ACTC and EITC Tax Refund Exempt under Washington Law

Posted by NCBRC - January 6, 2022

The debtor’s tax refund consisting of her Earned Income Tax Credit (EITC) and Additional Child Tax Credit (ACTC) falls under the category of “public assistance” within the meaning of Washington’s exemption law and is therefore exempt from distribution to creditors in bankruptcy. Ellis v. Moreno (In re Moreno), No. 21-1124 (B.A.P. 9th Cir. Dec. 23, 2021) (unpublished).

The debtor filed for chapter 7 bankruptcy on December 30, 2020, and filed her 2020 tax return post-petition. She received a tax refund that included $1,709 from the ACTC, and $5,550 from the EITC, both of which she claimed as exempt. The trustee sought turnover of the refund in the amount of $5,169.11 representing the prorated amounts of the ACTC and EITC tax credits. The bankruptcy court denied the debtor’s motion to certify the question to the Washington State Supreme Court and denied the trustee’s motion for turnover after finding the tax credits were exempt.

On appeal, the Bankruptcy Appellate Panel for the Ninth Circuit set forth the statutory context. Section 74.04.280 of the Rev. Code of Wash. provides that public assistance benefits “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 statute defines “assistance” as “public 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.” RCW 74.04.005(11). “Federal aid assistance” is further defined in terms of payments made by the federal government to “needy persons.”

The panel observed that other states with similar exemption statutes have interpreted them to include tax credits such as the ACTC and EITC. One such case, Hardy v. Fink (In re Hardy), 787 F.3d 1189, 1197 (8th Cir. 2015), relied in part on the legislative history of the ACTC including comments from legislators to the effect that the statute was intended to benefit needy taxpayers. Courts finding that the ACTC refund was not exempt tended to be addressing an earlier version of the ACTC in which the minimum income level for eligibility was higher than the later version at issue here. The panel agreed that the ACTC qualified as a “public assistance” benefit under the state exemption laws because its operation and purpose were largely to benefit low-income taxpayers.

The panel next addressed whether the debtor’s EITC refund was likewise exempt. The court’s review of caselaw from other jurisdictions found almost universal acceptance of the EITC, which is intended to benefit low-income taxpayers, as “public assistance.” The cases finding to the contrary were based on state exemption statues which had language excluding such tax credits. The panel agreed with the courts that found the EITC was intended to benefit low-income taxpayers. It held, therefore, that both the ACTC and the EITC were public assistance benefits which would be exempt under Washington exemption law.

The panel went on to address the trustee’s arguments to the contrary.

First, the trustee argued that neither tax credit was a “federal aid assistance” within the meaning of the state exemption statute, because neither was a “federal program.” The trustee cited the federal programs listed in the Catalog of Federal Domestic Assistance (“CFDA”) which is a “government-wide compendium of Federal programs, projects, services, and activities that provide assistance or benefits to the American public.” Because neither tax credit is listed in that catalog, the trustee maintained that they are not “federal aid assistance.”

The panel found the listing in the CFDA was irrelevant to the question of whether the tax credits fell within the state definition of public assistance. The panel reasoned that “the CFDA appears to be a mechanism by which individuals and organizations can find programs relevant to their needs— not a reference for determining whether a tax credit qualifies as a federally administered needs-based program under state law for purposes of exemption.”

The panel also found the trustee’s reliance on other state cases finding the ACTC and/or the EITC to be non-exempt was misplaced. The cases raised by the trustee all involved state exemption laws that were either specifically inapplicable to the tax credits or which were significantly narrower than the Washington statute.

To the trustee’s argument that the state exemption refers only to public assistance benefits provided by the state, the panel found that, in fact, Title 74 of the Washington statute is titled “Public Assistance” and public assistance is later defined to include “federal aid assistance” which the panel found includes the tax credits at issue here.

The panel affirmed.

Moreno 9th BAP Dec 2021

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