Opinion
Case No. 97-21549, Chapter 7
August 14, 1998
ORDER ON MOTION TO SET ASIDE ORDER COMPELLING TURNOVER
Charles Henry Morris, the debtor in this chapter 7 case, was ordered by the court to turnover to the trustee a portion of his 1997 Federal income tax refund, $1,335.77. The order was entered without a hearing, and Mr. Morris moved to set aside the order arguing that a portion of the refund was the property of his nondebtor spouse.
The court agrees that because the order was entered ex parte, Mr. Morris is entitled to a hearing on the substantive question. However, the court concludes that, except as modified by this order, the order requiring turnover is valid.
Mr. Morris filed his chapter 7 bankruptcy case on November 24, 1997. A debtor's right to a tax refund is a debt owed to the debtor at the time of the petition and that interest is property of the estate. In re Barowsky, 946 F.2d 1516 (10th Cir. 1991); In re Dussing, 205 B.R. 332 (Bankr.M.D.Fla. 1996). On the date of filing, any prepetition tax refund subsequently due Mr. Morris for the 1997 tax year became property of his bankruptcy estate, subject to any interest of his nondebtor wife.
The nature of an interest in property is determined by state law. There being no evidence that this refund was held in a joint tenancy, the court finds that the refund was owed to the taxpayers, Mr. and Mrs. Morris, as tenants in common. The question of course is what proportionate interest the tenants in common have.
In the rather old case of Binning v. Miller, 102 P.2d 64, 71, 55 Wyo. 478 (1940), rehearing denied, 105 P.2d 278 (1940), the Wyoming Supreme Court held one's proportionate interest in a tenancy in common in real property is determined by the amount of the contribution made by each tenant to the purchase price. There appears to be no Wyoming law resolving the issue of how a tenancy in common in personalty is determined.
There are a number of bankruptcy cases specific to the tax refund proration issue. The vast majority of the courts have held that the basis of the allocation should be the amount of withholding attributed to each taxpayer. In re Gleason, 193 B.R. 387 (Bankr.D.N.H. 1996); In re Lyall, 191 B.R. 78 (E.D.Va. 1996). Although Mr. Morris urges the court to divide the refund equally between the nonfiling spouse and the estate, there is no case which adopted this approach despite its ease of application.
To allocate the interests based on the contribution is also consistent with the ruling of the Wyoming Supreme Court in Binning. This court adopts the rule that the estate's interest in a tax refund arising out of a tax return filed jointly between the debtor and a nondebtor spouse should be allocated on the basis of the withholding paid by each taxpayer.
In this case, Mrs. Morris apparently had some income but no withholding. The parties are capable of determining the amount of the refund based on the yearly proration method and in accordance with the ruling in this order.
It is, therefore, ORDERED that the debtor's motion to set aside the order is granted; and further
ORDERED that the court's previous order of turnover is modified to allow for any interest of Mrs. Morris to the extent she contributed excess withholding which created the Federal income tax refund for the 1997 tax year.