16 B 40442
Gina B. Krol (the "Trustee"), chapter 7 trustee for the bankruptcy estate of Gerald O. McInerney (the "Debtor"), filed a motion for turnover of the estate’s interest in the Debtor’s federal and state income tax refunds for 2016 pursuant to 11 U.S.C. §§ 541 and 542. At issue was the proper allocation of those refunds which were filed jointly by the Debtor and his non-debtor spouse. The Trustee argued that the refunds should be divided equally between the Debtor and his spouse under the "50/50 Rule." The Debtor contended that, based on an agreement executed with his spouse after the filing of the bankruptcy petition, the refunds should be allocated using a "Hybrid Approach" of the "Separate Filings Rule" and the 50/50 Rule, whereby any tax benefit derived from the spouses’ decision to file jointly is equally divided between them, and the rest of the refund is then apportioned based on the balance owed or the refund due as calculated on hypothetical married-filing-separately tax returns. The Court found that, without a pre-petition agreement between the parties, the determination as to the division of the refunds must be made by the Court. Examining the various methods that other courts have used, as well as the Hybrid Approach advanced by the Debtor, the Court held that the appropriate method of allocating the refunds between the Debtor and his non-debtor spouse was the "Withholding Rule," under which the refund is divided between spouses in proportion to their respective tax withholdings during the relevant tax year. Applying that Rule, the Court found that, absent adjustments consensually made by the parties, the estate’s interest in the refunds totaled $6,254.91, and the Debtor was ordered to turn over to the Trustee, in addition to the amount he had already tendered, the sum of $5,035.42.