Graves Pt. 2 — or, Why the Trustee Still Loses

My last post was about a scintillating BAP opinion that used language like, “blood out of a turnip” and “contingent reversionary interest”. In that post I explained why a Trustee cannot recover from the Debtor a pre-petition tax refund that the Debtor applied to a post-petition tax year. In other words, the Debtor filed a tax refund that resulted in a large refund. The Debtor checked the box to apply that refund to the following year’s tax liability. The Trustee wanted his money, by golly. He’s the Trustee! He’s entitled. BAP ruled against him.

My first question reading the opinion was why the Trustee couldn’t recover the money from the IRS? Now, if we are going to be picky, Graves expressly states that it is not deciding that issue. However, Graves cites two other cases on this issue and appears to agree with them. So, according to In Re: Middendorf, 381 B.R. 774 (Bankr. Kan. 2008), the pre-petition transfer to the IRS cannot be avoided, because it is nether a preference nor a fraudulent transfer. It is not a preference, because it is not a payment on an antecedent debt. It is not a fraudulent transfer, because the Debtor received value for the transfer. The Graves Court also cited another case, Grant v. United States (In re: Simmons), 124 B.R. 606 (Bankr. M.D. Fla. 1991) for the point that this pre-petition transfer to the IRS was not property of the Estate, because it becomes a payment of the Debtor’s estimated tax rather than overpayment of his prior year’s taxes.

However, the Graves Court did find that the Trustee would be entitled to a share of whatever refund resulted from that post-petition tax year. Of course, the Debtors then have a whole year to crank their withholding down. They should be able to deal.

This isn’t all folks. There is still more to come from the fascinating and scintillating, in re: Graves.


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