James and Beverly Nichols filed their 2001 federal income tax return on January 20, 2002. The return showed that they were entitled to a refund in the amount of $2,231.57. They checked the box on their return, making the irrevocable election to apply that amount to payment of future taxes, pursuant to 26 U.S.C. § 6513(d). Sixteen days later, the Nichols filed their chapter 7 petition.
More than five years after these events, the Ninth Circuit has ruled that “the pre-petition application of the right to the tax refund was an asset as of the petition date, and that the Debtors must therefore deliver to the trustee the value of the property under section 542(a).” In re Nichols, 2007 WL 1344219 (9th Cir. May 09, 2007). This is one of those results that seems obviously correct in effect, but a little difficult to lawyer your way into.
The Ninth Circuit’s opinion omits any mention of the amount in dispute. I had to mine the Bankruptcy Court docket for that. Over my years practicing bankruptcy law, I have seen many published decisions at the appellate level that do reveal that the underlying dispute is over a tiny amount of money. At least tiny in relation to the cost of filing a lawsuit in the bankruptcy court, prosecuting an appeal to the US District Court, and then briefing and arguing the case in San Francisco before the Ninth Circuit.
Why did the Trustee file the lawsuit? As far as I can tell, no other assets were administered in the Nichols’ case, so assuming that certiorari is denied (that was meant to be a joke but I wouldn’t be surprised . . . ) the Trustee will get to administer a $2,231.57 estate, plus some interest and costs. Does this come up all the time? Why did the Debtor mount two unsuccessful appeals? Was their lawyer trying to establish a legal principle for the benefit of his own practice and the debtors’ bar? Was it a grudge match? Or do they both just love it so?
I’m going to send a copy of this post to all of the combatants and invite them to comment. I will probably be ashamed in the presence of their diligence and public spirit. Check back to see what they have to say.
