FOR THE NORTHERN DISTRICT OF CALIFORNIA
JOHN LAVELLE, No. 1-89-00898
RAYMOND CAREY, Trustee,
v. A.P. No. 1-90-0254
UNITED STATES OF AMERICA,
Memorandum of Decision
On April 5, 1989, the debtor filed his 1988 income tax return. It showed that he was entitled
to a refund of $15,760.00. He elected to apply $6,700.00 of the refund to his 1989 tax
obligation rather than take the refund in cash. The debtor filed his Chapter 7 petition on May
The debtor's 1989 tax obligation turned out to be $5,584.00. On November 12, 1990, the
IRS refunded $1,135.43, which was the excess of the credit over the actual taxes owed. This
amount has been turned over to the Trustee, who now seeks a judgment against the United
States for the $5,584.00 which it credited to the debtor's 1989 taxes.
The court notes that for some reason the debtor is not a defendant in this action, even though
this situation has resulted from his attempt to shelter more assets than he had a right to claim
as exempt. Accrued income tax refunds are property of the bankruptcy estate, except to the
extent lawfully exempted. Kokoszka
, 417 U.S. 642 (1974); Segal
, 382 U.S. 375 (1966). When the I.R.S. credited the debtor's accrued overpayment
it benefitted the debtor from funds which belonged to the debtor's creditors. Thus, the debtor
would seem to be liable for return of the funds pursuant to section 550(a)(1) of the Bankruptcy
Code even if the technical defenses raised by the I.R.S. are sustained.
The court also notes that the full $5,584.00 may not be at stake here. Assuming that the
debtor's 1989 income was steady throughout the year, five-twelfths of his 1989 obligation was
incurred by the time he filed. Accordingly, five-twelfths of the $5,584.00, or $2,326.65, was
used up as of the filing. The debtor could have achieved the same result by declaring a short
tax year as provided in the Bankruptcy Tax Act. 26 U.S.C. section 1398 (d)(2).
The sovereign immunity argument raised by the I.R.S. will be decided by higher courts than
this. The court resolves the issue for purposes of this litigation by observing that while the U.S.
government may not be liable for damages, it must still be accountable for its disposition of
funds belonging to the estate. Any other position would render too many case precedents
invalid, most notably U.S.
v. Whiting Pools,Inc.
, 462 U.S. 198 (1983).
Since the amount of the debtor's prepayment over and above taxes actually owed on the date
he filed his bankruptcy petition were property of the estate, it should not have been credited to
the debtor's account. Since what was done was merely a bookkeeping entry, the I.R.S. will
merely be directed to reverse the entry and pay the $3,257.35 to the Trustee.
While this matter appears to be ripe for summary adjucation, a possible issue of fact could
remain if the debtor's 1989 income was not steady throughout the year, so that $2,326.65 is not
the correct amount owed in taxes as of May 31, 1989. Accordingly, the court will stay entry
of judgment in this matter for 120 days, during which any party may request a hearing on the
amount of 1989 tax incurred as of May 31, 1989. This delay will also give the debtor a chance
to think about paying the Trustee himself, thereby avoiding considerable tax penalties.
If no hearing is requested, in 120 days counsel for the Trustee shall submit a form of
judgment conforming to this decision, which counsel for the government has approved as to
Dated: April 17, 1991 _______________________