Debtor Down but Additional Child Tax Credit Is Out

By James A. Beavers, J.D., LL.M., CPA, CGMA

The Eighth Circuit held that the additional child tax credit (ACTC) qualifies as a public-assistance benefit under Missouri law and thus was exempt from a debtor's bankruptcy estate.


Pepper Hardy filed for Chapter 13 bankruptcy relief in October 2012. Hardy stated in her bankruptcy schedules that she was to receive a 2012 federal tax refund, but that the majority of the refund was exempt because it was attributable to an ACTC, which is the refundable portion of a child tax credit (CTC). Hardy asserted that the CTC was a "public assistance benefit" and as such was exempt under Missouri bankruptcy law.

The bankruptcy trustee objected to the exemption. The Bankruptcy Court sustained the objection in a memorandum opinion in May 2013. Applying Missouri law, it found that the CTC was not a public-assistance benefit because the purpose of the credit was to "reduce the tax burden on working parents and to promote family values" and because the full credit was available to head-of-household filers with modified adjusted gross incomes (MAGIs) of up to $75,000 and married joint filers with MAGIs of up to $110,000. Thus, the CTC, unlike other traditional public-assistance benefits, did not benefit only the "needy." The Bankruptcy Court determined the differences between the CTC and the ACTC were "beside the point" and therefore did not thoroughly address them.

Hardy appealed to the Bankruptcy Appellate Panel (BAP), which affirmed. The BAP, relying on the same logic as the Bankruptcy Court, found that the CTC was not a public-assistance benefit because it was available to families that are not needy. Hardy sought to distinguish the nonrefundable CTC from the refundable ACTC, arguing that the ACTC benefits only lower-income families. The BAP rejected this argument, stating that Hardy had failed to present any evidence that only lower-income families were eligible for the ACTC. The BAP discounted a decision from an Illinois Bankruptcy Court (In re Koch, 299 B.R. 523 (Bankr. C.D. Ill. 2003)) that supported Hardy's position because the Illinois court could not say that a relatively affluent family will "never" benefit from the ACTC. The BAP also stated that "we fail to comprehend" how the ACTC could be a public-assistance benefit, because it required recipients to meet a minimum earned income threshold and would consequently not be available to the "most needy."

Hardy appealed the BAP's decision to the Eighth Circuit.

The Eighth Circuit's Decision

The Eighth Circuit held that the ACTC is a public-assistance benefit that is exempt from a debtor's bankruptcy estate under Missouri law. The court found that under Missouri law a public-assistance benefit is a government benefit provided to the needy. After reviewing the history of the CTC and ACTC, the court decided that statutory amendments that modified the ACTC demonstrated that Congress intended to benefit the needy with the ACTC.

The court first addressed what would qualify as a public-assistance benefit under Missouri law. Because the Missouri bankruptcy statute did not define "public assistance benefit," the court looked to other Missouri statutes where the term has been defined. However, the court did not find these definitions to be helpful in defining the term for bankruptcy purposes because the statutes deal with state and local benefits. The court therefore concluded that it should use the term's plain and ordinary meaning. The court agreed with the BAP that this was "government benefits provided to the needy."

To see if the ACTC fell within this definition, the court looked to congressional intent, statutory history (including amendments to the statute), and the operation of the statute in practice. As she had in the BAP and Bankruptcy Court, Hardy argued that if the benefit assisted anyone who is needy, it was public assistance, and the trustee argued if it benefited some individuals who were not needy, it was not public assistance.

While not endorsing either of these positions, the court determined, based largely on amendments to the original version of the ACTC, that the ACTC was a public-assistance benefit. The court described how in the frequent amendments made to the ACTC since its creation, the earned income threshold for receiving an ACTC had been lowered and the amount of the percentage of earned income that could be claimed as an ACTC had been increased—changes that specifically benefited low-income families. In particular, according to the court, the large reductions in the earned income threshold, in amendments in 2008 and 2009, had substantially shifted the focus of the ACTC from providing incentives for taxpayers to earn income to providing benefits to the needy. The court also noted that, in practice, with an income threshold at $3,000 after the 2009 amendment, the current version of the credit appeared to overwhelmingly benefit low-income families.

In addition to the actual effect of the amendments to the ACTC, the court found further support for its position in statements made by legislators. The court quoted numerous statements from legislators and President George W. Bush that the various amendments to the statute increasing the availability and the amount of the ACTC were made to benefit low-income families.

Finally, the court stated that its position that the ACTC was a public-assistance benefit was consistent with a number of Bankruptcy Court decisions that had addressed the issue. The court admitted that other courts had disagreed, but it disregarded those courts' opinions because the courts only considered the CTC and ACTC as they were first enacted, without taking into account the various amendments to the credits and the legislative purpose behind them.


The Eighth Circuit states in its opinion that public-assistance benefits by definition are "those government benefits provided to the needy." The Bankruptcy Court and the BAP in their opinions treated this definition as meaning "government benefits provided only to the needy." Under this definition, it logically follows that benefits that can be given to both the needy and the non-needy (such as the ACTC) cannot be public-assistance benefits. However, in reaching its decision, the Eighth Circuit actually treated the definition as meaning "benefits provided by the government that are intended to benefit andarealmost always provided to the needy." Creating this altered definition required some careful parsing of legislators' comments and congressional intent. It remains to be seen if other courts will go along with it.

Hardy v. Fink, No. 14-1181 (8th Cir. 6/2/15)

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