Splitting the Refund When One Spouse Files Bankruptcy

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Three individuals who have all provided guest blogs for PT have co-authored a new ABA Tax Section Publication that could be important for those interested in tax controversy work:  Litigating a Case in Tax Court by Sean Murphy Akins, Kandyce Lyndsey Korotky, and David M. Sams.  Designed to cover every aspect of a United States Tax Court case from start to finish, Litigating a Case in Tax Court provides detailed guidance and tips on the Tax Court process in an easy-to-read and easy-to-use paper format with an online portal for accessing many sample documents that practitioners can use.  If you are interested in the book, you can find information about ordering it here.  This is one of several books published by the ABA Tax Section on a tax procedure topic.

The case of In re Culp, No. 20-52558 (Bankr. E.D. Mich. 2021) resolves a fight between the debtor and the trustee of his chapter 7 case over who receives his 2018 refund.  The court decides that the trustee will get to keep the entire refund, applying one of the four tests that bankruptcy courts have developed for this situation.  The result follows the majority rule and follows the result that would attach outside bankruptcy in an injured spouse situation if one spouse had debts subject to offset.  I agree with the outcome but the various possibilities depending on where a bankruptcy petition is filed suggest that the issue should be resolved to reach a uniform application of the law.

I have written about bankruptcy and refunds previously here and here.  We have recently had articles about bankruptcy and offset, here and here.  In this case, the Culps were apparently up to date on the tax liabilities and offset did not become an issue.


Mr. Culp filed bankruptcy but his wife did not.  Although they did not file a joint bankruptcy petition, an election similar to filing a joint return, they did elect to file a joint 2018 return.  The 2018 return requested a refund of $13,825 which had not been paid as of the date of the filing of Mr. Culp’s bankruptcy petition on December 23, 2020.  The court does not explain why a 2018 refund was still unpaid so long after the due date.  It does say that the IRS paid $590.00 of interest on the refund, indicating that the return was probably filed on time, and something held it up in processing.  The delay in processing the return, whatever the reason, works to the Culps’ distinct disadvantage here.

When the IRS did issue the refund check on April 15, 2021, it knew of the bankruptcy case and sent the check to the trustee who, I am sure, gratefully received it since now the trustee had an asset case and was assured of getting more money out of this case than the ordinary no asset chapter 7 case.  The trustee moved to include the entire refund check as property of the bankruptcy estate.  Mr. Culp opposed the motion, arguing that the check should be split 50-50 between him and his wife with whom he filed the joint return.

In 2018, Mr. Culp worked and earned all the income reported on the return.  He had also paid all of the withholding generating the refund.

The court notes that bankruptcy courts have split four ways in their treatment of refunds issued in situations in which only one spouse has filed a bankruptcy petition.  It cites to the case of In re McInerney, 609 B.R. 497, 503 (Bankr. N.D. Ill. 2019) as describing and discussing in detail all the approaches that bankruptcy courts have taken on this issue.  The four approaches are:

  1. The 50/50 Rule: to allocate a joint tax refund equally between the spouses, regardless of tax withheld, income produced, or credits applied. A presumption of equal contribution and thus equal ownership is applied to find that a joint tax refund, as marital property, should be equitably distributed. This follows from the imposition of joint liability for any tax deficiency resulting from the filing of a joint tax return. This approach represents the minority approach in U.S. courts.
  2. The Income Rule: to divide joint tax refunds proportionally according to the income generated by each spouse. This rule is based on the principle that income tax liability arises from the receipt of income but has little support because income does not directly correlate to amounts withheld. This rule has thus been effectively superseded by the Withholding Rule, below.
  3. The Withholding Rule: to allocate the refund between spouses in proportion to their respective tax withholdings during the relevant tax year. This rule is based on the premise that the filing of a joint tax return does not alter the property rights of the spouses, and that each spouse has a separate legal interest in any overpayment of tax made by them on their own respective income. This is the majority rule in U.S. courts.
  4. The Separate Filings Rule: to apportion the refund based on a determination of what each spouse’s contributions and tax liabilities would have been if the spouses had filed separately, and to apply that proportion to the joint tax refund resulting from filing a joint return. This method is based on Revenue Ruling 74-611, in which the IRS ruled that when a joint return is filed, each spouse has a separate interest both in the reported income and in any overpayment. This approach considers each spouse’s withholdings, estimated tax payments, income, and contributions as a whole.

As mentioned above, the debtor argued for the 50/50 split since that would preserve the largest refund from the trustee’s clutches.  The trustee chose the withholding approach since that would bring the largest amount into the estate.

Interestingly, the bankruptcy judge deciding this case had split on the issue himself in prior opinions.  He had an opinion from 2008 using the 50/50 approach and one from 2013 using the withholding approach.  He benefited from the nice discussion in McInerney.  He decides here that the withholding approach, which has become the majority approach among bankruptcy judges, applies.

Because the treatment in the withholding approach tracks tax law principles, it makes the most sense to me.  Here, it works to debtor’s disadvantage, but it could work to the debtor’s advantage or be relatively neutral in another case.  Having the bankruptcy outcome parallel the tax outcome seems the most appropriate, even though the combination of this approach and the IRS’s delayed issuance of the refund hurts the Culps here.

Because the refund was sizable, it makes you wonder if earlier receipt of the refund might have staved off the bankruptcy filing.  It’s also impossible, at least without digging into the bankruptcy case, to know which creditors are the winners and losers as a result of the late refund – assuming that the Culps would have used the refund to pay creditors.  The clear winner here is the trustee who will get to take a fee out of the refund.


  1. Bob Kamman says

    The case citations all seem to come from states that do not recognize community property. Is that because in community-property states — about a third of the country, by population — all four tests would lead to the same result in most cases?

    • Bob – I think you are right to point out that in community property states this is probably not an issue. I am not a community property expert but my expectation is that the four tests would lead to the same result in a community property state.

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