Federal Stimulus Payment "Hands-Off" for Bankruptcies Filed Early Enough in 2008?

[phoenyx]

A poster had a question in the Exemptions forum about the upcoming stimulus payments (aka tax rebates). That post, plus a lot of spare time I had tonight, lead me to writing a position paper where I take and defend the position: ""

I am not a CPA, or an attorney. If anyone wants to take the position I advocate in my position paper, I disclaim all liability, and ask the bankruptcy filer to carefully consider my position and share it with their bankruptcy attorney. That being said, I'm almost certain that I'm right. Then again, being right doesn't mean a trustee or judge will let it happen.

Anyone may also feel free to distribute this PDF file as long as it is not modified, including my name and email address.

If anyone reads my position paper, or shares it with their bankruptcy attorney, I would love to hear about the results! Unfortunately, I won't be able to test if my position works because I am not eligible for the stimulus payment on my 2007 taxes. As explained in the paper, hopefully I will be eligible on my 2008 taxes.

I tried attaching my PDF file to my post, but I am getting an error that the forum's quota is exceeded. So, it is available at:

http://sigma.homeunix.com/FederalSti...oughIn2008.pdf

Edit: Changed references to 341 meeting to bankruptcy filing, per HHM's comments. Also am hosting the PDF file at a better location than RapidShare.

[krielly]

Sorry, didn't take the time to download the entire text, but you need to remember that this stimulus rebate is based upon tax year 2007, so your point in "b" is moot.

You also mentioned you were not eligible for the rebate on your 2007 taxes, but hoped you would be on your 2008 taxes. Sorry, but this is a one time rebate based on 2007 eligibility.

K

[phoenyx]

Sorry, didn't take the time to download the entire text, but you need to remember that this stimulus rebate is based upon tax year 2007, so your point in "b" is moot.

You also mentioned you were not eligible for the rebate on your 2007 taxes, but hoped you would be on your 2008 taxes. Sorry, but this is a one time rebate based on 2007 eligibility.

K

I also realize this is the way most news articles are explaining the rebate, but in my paper I explain my position that since it is a tax year 2008 credit and rebate being issued a year in advance, how taxpayers who are not eligible on their 2007 taxes for the stimulus payment should be eligible to take it on their 2008 taxes. I am not stating that taxpayers who receive the credit and rebate now can "double-dip" next year; it's definatley one stimulus payment per eligible taxpayer.

As noted in the paper, this interpretation seems to be in agreement with the IRS. At this IRS webpage, the IRS states: "If you're not eligible this year but you become eligible next year, you can claim the economic stimulus payment next year on your 2008 tax return."

[HHM]

I will read the paper, but first a quick comment.

The 341 date has no legal significance vis-a-vis the Bankruptcy Estate. So, you wouldn't want to use the 341 date for any sort of cut-off. The date of fling is generally the "cut-off" for the BK estate. Anything earned AFTER that date is not part of the estate. (the exceptions being if someone you know died and left you either inheritance of life insurance proceeds up to 180 days after the date of filing).

[phoenyx]

Ahh, OK, I was mistaken thinking assets earned between filing and 341 could be made part of the bankruptcy estate. Thanks for pointing that out. That's even better for my theory then, since instead of having to receive the stimulus payment after the 341 meeting, it's instead having to receive the stimulus payment after the filing itself.

Thanks for looking over the paper, I'm eager to see what you think of it.

[HHM]

Ok, I read the paper. My comment about changing 341 date to filing date still stands.

Note, I am not going to go read the rebate text...so I will take your word on that.

I am a little confused, you quote the statute and it talks about 2008 tax year, then you discuss how a person "qualifies" for the credit based off of 2007 tax returns. You may want to clarify a distinction between how a person is "eligible" for the rebate, and the tax year in which the rebate applies. I think what you are saying is that, the rebate is FOR tax year 2008, but that a person has the option to submit their eligibility either off of their 2008 tax return (for tax year 2007), or 2009 tax retrun (for tax year 2008). Does that sound right?

As a result, I think you need to make sure you clarify you language a litte. In some parts you talk about 2007 tax returns and 2007 tax year...which are quite different things. When I say 2008 tax return, those returns are for tax year 2007. So I don't think you mean to say that a person submits eligibility off of their 2007 tax returns (which would be for tax year 2006). However you decide to word this, just make sure you are consistent.

Unfortunately, there is no universal theory that applies to all districts about how a tax "refund" is part of the BK estate, and in what amount. Once the refund is actually received and in the debtor's hands, it is basically a cash asset. What we are really talking about is the "right to receive" the refund check. In my district, the refund is treated as incrementally received throughout the year. For example, if you filed BK in Oct of 2007, the trustee would be entitled to the portion of the refund that accounts for Jan 07-Sept 07, and the debtor would receive that portion of the refund for Oct 07 to Dec 07. But, there is overflow, if you file BK in Jan, Feb, Mar of the 2008, and have yet to receive your refund, the trustee will take all of it. I am not sure of the legal justification, but I think the idea is that the refund for tax year 2007 is essentially fully earned and nearly liquidated, and you are just waiting on the check, but since you have not actually received the check, the trustee gets it all.

Thus, I think in my district, the trustees would probably argue that if a debtor files BK in 2008, that the tax credit should be amortized in the same way as the tax refund. Thus, I am not sure that drawing an analogy to how tax refunds are treated is the best approach.

Also, there is the issue of how the stimulus tax credit would be treated in a chapter 13.

I have to get going, but I may have more to add as a mull this over.

[phoenyx]

Thanks for your reply!

Ok, I read the paper. My comment about changing 341 date to filing date still stands.

Note, I am not going to go read the rebate text...so I will take your word on that.

I am a little confused, you quote the statute and it talks about 2008 tax year, then you discuss how a person "qualifies" for the credit based off of 2007 tax returns. You may want to clarify a distinction between how a person is "eligible" for the rebate, and the tax year in which the rebate applies. I think what you are saying is that, the rebate is FOR tax year 2008, but that a person has the option to submit their eligibility either off of their 2008 tax return (for tax year 2007), or 2009 tax retrun (for tax year 2008). Does that sound right?

Your understanding is correct, that's the point I'm getting at. Later today, I will look at clarifying the distinction.

As a result, I think you need to make sure you clarify you language a litte. In some parts you talk about 2007 tax returns and 2007 tax year...which are quite different thing. When I say 2008 tax return, those returns are for tax year 2007. So I don't think you mean to say that a person submits eligibility off of their 2007 tax returns (which would be for tax year 2006). However you decide to word this, just make sure you are consistent.

I'm pretty sure that in IRS and tax preparer terminology, "the 2008 tax return", applies to the tax year 2008, although it is filed by April 15, 2009. It's based off which tax year the return is for, which is the year listed on all the IRS forms. I'll look at clarifying the language a little.

Unfortunately, there is no universal theory that applies to all districts about how a tax "refund" is part of the BK estate, and in what amount. Once the refund is actually received and in the debtor's hands, it is basically a cash asset. What we are really talking about is the "right to receive" the refund check. In my district, the refund is treated as incrementally received throughout the year. For example, if you filed in Oct of 2007, the trustee would be entitled to the portion of the refund that accounts for Jan 07-Sept 07, and the debtor would receive that portion of the refund for Oct 07 to Dec 07. But, there is overflow, if you file in Jan, Feb, Mar of the 2008, and have yet to receive your refund, the trustee will take all of it. I am not sure of the legal justification, but I think the idea is that the refund for tax year 2007 is essentially fully earned and nearly liquidated, and you are just waiting on the check, but since you have not actually received the check, the trustee gets it all.

Thus, I think in my district, the trustees would probably argue that if a debtor files BK in 2008, that the tax credit should be amortized in the same way as the tax refund. Thus, I am not sure that drawing an analogy to how tax refunds are treated is the best approach.

Also, there is the issue of how the stimulus tax credit would be treated in a chapter 13.

I have to get going, but I may have more to add as a mull this over.

If a district, like yours, treats the standard tax refund as incrementally received throughout a tax year, then in my opinion they could treat the stimulus payment (if not yet received by filer) as incrementally received throughout the period of Jan 08 to Dec 08. My point is that they shouldn't be able to treat it as incrementally received throughout the period of Jan 07 to Dec 07, like any standard tax refunds that will be going out shortly. (If it is received by the filer before their bankruptcy is filed, I think a trustee could sidestep the issue since it is cash on hand.)

I argue they should have the same claim to the stimulus payment as the filer's refund on their 2008 tax return (which is filed next year, by April 15, 2009.)

What I don't think a trustee should be allowed to do is: take the entire stimulus payment from a filer that receives it after they file bankruptcy, if they would only attempt to take the filer's refund on their 2007 tax return (which is being filed now, by April 15, 2008), and attempt taking no part of the filer's refund on their 2008 tax return (which will be filed next year, by April 15, 2009.)

[HHM]

I'm pretty sure that in IRS and tax preparer terminology, "the 2008 tax return", applies to the tax year 2008, although it is filed by April 15, 2009. It's based off which tax year the return is for, which is the year listed on all the IRS forms. I'll look at clarifying the language a little.

That is fine, so long as you are consistent and make it clear to what you refer. Maybe the IRS takes that approach about terminology, but I think for common people, when they reference their 2008 tax returns, they are talking about the return they filed IN 2008, which is actually for tax year 2007.

As for the rest, if that is the only point you are making, don't you think it is somewhat moot. Has any trustee actually attempted to lay claim to the rebate based on an argument that it is earned in 2007. I thought you were going to try to make the larger point that the trustees should not be entitled to the rebate on any grounds. In any event, taking your word on what ESA2008 says, then you are correct, the trustee could not lay claim to the full amount of the rebate as if it was earned in 2007.

But it raises another point, and I think the more interesting position to try to refute, would be the trustees argument that the rebate is earned in full, immediatly, by nature of ESA2008. One reason the tax refund is amortized, is because your taxes are based off your income, so when you file BK mid year, the income you earn after you file BK is yours, and so is any tax benefit from that work. This tax rebate does not work the same way, does it? I could see a trustee argue that they are entitled to the full Rebate regardless of when a person files BK in 2008, because it is a lump sum that is earned simply by the fact that the debtor is a tax payer. (thus, you may need to explore the eligilbility requirements).

[phoenyx]

That is fine, so long as you are consistent and make it clear to what you refer. Maybe the IRS takes that approach about terminology, but I think for common people, when they reference their 2008 tax returns, they are talking about the return they filed IN 2008, which is actually for tax year 2007.

As for the rest, if that is the only point you are making, don't you think it is somewhat moot. Has any trustee actually attempted to lay claim to the rebate based on an argument that it is earned in 2007. I thought you were going to try to make the larger point that the trustees should not be entitled to the rebate on any grounds. In any event, taking your word on what ESA2008 says, then you are correct, the trustee could not lay claim to the full amount of the rebate as if it was earned in 2007.

But it raises another point, and I think the more interesting position to try to refute, would be the trustees argument that the rebate is earned in full, immediatly, by nature of ESA2008. One reason the tax refund is amortized, is because your taxes are based off your income, so when you file BK mid year, the income you earn after you file BK is yours, and so is any tax benefit from that work. This tax rebate does not work the same way, does it? I could see a trustee argue that they are entitled to the full Rebate regardless of when a person files BK in 2008, because it is a lump sum that is earned simply by the fact that the debtor is a tax payer. (thus, you may need to explore the eligilbility requirements).

It's hard for me to say at this time whether my point is moot or not. Since the stimulus payments haven't been sent out yet, we haven't seen how trustees will handle them, and if they will try to take them from people who have already filed recently, or will be filing before they receive the stimulus payment.

I prepared this paper based off a poster's question on if they filed now what happens to the stimulus payment. He was worried that his trustee would take the stimulus payment since it would not be exempted, because under his attorney's advice, he couldn't exempt something he did not yet have. So, I prepared this paper to be used in the situation where a trustee tries grabbing the stimulus payment for bankruptcies being filed recently or in the near future.

I'll definately think through the possible trustee argument that you raised.

[HHM]

I see.

Also, just to clarify the filing date vs 341 issue briefly. It can sometimes seem like the trustee can lay claim to some assets that are received after the date of filing but before the 341 meeting, but what is going on is the trustee is making the argument that the debtor's "right" to receive that asset actually accrued before the filing date, thus making the asset a part of the BK estate. But there is no "asset grace period" regarding the BK estate, the estate is created the SECOND you file BK and contains all assets and liabilities that exist for the debtor at that moment. The other thing that confuses the issue is that "US Trustee" will still look at future income, (income earned between filing and the 341) to see if any disposable income is available to force the creditor into a chapter 13. (note, this aspect of what the US trustee does is controversial).

[phoenyx]

HHM, what do you think of the last two paragraphs in my paper? These are the ones that suggest waiving receiving the stimulus payment a year early with the IRS, and instead taking it on the tax return for 2008 (by April 15, 2009) would destroy the right to receive argument? In the paper, I put my worry that a trustee might claim this was fraud or hiding assets, if the taxpayer uses this method to defer receiving the stimulus payment a year. I don't know enough about fraud claims to know if an argument could/would/should be made against this method.

(For clarification, there's two seperate issues discussed in my paper. The first is a position stating that the trustee can't necessarily take the entire stimulus payment for bankruptcies filed around now. This position couldn't involve fraud because it's just arguing something is out of the trustee's seizable assets. It's the sceond position discussed in my paper, where a taxpayer could defer receiving the stimulus payment a year, that I'm not sure if it rises to fraud levels.)

[HHM]

HHM, what do you think of the last two paragraphs in my paper? These are the ones that suggest waiving receiving the stimulus payment a year early with the IRS, and instead taking it on the tax return for 2008 (by April 15, 2009) would destroy the right to receive argument? In the paper, I put my worry that a trustee might claim this was fraud or hiding assets, if the taxpayer uses this method to defer receiving the stimulus payment a year. I don't know enough about fraud claims to know if an argument could/would/should be made against this method.

I don't know. To really offer any insight I would actually have to go read ESA2008 and any IRS publications on the issue.

I'm not sure deferring receipt of the refund helps. If I understand you correctly, the choice of when to seek the rebate is merely a choice of deciding which tax returns (2008 or 2009) you want to use to establish the debtors eligibility for the rebate. But the rebate itself, is for tax year 2008 regardless of when the debtor establishes eligibility.

[phoenyx]

I don't know. To really offer any insight I would actually have to go read ESA2008 and any IRS publications on the issue.

I'm not sure deferring receipt of the refund helps. If I understand you correctly, the choice of when to seek the rebate is merely a choice of deciding which tax returns (2008 or 2009) you want to use to establish the debtors eligibility for the rebate. But the rebate itself, is for tax year 2008 regardless of when the debtor establishes eligibility.

No problem. I'm not in the situation of neededing to defer receipt, so I'm probably not going to put much more thought into the possibility of deferring it either.

You are correct of my understanding, that it's an issue of which of the two tax returns you are using to establish eligibility for the stimulus payment.

However, this method could help (if it doesn't cause a fraud claim) a filer who would be otherwise filing bankruptcy after when the IRS is going to be sending out the stimulus payments -- if they are in a bankruptcy district that wouldn't otherwise try to seize future tax returns for a year that is only half way through or so. I have been under the impression that in some bankruptcy districts, if a debtor files in June, for example, that the trustees might not bother asking about the tax refund they receive a year later -- even though the year they are filing in is half over.

Doing this would at least make the stimulus payment not treated as cash received, and in districts that are not as aggressive as others about seizing future tax returns, the debtor might be able to keep the stimulus payment this way if they receive it over a year from now, whereas they might encounter problems keeping the stimulus payment if they allow the IRS to otherwise send it early, within the next few months.

[HHM]

It will be interesting to see how this is resolved.

It might simply come down to a public policy argument. Some judge will hopefully rule that by allowing the trustee to seize the tax rebate defeats the purpose of ESA2008, and therefore the rebate is beyond the reach of the trustee. The purpose of ESA2008 is to stimulate consumer consumption, and paying off creditors does not achieve that purpose. From a strict legal perspective, that is not a very strong argument, but who knows.

[phoenyx]

Very true. To me, It's really too bad that the ESA2008 doesn't say the stimulus payment isn't a seizable asset in a bankruptcy. Increasing the national debt to pay creditors in a bankruptcy doesn't sound like a good idea to me.