Timothy Fox

Document Type

Research Memorandum

Publication Date




Establishing what property of the debtor will pass into the bankruptcy estate is critical to effectuating the dual purposes of the Bankruptcy Code: to grant the debtor a fresh start and to divide assets of the estate equitably among creditors. In a chapter 7 proceeding, this threshold determination divides the debtor’s assets into those that the debtor will retain and those that will be liquidated to satisfy creditors’ claims.

In determining what is property of the estate, an issue arises when before filing for bankruptcy, the debtor files a return for a pre-petition tax year and elects to apply a refund toward her petition year’s tax liability. Assuming the refund was property of the estate, how does the debtor’s election, which is irrevocable under the Tax Code, affect the nature of the debtor’s property interest? If the debtor retained an interest, then the refund is property of the estate under section 541 of the Bankruptcy Code and is subject to turnover under section 542 of the Code. See 11 U.S.C. §§ 541– 542 (2006).

Recently, in Nichols v. Birdsell, 491 F.3d 987 (9th Cir. 2007), the Ninth Circuit confronted this issue and determined that the debtor’s irrevocable election to apply a tax refund as a credit for the following tax year was not a bar to the bankruptcy trustee’s turnover claim. Other courts that have encountered this issue have reached a different result.

Part II of this memo details the Bankruptcy Code’s provisions relevant in determining what property belongs to the estate. Part III discusses case law from courts that have confronted the issue of a chapter 7 debtor’s election to apply a pre-petition tax refund toward the petition tax year and illustrates that courts have adopted three different approaches in adjudicating the issue. Part IV explores the policy considerations involved in these three approaches. The memo concludes that regardless of the approach selected, the bankruptcy court must consider the competing interests of creditors and debtors.



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