In determining what is property of the estate, an uncertain situation arises when before filing for bankruptcy the debtor filing her tax return for a pre-petition year elects to apply a refund toward her next year’s tax liability. Assuming the refund was property of the estate, how does the debtor’s election, an irrevocable election under the Tax Code, affect the nature of the debtor’s property interest? If the debtor retained an interest, then the debtor’s interest in the refund is property of the estate under section 541 of the Bankruptcy Code and is subject to turnover under section 542 of the Bankruptcy Code. Recently, in Nichols v. Birdsell, 491 F.3d 987, the Ninth Circuit confronted this uncertain situation 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 under section 542, i.e. the credit was property of the estate. Other courts, however, that have encountered this issue of a debtor who, pre-petition, irrevocably elects to apply a tax refund to the following tax year have reached a different result.
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Timothy Fox, J.D. Candidate 2010 No. 10, Vol. 1 (2009)