Kansas EITC Exemption Constitutional

Posted by NCBRC - August 19, 2013

Despite relentless attacks by the bankruptcy trustees Kansas’s bankruptcy-only exemption scheme, under which a debtor in bankruptcy is permitted to exempt his Earned Income Tax Credit, has once again been deemed constitutional. Nazar v. Lea (In re Lea), No. 12-1297 (D. Kans. Aug. 16, 2013), consolidated with Parks v. Hudson (In re Hudson), No. 12-1298. The exemption benefits low income families with dependent children by treating the excess of EITC credit over taxes owed as an overpayment of taxes and refunding the difference.

Like all the courts addressing the Kansas statute so far, the district court rejected the trustees’ argument that the exemption statute violates the Uniformity and the Supremacy Clauses of the Constitution.

There is no violation of the Uniformity Clause for the simple reason that that Clause restricts the power of Congress and is not applicable to state action. See In re Kulp, 949 F.2d 1106, 1109 n. 9 (10th Cir. 1991). See also Richardson v. Schafer (In re Schafer), 689 F.3d 601 (6th Cir. 2012), cert. denied, No. 12-643 (Feb. 19, 2013).

Relying on section 522 of the Bankruptcy Code which expressly permits states to use their own exemptions rather than the federal exemption scheme, the court quickly dispensed with the notion that the exemption statute offends the Supremacy Clause by express or field preemption. Against the backdrop of a presumption of constitutionality, the court went on to reject the trustees’ argument that the exemption statute actually conflicts with several provisions of the federal Bankruptcy Code. The trustees argued that the exemption conflicts with sections 541(c)(1)(B) (defining property of the estate), 507 (priorities), 549 (post-petition transfers), and 544(a)(2) (“strong arm” statute giving trustee power of hypothetical creditor). The court found that as to the first three provisions, Kansas’s EITC exemption, by removing property from the bankruptcy estate, operated exactly as any other exemption statute operates and could not, therefore, be deemed preempted without preempting all state exemptions. Likewise, with respect to section 544, a trustee has no less power by reason of the EITC exemption than the hypothetical creditor because no creditor is able to obtain exempt property. Nor could a creditor outside bankruptcy attach the EITC credit held by the IRS or the Kansas Department of Treasury. From a policy standpoint, the exemption furthers the federal goal of benefiting a vulnerable segment of society.

NACBA has filed amicus briefs in these cases and other cases attacking the Kansas exemption statute. Notwithstanding consistent losses on these issues, the Kansas trustees have taken two cases raising the identical arguments to the Tenth Circuit BAP. In re Beach, No. 13-37, and In re Murray, No. 13-34.

Lea opinion


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