SW Legal studies in Business

Spouses Share Income Tax Burden According to State and Federal Tax Rules
Description

Bankruptcy judge held that courts follow state and federal tax rules regarding tax liability and tax refunds for married couples that file joint returns. Hence, when one party to a marriage files for bankruptcy, and the other does not, the tax liability and refund rights are kept separate.

Topic Bankruptcy
Key Words

Chapter 7; Income Tax Refund; Joint Tax Return

C A S E   S U M M A R Y
Facts

Spina filed a voluntary petition for relief under Chapter 7 on February 28, 2009. His statement listed an anticipated tax refund of $5,500 from the 2008 tax year, which he listed as jointly owned with his wife. The federal refund ended up being $5,636, plus a state tax refund of $2,500. Spina claimed that since the returns were joint returns his wife is due one-half of the income tax returns. Trustee claims that since Spina was the only income earner in 2008, all tax returns should go to the bankrupt estate.

Decision

Any joint tax refund belongs to the spouses equally. Under the 50/50 rule in allocating joint tax refunds, the court applied state matrimonial law to establish each spouse’s right to marital property and considers what the division of marital property would be in divorce proceedings, creating a presumption that each spouse contributed equally to the household. Under New York law, as a general rule, refund on a joint tax return is a joint asset that the spouses own in equal shares. The court cannot assume that any refund represents income for one spouse or the other. Under the Internal Revenue Code, there is joint and several liability for spouses who file a joint federal income tax return. Hence, the spouses share the refund equally.

Citation In re Spina, ---B.R.--- (2009 WL 3078542, Bnkr. Ct., E.D., NY, 2009)

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