Child Tax Credit Refund Exemptible as Public Assistance Benefit

Posted by NCBRC - June 4, 2015

The federal Additional Child Tax Credit is a “public assistance benefit,” which may be exempted in bankruptcy under Missouri exemption law. Hardy v. Fink (In re Hardy), No. 14-1181 (8th Cir. June 2, 2015).

The CTC, 26 U.S.C. § 24, as enacted in 1997, “allowed parents under a certain income threshold to claim a nonrefundable credit of $500 per qualifying child.” Families with greater income were entitled to a reduced benefit. The ACTC refunds to the taxpayer a portion of the tax credit that exceeds the taxpayer’s tax liability. The bankruptcy court found that, because the CTC benefits both needy and non-needy recipients, it did not qualify as a “public assistance benefit” and sustained the trustee’s objection to the exemption. The BAP affirmed. Hardy v. Fink (In re Hardy), 503 B.R. 722 (B.A.P. 8th Cir. 2013).

The Eighth Circuit reversed.

The circuit court began with Missouri’s exemption law noting that it does not specifically define “public assistance benefit.” Nor do the definitions of that phrase in the context of other laws address federal tax refunds. Turning to dictionary definitions, the court agreed with the BAP that public assistance benefits are those designed to help the needy. The court then turned to congressional intent, legislative history and how the statute has been applied by other courts to determine whether the ACTC qualifies.

The court was persuaded that the history of amendments to the CTC demonstrate that the purpose of the child tax credit refund is to benefit low income families. In 2001, the refundable portion of the ACTC increased for lower income families and it was expanded to cover all families with dependent children rather than being limited to those families with three or more children. “This change overwhelmingly benefitted lower income taxpayers.” The court pinpointed several congressional statements illustrating that the refund was intended to benefit those taxpayers most in need (e.g. Senator Wellstone: “half a million children will be lifted out of poverty;” Senator Baucus: “We increase the amount of the [child tax] credit that is partly refundable so lower income families can benefit from the credit as well.”). In subsequent increases in the tax credit, Congress made a point to also increase the ACTC permitting low-income recipients to benefit in a greater amount and shift the bulk of the benefit to those with lower income. “These changes enabled more low-income earners to claim a refund and increased the refund amount for many low-income earners who previously were receiving a small refund.” 2008-2009 changes to the operation of the ACTC shifted the balance between providing incentives to earn greater income to simply providing assistance to the needy. 2010 and 2013 amendments further increased the benefit to low-income recipients. This steady shift toward increased support to the most needy convinced the court that the refund qualified as a public assistance benefit.

The court noted that its conclusion was in harmony with most other jurisdictions addressing similar issues, and that those courts finding that the ACTC is not a public assistance benefit generally failed to consider the legislative history and evidence of congressional motivation.

NCBRC was actively involved in this case with Nancy Thompson writing an amicus brief on behalf of the NACBA membership and assisting debtor’s counsel in responding to the court’s request for a 28j letter describing congressional intent behind the Act.

Hardy 8th opinion


Post a Comment

You must be logged in to post a comment.