Turnover of Tax Refunds in Bankruptcy

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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 Shaikh, Case No. 19-80436-TLM (Bankr. E.D. Okla., March 4, 2022)

This case addresses an intersection of tax and bankruptcy law related to tax refunds.  Specifically, it looks at the issue of whether and when chapter 13 debtors are required to turn over tax refunds to the trustee.

Here, the Debtor filed his chapter 13 bankruptcy case on April 25, 2019, and initially confirmed a plan on February 18, 2020.  For reasons not relevant to the issue at hand, a Bankruptcy Appellate Panel reversed the confirmation and remanded the case to the Bankruptcy Court on November 23, 2020.  A second confirmation was held on the Debtor’s first amended chapter 13 plan, resulting in confirmation of the amended plan in February, 2021.

Subsequent to filing the case, the Debtor incurred post-petition income taxes to the IRS for tax year 2019.  To avoid dismissal of his bankruptcy case, on March 2, 2021, the Trustee and the Debtor agreed to the entry of an order requiring Debtor to make payments to the IRS of $100 a month beginning March 28, 2021, until the 2019 taxes were paid.  For tax year 2020, Debtor was entitled to a refund for overpayment of taxes to the IRS in the amount of $3,625 plus interest, as well as a refund from the Oklahoma Tax Commission (“OTC”) of $207.  From this overpayment, the IRS set off $771.74 for taxes still owing for 2019.

Upon notice of the 2020 tax refunds, the Trustee requested the Debtor turn over the tax refunds in accordance with the terms of the confirmed Chapter 13 Plan.  After much discussion between the Trustee and Debtor’s counsel, the Trustee demanded that the amount due from the 2020 tax refunds was $2,070.01, calculated as follows:

Overpayment for tax year 2020:          $ 3,625.00

+ Interest on overpayment:                  $      38.01

+ State tax refund:                                $    207.00

Less exempt stimulus payment:           $(1,800.00)

Net tax refund demanded by Trustee:  $ 2,070.01

Focusing on the language of “net tax refunds” found in the Plan, the Trustee urged that the only credit allowed was earned income tax credits, reaching this conclusion based on the following language from the plan:

Debtor(s) will timely file all required income tax returns and supply the Trustee with a complete copy (including all attachments) of each income tax return (both state and federal) filed during the Plan term within fourteen (14) days of filing the return and will turn over to the Trustee all net income tax refunds, minus earned income tax credits, received during the Plan term. Income tax refunds shall be paid to the Trustee in addition to the Plan payments stated above.

When the amount was not immediately paid, the Trustee filed a Motion to Dismiss.  The Debtor responded, arguing that the Debtor should only be required to turn over funds received from the IRS and OTC that he actually received, calculated by the Debtor as follows:

Overpayment for tax year 2020:           $ 3,625.00

+ Interest on overpayment:                   $      38.01

+ State tax refund:                                 $   207.00

Less amount offset by IRS for 2019: $  (771.74)

Less exempt stimulus payment:            $(1,800.00)

Net tax refund demanded by Trustee:   $ 1,298.27

Restated, the Debtor argued that he should not be required to turn over the amount offset by the IRS for 2019 taxes because he did not receive those funds.  The Debtor, of course, argued that “net” means the amount actually paid to the Debtor since the Debtor cannot turn over what he did not receive.

Finding no ambiguity in the language of the plan, the Court easily found that “net” means that which is remaining after the deduction of all charges, outlay or loss.  The Court found unpersuasive the idea that the specific reference to earned income tax credits in any way changed the allowance of other deductions in reaching “net income tax refunds.”  The Court further iterated that it “[did] not believe that a debtor can turnover funds he did not receive.”  The Court therefore concluded that the Debtor’s calculations were correct, and that he was therefore required to turn over only $1,298.27 from his 2020 tax refund – the amount that was actually received.


Although this case does not offer a tremendous amount of opportunity for debtors regarding retention of tax refunds, it does provide some relief knowing that debtors cannot be forced to turn over more than they actually receive in the form of a tax refund.  While scenarios can be envisioned that might limit the scope of this opportunity, it at least bears keeping in mind that there may be opportunities to structure one’s tax situation in a way that prevents tax refunds from being taken by trustees in a chapter 13 bankruptcy case.


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