October 20, 2023
One of the places I like to stash money for my Debtor clients is with taxing authorities. Having a credit balance with a taxing authority can be a very useful asset protection plan. Everyone owes a tax for something. Whether it is real estate taxes, sales taxes, income taxes, etc., having a taxing authority hold excess cash can be very helpful. Further, if the money is not needed for taxes, the Debtor can always ask for a refund.
Under the axiom, “Pigs get fat and hogs get slaughtered,” Judge Tucker of Eastern District of Michigan tells us when a Debtor is a hog instead of a pig. See In re Wylie, 649BR852(Eastern D Mich., 2023). Here the husband-and-wife Debtors, every year, would have a tax refund due to them and each year they would roll over the tax refund into the next year’s tax return. Starting in 2018, the Debtors filed their returns and did not ask for a refund. As of the petition date in August 2020, the Debtors were entitled to refunds totaling $41,534.00 from both the State of Michigan and the IRS. However, after the Debtors filed for bankruptcy and after a trustee was appointed, the Debtors filed their 2019 tax returns and again rolled over the tax credit to the 2020 tax return. The Debtor explained that there were foreclosures of equipment, and they were unsure if there would be any tax liabilities that they would owe. The court found that while there was an intent to transfer property with the tax returns for 2018 but, it was merely a preferential transfer and thus did not give rise to a §727 non-dischargeability action.
The Debtors’ problem arose because after the filing of the bankruptcy, any tax refund is the property of the estate. So, by requesting that any refund on their 2019 tax return be applied to their 2020 taxes, the Debtors intentionally transferred property of the estate. I disagree with the Judge that this transfer was made with the intent to hinder the trustee by applying the credit to the 2020 taxes. The Debtor just wanted to make sure that they had enough funds to pay any taxes due after all their property was foreclosed or sold by the trustee. The Court made a point that the trustee would have to file a turnover motion or an adversary proceeding to get the funds back and as a result it cost the estate money. However, the Court found that the Debtors did not file a false statement on their schedules and SOFA, and did disclose some tax refund might be available Further, the Court made a finding that the statement was not made to hinder, delay or defraud the trustee, however the Court found that asking to continue to roll over the tax refund after that refund became property of the estate, should be deemed a violation of §727. A better result, in my opinion, would be to order the turnover of the funds. As has been the case many times in my career, a judge disagrees with my view of the world. In this case, the Debtors’ bankruptcy counsel was involved in the decision to roll over the refund. The Court states, “The Court assumes the Debtors were not intimately familiar with the …bankruptcy distributions and priorities, although their attorney no doubt was. But the Debtors’ actual subjective intent in transferring property of the bankruptcy estate, when they made their 2019 tax Refund Transfers, still was, in substance, an intent to “hinder” the Trustee.”
The Court at least has given us instructions that transfers of refunds into the next taxable year for a legitimate concern that there might be future taxes owed might be a preference, but it is not a §727 claim unless and until a bankruptcy trustee has rights to the refund.
<<<
We have more to say about Asset Protection Planning in our next post or podcast. Stay tuned…
>>>
Previous Blogs:
Asset Armor: Protecting Your Wealth with Bernstein-Burkley’s Asset Protection Insights Blog #1
Asset Armor: Protecting Your Wealth with Bernstein-Burkley’s Asset Protection Insights Blog #2
Asset Armor: Protecting Your Wealth with Bernstein-Burkley’s Asset Protection Insights Blog #3
Asset Armor: Protecting Your Wealth with Bernstein-Burkley’s Asset Protection Insights Blog #4
Asset Armor: Protecting Your Wealth with Bernstein-Burkley’s Asset Protection Insights Blog #5
Asset Armor: Protecting Your Wealth with Bernstein-Burkley’s Asset Protection Insights Blog #6
Asset Armor: Protecting Your Wealth with Bernstein-Burkley’s Asset Protection Insights Blog #7
Asset Armor: Protecting Your Wealth with Bernstein-Burkley’s Asset Protection Insights Blog #8
Asset Armor: Protecting Your Wealth with Bernstein-Burkley’s Asset Protection Insights Blog #9