The Tenth Circuit BAP handed down a decision four days ago called, Weinman v. Graves (In re: Graves), 2008 WL 4649378, Nos. CO-08-038, 07-20569-ABC (10th Cir. BAP, Oct. 22, 2008); that is an absolute embarrassment of riches. Oh, and the fact that it provides a nifty new tool when representing debtors who are expecting a hefty tax refund and don’t have time to get it back before they file for Bankruptcy is just almost gravy.

The issue in Graves is whether or not a Chapter 7 Trustee can require turnover from the Debtors of a prepetition transfer to the IRS in the form of an application of a pre-petition tax refund to a post-petition tax year. In other words, the Debtors filed a tax return that would result in a large refund. The Debtors elected to have that refund applied to their next year’s tax liability. (Every year I see that box on my tax return and wonder who on EARTH would do that? Well, now I know — smart debtors.) The Trustee demanded turnover from the Debtors of that refund amount. The Debtors refused, and the rest is a wonderful BAP opinion.

Now, I am a little bit prejudiced. I am going to like any opinion that begins with:

This appeal exemplifies the concept that “you cannot get blood out of a turnip.”

Oh, and it gets better.

The official holding of the Court is:

Assuming, without deciding, that the pre-payment constitutes estate property as a contingent reversionary interest, this Court must decide wither the Bankruptcy Code empowers trustees to demand its turnover. We hold that it does not. Turnover is a remedy that is specifically limited by Section 542 to “property that the trustee may use, sell, or lease,” and is in the turnover target’s possession or control during the bankruptcy case. A contingent reversionary interest in funds held by another is simply not something that is in the debtor’s possession that can be turned over to the trustee.

Oh, please, “A contingent reversionary interest”? Would someone who paid attention in Property I please explain that to me?

Ok, so a Debtor can apply a tax refund to a post-petition year, and the Trustee can’t take it back from the Debtor. Why can’t the Trustee take it back from the IRS? Stay tuned for that and more fascinating tidbits from Graves.

By the way, if you are in the 9th Circuit (or just outside the 10th) be sure to read Nichols v. Birdsell, 491 F.3d 987 (9th cir. 2007) before getting too excited about Graves.

Elaine