Next year, the Tenth Circuit will be deciding under Colorado law whether an entire child tax credit is exempt, or only a pro rata portion.

Chief Bankruptcy Judge Kimberly H. Tyson of Denver and Chief District Judge Philip A. Brimmer both decided that a refundable child credit is entirely refundable even if the child tax credit was responsible for only a small portion of the refund. Although the Colorado statute favors the debtor, the two judges’ opinions are examples of liberal interpretation of exemptions in favor of the debtor.

The Child Tax Credit

The individual debtor in chapter 7 signed a stipulation calling for him to file his tax return and turn any refund over to the trustee. The stipulation required the trustee to turn over any exempt portion of the refund to the debtor.

The debtor had paid about $8,000 in federal withholdings, and he was entitled to a refundable child tax credit of some $1,800. His tax bill was about $8,500, giving him a tax refund of about $1,300. Representing his exempt child tax credit, the debtor demanded that the trustee turn over the entire $1,300.

Effective at the time, the Colorado statute exempted “[t]he full amount of any federal or state income tax refund attributed to an earned income tax credit or a child tax credit.” Colo. Rev. Stat. § 13-54-102(1)(o) (2021). [Emphasis added.]

After the trustee filed a motion to compel the debtor to relinquish his claim to the tax refund, Chief Bankruptcy Judge Tyson decided that the debtor was entitled to recover the entire $1,300. Chief District Judge Brimmer affirmed in an opinion on September 3.

Not Pro Rata

On appeal to Judge Brimmer, the trustee contended that the bankruptcy court should have used a pro rata tracing method, which would have yielded the debtor just a small refund, given that the child tax credit was only 22% of the debtor’s withholdings. Judge Brimmer undertook de novo review of the question of law.

Judge Brimmer observed that the state statute did not define “attributed to” and that the Colorado Supreme Court has not interpreted the term. He consulted dictionaries in holding “that the plain meaning of the statute exempts the full amount of any federal tax refund caused by the child tax credit.” [Emphasis in original.] He also said that “the ‘test for causation’ is typically the but-for test” under Colorado Supreme Court authority.

“Removing the refundable child tax credit,” Judge Brimmer said, “would eliminate [the debtor’s] federal refund.” As a result, he said that the “refundable child tax credit is thus a ‘but-for’ cause of the federal refund.”

Judge Brimmer noted how the state statute did not exempt a portion or percentage of the tax credit. “Rather,” he said, the statute exempts the “‘full amount of any federal or state income tax refund attributed to an earned income tax credit or a child tax credit.’”

“Because the full amount of [the debtor’s] federal refund is ‘attributed to’ the ‘child tax credit,’” Judge Brimmer ruled that the debtor’s “refund is therefore exempt under” Colorado law. Affirming Judge Tyson, he said that the “Colorado legislature could have chosen alternative words to impose a causation standard different from but-for causation.”

Note

The trustee is appealing to the Tenth Circuit. Often, appeals courts will certify questions of the sort to the state supreme court. However, the Colorado legislature amended the exemption statute after the debtor filed his bankruptcy petition to deal with comingling and to say that the exemption is exempt whether refundable or not. It is unclear to this writer whether the state’s high court would wish to interpret a former statute.