Opinion handed down June 2, 2015
When filing Chapter 13 Bankruptcy, Pepper Hardy sought exemption of her tax refund from the Additional Child Tax Credit (“ACTC”) as a public assistance benefit.[1] The bankruptcy trustee objected to Hardy’s requested exception, arguing that the ACTC was not a public assistance benefit because the legislative purpose behind the credit and the credit for households of up to $110,000 modified gross income contradicted Hardy’s characterization of the benefit.[2] The bankruptcy court sustained the trustee’s objection and denied the exception of the ACTC from Hardy’s bankruptcy estate, noting the ACTC did not benefit only “needy” families and did not qualify as a public assistance benefit.[3] Hardy appealed the bankruptcy court’s decision, but the Bankruptcy Appellate Panel (“BAP”) affirmed the court’s decision. Hardy appealed the BAP’s decision, and the Eighth Circuit reversed the bankruptcy court’s decision, concluding that amendments to ACTC exhibited a legislative intent to provide public assistance to low-income families and should thus be exempted.[4]
I. Facts and Holding
In 2012, Pepper Hardy filed for Chapter 13 bankruptcy and stated on her Schedule B that she planned on receiving a 2012 tax refund.[5] On her Schedule C, Hardy claimed most of this tax refund was exempted from her bankruptcy estate.[6] Specifically, Hardy noted that $2000 of the refund was attributed to her Child Tax Credit (“CTC”).[7] Hardy contended that a portion of the CTC contained a refundable ACTC, which was exempted as a “public assistance benefit” because the credit only benefitted low-income families.[8] However, the BAP rejected this argument, citing Hardy’s failure to present evidence demonstrating this exclusively low-income benefit.[9] Further, the BAP noted that it was feasible for a “relatively affluent family” to benefit from the ACTC, and the minimum income threshold prevented many needy families from benefitting at all from the credit.[10] Hardy appealed the BAP’s decision to the Eighth Circuit Court of Appeals, arguing that the existence of any public assistance benefit in the ACTC should qualify the credit for a public assistance benefit exemption.[11] The U.S. Court of Appeals for the Eighth Circuit reversed the bankruptcy court’s decision and held that the credit qualified for exemption because several amendments to the ACTC suggested a legislative intent to benefit low-income families.[12]
II. Legal Background
Though Title 11 of the United States Code defines bankruptcy law,[13] Missouri is one of thirty-five states that has opted out of the federal bankruptcy exemptions.[14] Rather than the federal exceptions, courts must look at Missouri’s bankruptcy exemption statutes’ construction, interpretation, and application when determining the potential exemption of various tax credits. Specifically, Missouri allows one filing for bankruptcy to exclude “public assistance benefits” from his or her bankruptcy estate.[15] The statutes, however, do not explicitly define public assistance benefits.[16] Other areas of the Missouri code have defined the term with significant consistencies.[17] Both the “County Health and Welfare Programs” and “Miscellaneous Offenses” criminal statute define public assistance benefits as:
Anything of value, including money, food, food stamps, commodities, clothing, utilities, utilities payments, shelter, drugs and medicine, materials, goods, and any service, including institutional care, medical care, dental care, child care, psychiatric and psychological service, rehabilitation instruction, training, or . . . benefits, programs, and services provided or administered by the department of social services.
An Illinois bankruptcy court held that a similar Illinois statute constituted a public assistance benefit because legislative changes implied intent to benefit low-income taxpayers.[18] While the statute’s original intent was not expressly noted as a public assistance benefit, the Illinois bankruptcy court noted recent amendments to the Illinois statute had greatly benefited low-income families.[19] Conversely, other state courts have ignored the progressing legislative history of these statutes in holding that ACTC is not a public assistance benefit.[20]
III. Instant Decision
The Eighth Circuit reversed the bankruptcy court in holding that the ACTC constituted a public assistance benefit, which was exempt under Missouri’s legislative intent of the credit.[21] While noting that neither Hardy nor the trustee’s arguments were overly convincing, the court relied predominantly on an analysis of the various amendments to the ACTC over the past fifteen years.[22]
The court first examined a 2001 amendment to the CTC, which established a yearly increase to the amount of credit per child, made the credit available to all families regardless of number of children, and planned an increase to the refundable portion of income earned over the threshold.[23] The court noted these beneficial changes and the explicit comments of senators describing the amendments as beneficial to low-income families as an illustration of the ACTC’s intent to provide a public assistance benefit. Similarly, the court discussed a 2003 change to the ACTC, which again increased the tax credit per child and immediately implemented the increased refundable portion planned and outlined by the 2001 amendment.[24] The court further analyzed the congressional progression toward a lower minimum threshold for the credit, which allowed more low-income earners to claim a refund while also increasing refund amounts for low-earners.[25] Responding to other courts’ determinations that ACTC should not be exempt, the Eighth Circuit stressed the lacking analysis of the state’s legislative purpose and amendments.[26] The legislative history of the ACTC, paired with legislative commentary, led the court to conclude that the credit qualified for exemption as a public assistance benefit.[27]
IV. Comment
In analyzing the past fifteen years of legislative history and commentary, the Eighth Circuit appears to have thoughtfully and comprehensively interpreted the evolving legislative intent of the ACTC. While the bankruptcy court, BAP, and other state district courts have sensibly construed the original construction and legislative intent of these statutes, their failure to consider recent changes and congressional commentary regarding the newly defined intent ineffectively characterizes the actual and purpose and current practical effect of the tax credit. Various statements from legislators expressly stating the purpose of the statutory changes was to benefit low-income families paired with the practical application of the statute clearly serving as a public assistance benefit to “needy” families makes it difficult to interpret the statute as a non-exempt credit.
– Mark Ohlms
[13]Gary Neustader, The New California Exemptions in Bankruptcy: A Constitutional Reprise, 15 Pac. L.J. 1, n.9 (1983); 11 U.S.C. § 101 (2012).
[20] In re Steinmetz, 261 B.R. 32 (Bankr. D. Idaho 2001); In re Jackson, 2013 WL 315595, at *2 (Bankr. S.D. Ind. 2013).
