In re Moreno: Bankruptcy Exemptions and Income Tax Refunds

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Gregory W. Mitchell

Gregory W. Mitchell



Gregory Mitchell joins Freeman Law to lead its bankruptcy practice. Mr. Mitchell is a native of the Dallas area, graduating from Southern Methodist University with a Bachelor’s Degree in Economics in 1991 and with his J.D. in 1994. In 1995, he obtained an LL.M. in Taxation from New York University. Mr. Mitchell currently directs the SMU Dedman School of Law’s federal taxpayer clinic. Mr. Mitchell’s background in tax makes him a natural fit for Freeman Law.

Prior to joining Freeman Law, Mr. Mitchell was the managing partner of The Mitchell Law Firm, L.P., a small firm he started in 2004, where he ran a diverse practice primarily focused on bankruptcy, tax and related litigation matters.

Prior to starting his own firm, Mr. Mitchell served as a Partner and General Counsel with Tax Automation, L.P., a national tax consulting firm. Mr. Mitchell was previously the National Director of Tax Technology at Ryan & Company, a national tax consulting practice, as well as a Senior Manager with KPMG, a “Big Four” accounting firm.

Case: In re Moreno, 127 AFTR 2d 2021-1946, Case No. 20-42855 (Bankr. W.D. Washington, May 11, 2021).

This case focuses on bankruptcy exemptions applicable in the State of Washington to certain amounts received by the Debtor as part of her federal income tax refund.  The trustee in her case filed a motion for turnover of estate property seeking certain federal tax refunds received by debtor Adelina Moreno (“Debtor”).

Specifically, the Debtor’s tax refund – a total of $10,631.00 – was comprised of the following amounts:

  1. $572.00 from taxes withheld (“Withheld Taxes”);
  2. $2,800.00 from the Recovery Rebate Credit (“RRC”);
  3. $1,709 from the Additional Child Tax Credit (“ACTC”); and
  4. $5,500.00 from the Earned Income Tax Credit (“EITC”).

The Debtor claimed exemptions under Washington law. The Trustee conceded that certain portions of Debtor’s tax refund were exempt. First, she did not dispute Debtor’s right to retain the full RRC in the amount of $2,800. She also conceded Debtor was entitled to an exemption in the amount of $2,630, representing the remainder of Debtor’s exemption under Wash. Rev. Code (“RCW”) § 6.15.010(1)(d)(ii) after using that subsection to claim $370 in cash and checking accounts as exempt.  But the Trustee sought to recover the remaining prorated refund of $5,169.11. Debtor argued that her entire tax refund is not property of the estate or that it is exempt.

Tax Refund as Property of the Estate

Debtor first argued that, because she filed her tax return postpetition, her interest in the tax refund only arose postpetition and the tax refund is not property of the estate.  The Court summarily dismissed this argument, noting that under 11 U.S.C. § 541(a)(1), the bankruptcy estate includes all legal or equitable interests of the debtor in property as of the commencement of the case. Debtor obtained an interest in the tax refund as she earned income throughout 2020. The Court concluded that the tax credits for the prepetition portion of the tax year are sufficiently rooted in Debtor’s prepetition earnings to be considered property of the estate, notwithstanding that obtaining the refund was contingent on her filing a tax return after the end of the tax year.

The RRC Portion of the Tax Refund

As noted, the Trustee did not dispute that Debtor is entitled to the RRC. The recently enacted 11 U.S.C. § 541(b)(11), which became effective December 27, 2020, excludes RRCs from estate property. Accordingly, the $2,800 RRC received by Debtor was held not to be part of the estate.

The Withheld Taxes

The Debtor also claimed in her Amended Schedule C that the $572 portion of her 2020 refund for taxes withheld was exempt under RCW § 6.27.150.  The Trustee challenged Debtor’s claim of this exemption, but the Debtor did not articulate how this statute would be applicable to the taxes withheld portion of her tax refund, nor did she otherwise rebut the Trustee. However, the Court found that it did not need to reach the issue. As explained below, the withheld portion of Debtor’s tax refund was exempt irrespective of RCW § 6.27.150’s applicability, as it is encompassed by her remaining exemption under RCW § 6.15.010(1)(d)(ii) related to assistance programs.

The ACTC and EITC Portions of the Tax Refund

The Debtor argued that her remaining tax refund-considering that the RRC is not part of the estate and that Debtor can still apply $2,630 of the exemption under RCW § 6.15.010(1)(d)(ii) – was exempt under  Washington law as either: (1) “public assistance” under RCW §§ 74.04.280 and 74.04.005; or (2) “child support” under RCW § 6.15.010(1)(d)(iv).

The Court first concluded that neither the ACTC nor the EITC portions of the tax refund constituted “child support” under RCW § 6.15.010(1)(d)(iv).  Finding that the plain meaning of “child support” refers to payments legally required of parents, the Court quickly that that the ACTC and EITC were not exempt as “child support” under § 6.15.010(1)(d)(iv).

The Court then turned to the issue of whether the ACTC and EITC Portions of the Tax Refund constituted “public assistance” under RCW §§ 74.04.280 and 74.04.005.  Starting with RCW § 74.04.280, the Court first noted that Washington law restricts bankruptcy trustees’ ability to obtain and administer “[a]ssistance”:

Assistance given under this title shall not be transferable or assignable at law or in equity and none of the moneys received by recipients under this title shall be subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy or insolvency law.

The Court went on to note that, while not part of Washington’s exemption scheme at RCW § 6.15.010, the Washington Supreme Court has nevertheless referred to statutes granting protections similar to the “public assistance” protection as exemptions.  It then proceeded to an analysis of whether the federal tax credits constituted “public assistance.”

Turning to statutory definitions, the Court found that “public assistance” was defined in RCW § 74.04.005(11) as:

[P]ublic aid to persons in need thereof for any cause, including services, medical care, assistance grants, disbursing orders, work relief, benefits under RCW 74.62.030 and 43.185C.220, and federal aid assistance.

Focusing in further, the Court found that ACTC and EITC would only be exempt if they qualified as “federal aid assistance” under this definition.  The issue would be defined even further by reference to a separate statutory definition of the term “federal aid assistance,” found at RCW § 74.04.005(8) to include:

[T]he specific categories of assistance for which provision is made in any federal law existing or hereafter passed by which payments are made from the federal government to the state in aid or in respect to payment by the state for public assistance rendered to any category of needy persons for which provision for federal funds or aid may from time to time be made, or a federally administered needs-based program.

Drilling down further into that definition, the Court found that this definition specifies two types of federal assistance, as separated by the comma. The first part describes assistance in the form of monetary payments from the federal government to the state for administration to needy persons but does not describe federal tax credits, as those are credited or paid by the federal government directly to taxpayers. But the second part includes as “federal aid assistance” any “federally administered needs-based program.” To qualify as “assistance” protected from bankruptcy administration under RCW § 74.04.280, the ACTC and the EITC would need to qualify as “federally administered needs-based program[s].”

The Court looked to determine whether federal tax credits could be considered federally administered needs-based programs.  Unfortunately, there was no mention of any tax-based federal benefits that offered any guidance.  The Court similarly found the legislative history unhelpful.  Further, the Court found no other Washington cases that discuss these tax-based programs.

The Trustee argued against categorizing any federal tax credit as a federally administered needs-based program, suggesting that making certain tax refunds exempt as needs-based programs would cause the availability of the exemptions to differ between debtors. The Trustee pointed out that debtors with children would be entitled to exemptions unavailable to other debtors due to the nature of the ACTC. The Court, however, was unpersuaded.  Turning to opinions of other states’ bankruptcy courts, the Court, while acknowledging the difference in wording of other states’ exemption statutes, found that both the ACTC and the EITC constituted “federally administered needs-based programs” that were therefore protected from bankruptcy administration under RCW § 74.04.280.


On one level, the precedential value of this opinion is limited to bankruptcy cases arising under Federal law.  However, the analysis undertaken by the Bankruptcy Court is instructive as to how bankruptcy courts in other states would approach the issue of whether certain tax credits and other tax-related benefits would constitute exemptions.  Each state’s statutes would need to be scrutinized for their unique statutory and definitional structure, but the Moreno court’s analysis provides a roadmap for such an analysis.


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