependents.
A. Right to Receive
Initially, the Trustee argues that to have the "right to receive" a disbursement under the language of Ohio Rev. Code § 2329.66(A)(11), there must be a court order and, in support of this argument, the Trustee cites In re Davis, 167 B.R. 104 (Bankr. S.D. Ohio 1994). The court disagrees with the Trustee. Nothing in the statutory language of § 2329.66(A)(11) limits the exemption to disbursements by court order. Additionally, the question is not answered by the Davis case. In Davis, the court specifically construed the meaning of the "right to receive" in the context of a domestic support order to include both payments previously ordered, but not yet due, as well as payments due and unpaid at the date of filing. 167 B.R. at 106. However, the Davis court does not, as the Trustee argues, hold that the "right to receive" language actually limits the exemption to domestic support orders. Id.
Instead, the issue is most directly addressed by Judge Waldron in the case of In re Jackson, 348 B.R. 771 (Bankr. S.D. Ohio 2006). In Jackson, Judge Waldron concluded that § 2329.66(A)(11) was not limited to domestic support orders and that a "widow's allowance," a grant provided for by statue, qualified for the exemption. In re Jackson, 348 B.R. at 773-74 (describing the widow's allowance for support provided in Ohio Rev. Code § 2106.13(A)). Consequently, the Trustee's argument that the "right to receive" language limits the exemption to court ordered disbursements fails.
Furthermore, while an argument could be made that a debtor does not have a "right to receive" a nonrefundable tax credit that is only an offset against taxes owed, the Debtor has shown that the adoption tax credit at issue in this case was a refundable credit in 2011, the year that the adoption was finalized and the credit was claimed. Patient Protection and Affordable Care Act of 2010, Pub. L. No. 111-148, § 10909; 124 Stat. 119 (March 23, 2010) (expanding the adoption tax credit and moving it from 26 U.S.C. § 23 to 26 U.S.C. § 36C, a section of the Internal Revenue Code for refundable credits). Recognizing that Ohio exemptions are to be liberally construed in favor of the Debtor and her dependents, the court concludes that the Debtor had a "right to receive" the adoption tax credit that was claimed pursuant to 26 U.S.C. § 36C.
B. Allowance
The Trustee next argues that the adoption tax credit does not qualify as an "allowance" as that term is used in Ohio Rev. Code § 2329.66(A)(11). This court's research revealed no direct authority addressing whether an adoption tax credit qualifies as an "allowance" under this provision of the Ohio exemption statute nor is the term "allowance" defined by the Ohio legislature. In re Delmoe, 365 B.R. 124, 130 (Bankr. S.D. Ohio 2007). However, this does not mean that the term has not been defined in the case law. Indeed, bankruptcy judges from the Southern District of Ohio have interpreted "allowance" quite broadly. Jackson, 348 B.R. at 773-74. See also Delmoe, 365 B.R. at 130 (Bankr. S.D. Ohio 2007) (noting that the ordinary and accepting meaning of "allowance" found in Black's Law Dictionary (8th ed. 2004) is broadly stated as "[a] share or portion, esp. of money that is assigned or granted").
Judge Waldron, in particular, noted that while the term "allowance" appears in the statutory provision along with "spousal support," "child support" and "maintenance," nothing in § 2329.66(A)(11) suggests that "allowance" must be limited to payments arising from a divorce decree or order of obligation. Jackson, 348 B.R. at 773-74. But see Delmoe, 365 B.R. at 130 (noting that the placement of "allowance" between these terms is at least an indication of the legislature's intent to tie it to the concept of financial assistance or support). Furthermore, the word "allowance" should not be interpreted as merely a superfluous term which repeats, in different nomenclature, an additional component of spousal support, child support or other maintenance. Id. at 774. Because the term "allowance" was without such qualification in the statute, Judge Waldron interpreted the term to apply to a "widow's allowance" granted in a probate statute if the funds were reasonably necessary for the support of the debtor and her dependents, a question of fact. Id.
To support the contrary position, the Trustee cites, among other cases, In re Delmoe, in which the court concluded that "allowance" was not so expansive as to exempt trust funds paid to a beneficiary when the trust was neither intended as a spendthrift nor a support trust. Delmoe, 365 B.R. at 131. Nonetheless, the court recognized that "allowance" was a broad term that applied to situations beyond child or spousal support awards and had been applied by courts in Ohio to statutory grants where the purpose of the grant was to provide support or financial assistance to debtors and their dependents. Id. at 130. Reading Jackson and Delmoe together, a statutory grant may be exempt as an "allowance" under Ohio Rev. Code § 2329.66(A)(11) when the purpose of the grant is support or financial assistance and the disbursement is reasonably necessary for the support of the debtor and the debtor's dependents.
Turning to the language of the federal statute under which the Debtor claimed the adoption tax credit, it states in general terms:
In the case of an individual, there shall be allowed as a credit against the tax imposed by this chapter the amount of the qualified adoption expenses paid or incurred by the taxpayer.26 U.S.C. § 36C(a)(1). The tax credit is expanded if a party can show the adoption was for a child with "special needs." 26 U.S.C. § 36C(a)(3). More specifically, 26 U.S.C. § 36C(a)(3) provides:
In the case of an adoption of a child with special needs which becomes final during a taxable year, the taxpayer shall be treated as having paid during such year qualified adoption expenses with respect to such adoption in an amount equal to the excess (if any) of $13,170 over the aggregate qualified adoption expenses actually paid or incurred by the taxpayer with respect to such adoption during the taxable year and all prior taxable years.26 U.S.C. § 36C(a)(3). As the legislative history makes clear, the tax credit, especially the additional credit for children with special needs, is intended to promote the adoption of children that are difficult to place as well as defray adoption costs so that the associated expenses are not a barrier to adoption. S. Rep. No. 104-279 (1996).
Using the guidance of Jackson and Delmoe, the court concludes that the adoption expense tax credit provided in 26 U.S.C. §36C is a statutory grant intended to provide financial assistance to adoptive parents by defraying the costs associated with adoption. Consequently, the Debtor's refund based on the tax credit may qualify as an "allowance" under ORC § 2329.66(A)(11) if the funds are reasonably necessary for the support of the Debtor and her dependents, an issue addressed by the Debtor's testimony.
At the hearing, the Debtor testified that she is single and currently has six dependent children living in her home [Tr., pp. 35-36, 43]. With a modest income of $44,000 a year as a social worker and some cash assistance for one of her foster children, the Debtor had disposable income of less than $100 per month at the time of filing [Tr. 42; Ex. B, Schedules I and J]. The Debtor testified to subsequent increases in her rent, car payment and other household expenses that would more than eat through her minimal monthly disposable income [Tr., pp. 37-40]. Furthermore, the Debtor testified to ongoing medical and psychiatric care required by her adopted children [Tr., pp. 44-45]. The Debtor's testimony, which was not refuted by the Trustee, satisfies the court that the funds are reasonably necessary for the support of the Debtor and her dependent children.
The Trustee includes a minimally developed third argument that because certain tax credits are subject to specific exemption, see Ohio Rev. Code § 2329.66(A)(9)(g), the failure of the Ohio legislature to include a specific exemption for the adoption tax credit is an indication of the legislature's intent to exclude it. However, the Trustee provides no legal authority for this argument nor points to any language in the statute or elsewhere indicating the legislature's intent to exclude all other tax credits from exemption via the statute's more general exemption provisions. In light of the fact that exemptions are to be liberally construed in favor of a debtor and a debtor's dependents, the court rejects the Trustee's argument.
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CONCLUSION
The court holds that the Debtor properly claimed an exemption of $26,720 for an adoption tax credit under § Ohio Rev. Code § 2329.66(A)(11). Therefore, the Trustee's objection to the exemption is overruled. The Trustee's related motion to compel is denied.
SO ORDERED. cc:
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