Court Rejects Nonstandard Provision for Retention of Tax Refund

Posted by NCBRC - January 25, 2019

The chapter 13 debtor was not permitted to include a nonstandard plan provision to retain her tax refund where the refund was not reasonably necessary for the support of the debtor or her dependents. Penn v. Viegelahn, 2018 WL 5984844, No. 18-354 (W.D. Tex. Nov. 13, 2018).

In her chapter 13 plan, Gloria Penn proposed to retain her 2017 tax refund of $5,832.00, and use the money to rehab real property which she would then either rent out or live on herself. The trustee objected on the grounds that the provision was contrary to the district’s form plan under which tax refunds are to be treated as disposable income to the extent they exceed $2,000.00. At a hearing to address her motion to retain and for plan confirmation, the bankruptcy court informed Ms. Penn that it would not confirm her plan as proposed and offered alternatives such as increasing her monthly homeowner’s expenses, or dismissing her case. The court then continued the confirmation hearing to a later date to give Ms. Penn the opportunity to consider her options. Before that second hearing was held, Ms. Penn requested that her case be dismissed.

On appeal, the district court began with the trustee’s argument that the confirmation denial was mooted by the dismissal of Ms. Penn’s case. The court found that even though the bankruptcy court did not enter an order at the initial confirmation hearing, it made the decision at that time that her motion to retain would be denied and that her plan was not confirmable. Where Ms. Penn opted for dismissal in order to appeal the confirmation denial, the court found that she had a right to appeal under Bullard v. Blue Hills Bank, 135 S. Ct. 1686 (2015).

The court turned to Ms. Penn’s argument that section 1325(b)(2)(A) permits her to deduct the refund from her disposable income calculation because the funds were reasonably necessary for her support or the support of her dependents. The court found, however, that the bankruptcy court did not err in concluding that Ms. Penn had not shown that the tax refund would be sufficient to make the necessary repairs to the property or that, as advised by the bankruptcy court, Ms. Penn could not have adjusted her plan to increase her monthly homeowner’s expense to achieve the same result. The district court, therefore, found that the bankruptcy court did not err in concluding that retention of the tax refund was not reasonably necessary. It affirmed.

The debtor has appealed this decision to the Fifth Circuit, No. 18-51055.

Penn WD Tex Nov 2018

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