F I L E D
United States Court of Appeals
Tenth Circuit
PUBLISH
OCT 19 2000
UNITED STATES COURT OF APPEALS
PATRICK FISHER
Clerk
TENTH CIRCUIT
IN RE: DARLENE OLINDA ANNIS,
Debtor.
SUSAN J. MANCHESTER, Trustee,
No. 99-6116
Plaintiff-Appellee,
v.
DARLENE O. ANNIS,
Defendant-Appellant.
APPEAL FROM THE UNITED STATES BANKRUPTCY
APPELLATE PANEL OF THE TENTH CIRCUIT
(BAP No. WO-98-075)
(Bankr. No. 98-11454-BH)
(Bankr. Adv. No. 98-1201-BH)
Submitted on the briefs:
Patrick E. Moore, Patrick E. Moore Attorney, P.C., Oklahoma City, OK, Attorney for
Appellant.
Susan Manchester, Taylor & Manchester, Oklahoma City, OK, Attorney for Appellee.
Before EBEL, HOLLOWAY, and HENRY, Circuit Judges.
HOLLOWAY, Circuit Judge.
Debtor Darlene Olinda Annis (Debtor) filed a Chapter 7 case and sought to have
her (and her deceased husband’s) federal and state income tax refunds exempted from her
bankruptcy estate pursuant to Okla. Stat. tit. 31, § 1.1. The bankruptcy court held that the
refunds were exempt, in part, because they constituted “earnings from personal services”
as required by the statute. Trustee Susan Manchester (Trustee) appealed and the
Bankruptcy Appellate Panel (BAP) reversed. Debtor timely appeals to this court. We
have jurisdiction pursuant to 28 U.S.C. § 158(d). For the reasons that follow, we affirm
the BAP.1
I
In February 1998 Debtor filed this Chapter 7 case. See Manchester v. Annis (In re
Annis), 229 B.R. 802, 803 (B.A.P. 10th Cir. 1999). Thereafter, Debtor filed her (and her
deceased husband’s) federal and state tax returns, which resulted in refunds. See id.
Debtor then claimed an exemption for the tax refunds under Oklahoma’s undue hardship
statute, Okla. Stat. tit. 31, § 1.1.2 See Annis, 229 B.R. at 803. That statute exempts “by
1
After examining the briefs and appellate record, this panel has determined
unanimously to honor the parties’ request for a decision on the briefs without oral argument.
See Fed. R. App. P. 34 (f). The case is therefore submitted without oral argument.
2
Okla. Stat. tit. 31, § 1.1. A provides:
Earnings from personal services –Exemption from process – Order
A. Following the issuance of an execution, attachment, or garnishment,
except process to collect a judgment or order for child support or maintenance
of children or in cases in which the court has limited or reduced the application
of this section pursuant to 142.18 of Title 21 of the Oklahoma Statutes, the
debtor may file with the court an application requesting a hearing to exempt
from such process by reason of undue hardship that portion of any earnings
2
reason of undue hardship that portion of any earnings from personal service necessary for
the maintenance of a family or other dependents supported wholly or partially by the labor
of the debtor.” Okla. Stat. tit. 31, § 1.1.
The Trustee objected, arguing that the refunds did not satisfy the requirements of
the statute. See Annis, 229 B.R. at 803. The Debtor filed a motion for summary
judgment, which the bankruptcy court granted. See id. The bankruptcy judge first held
that the tax refund constituted “earnings from personal service” as required by the statute:
As the defendant accurately states: if the monies withheld were, in fact,
taxes then the taxing entity would never have returned them. What were
returned to the defendant were her wages, for which no taxes are due.
Although the defendant presents no authority to support her contention, her
point is logically and persuasively argued.
Appellant’s Appendix at 64-65 (footnote omitted). In reaching that conclusion, the
bankruptcy judge distinguished two other bankruptcy court decisions reaching a contrary
conclusion:
The key issue is whether the tax refund constitutes earnings within
the meaning of [Okla. Stat. tit. 31, § 1.1].
The plaintiff cites to two bankruptcy decisions dealing with
Oklahoma law which would indicate that [the tax refunds] are not [exempt].
In re Linn, 52 B.R. 63 (Bankr. W.D. Okla. 1985); In re Miles, 153 B.R. 72
(Bankr. N.D. Okla 1993). Both of those decisions stated that earnings
become taxes at the moment that they are withheld for the payment of taxes.
from personal services necessary for the maintenance of a family or other
dependents supported wholly or partially by the labor of the debtor. A debtor
with no family or other dependents may not claim an exemption under this
section. . . .
3
These courts indicated that the monies in question undergo a
“metamorphosis” at the instant of withholding. . .
....
. . . [T]he reasoning presented in In re Linn and In re Miles is
rejected. The change in status of the monies collected for the payment of
taxes occurs once it is determined what the amount of the tax is and when
the taxes are, in fact, paid. Until that point, these monies retain their status
as earnings, albeit in the possession of the government.
Appellant’s Appendix at 64-65.
The bankruptcy judge concluded that the hardship exception provided in the
Oklahoma statute was applicable here and the refunds were exempt. Summary judgment
was granted to the defendant with regard to the remaining tax refund monies except for
the earned income credit. Id. at 65-66.
The Trustee timely appealed to the BAP. See Annis, 229 B.R. at 802-804. The
BAP reversed. The BAP first noted that the Supreme Court had held that a tax refund did
not constitute earnings under a similarly-worded federal exemption statute:
In reaching its conclusion, the Supreme Court relied on the
legislative history of the Consumer Credit Protection Act. The Court found
that the legislative history indicated that Congress sought to regulate
garnishment “in its usual sense as a levy on periodic payments of
compensation needed to support the wage earner and his family on a week-
to-week, month-to-month basis.”. . . The Court concluded that the tax
refund did not have these attributes and was, therefore, not subject to the
exemption provided by that act.
Annis, 229 B.R. at 804-05 (citing Kokoszka v. Belford, 417 U.S. 642, 651 (1974)). The
BAP then noted that the Tenth Circuit had followed the approach used by the Supreme
Court in Kokoszka, see Annis, 229 B.R. at 805 (citing Barowsky v. Sereleson (In re
4
Barowsky), 946 F.2d 1516 (10th Cir. 1991)), and that the Oklahoma bankruptcy courts, as
well as several other courts, had relied on the reasoning from Kokoszka to hold that a tax
refund did not constitute “earnings” under state law. See Annis, 229 B.R. at 805. This
timely appeal ensued.
II
The BAP’s decision rests on its interpretation of a statute. Accordingly, we review
the decision de novo. See Anderson v. Unipac-Nebhelp (In re Anderson), 179 F.3d 1253,
1255 (10th Cir. 1999).
When a case has been commenced under the Bankruptcy Code, the estate
ordinarily includes all property in which the debtor has a legal or equitable interest. 11
U.S.C. § 541(a). Section 522 of the Bankruptcy Code, however, allows a debtor to
exempt certain property from the estate. That section also allows a state to opt out of the
federal exemptions and limit its residents to those exemptions provided under state law.
See 11 U.S.C. § 522(b)(1) (“Such property is . . . property that is specified under
subsection (d) of this section, unless the State law that is applicable to the debtor under
paragraph (2)(A) of this subsection specifically does not so authorize.”).
Oklahoma has opted out of the federal exemptions and instead has limited its
exemptions to those provided under Okla. Stat. tit. 31 and other provisions of state law.
See Okla. Stat. tit. 31, §1(B) (“No natural person residing in this state may exempt from
the property of the estate in any bankruptcy proceeding the property specified in
5
subsection (d) of Section 522 of the Bankruptcy Reform Act of 1978, Public Law 95-598,
11 U.S.C.A. 101 et seq., except as may otherwise be expressly permitted under this title
or other statutes of this state.”); see also Linn, 52 B.R. at 64 (noting that Oklahoma has
“opted out” of the federal exemptions). Accordingly, we must decide whether state law,
as opposed to federal law, allows an exemption for state and federal income tax refunds.
III
As noted above, Okla. Stat. tit. 31, § 1.1 exempts “that portion of any earnings
from personal service necessary for the maintenance of a family or other dependents
supported wholly or partially by the labor of the debtor.” The Debtor’s argument (and the
bankruptcy court’s holding) that this provision embraces tax refunds has a somewhat
logical appeal. See, e.g., Wallerstedt v. Sosne (In re Wallerstedt), 930 F.2d 630, 631 (8th
Cir. 1991) (“On this issue, the district court held that earnings do not los[e] their character
as such because they have been withheld by the taxing authorities and then returned. At
the outset, we are inclined to agree. The practical reality to the taxpayers, who have had
more of their earnings withheld than necessary to satisfy their tax liabilities, is simply a
return of that excess to them.”) (citation, alteration, and internal quotation marks
omitted)3; see also Ragan v. Commissioner, 135 F.3d 329, 333 (5th Cir. 1998) (noting
3
The Eighth Circuit, in the end, however, held that a tax refund did not constitute
“earnings.” See Wallerstedt, 930 F.2d at 632-33.
6
that “a refund of excess withholding tax [is] merely . . . a repayment of earnings from
employment”) (citation and internal quotation marks omitted), rev’d in part on other
grounds, 210 F.3d 514 (5th Cir. 2000).
That argument asserts that: (1) the money at issue here was undeniably “earnings
from personal service” when paid by the employer as wages; (2) unlike most wages which
go directly to the employee, the money at issue was withheld by the government to satisfy
any year-end tax liability; (3) when the year ended, the withholdings exceeded the
employee’s tax liability; (4) therefore the government returned the excess withholdings.
According to the Debtor (and the bankruptcy court) at no time was the returned money
itself a tax (as noted above, the withholding exceeded tax liability). The money instead at
all times remained the employee’s wages, albeit wages held by the government for the
employee. In the circumstances, the money constitutes earnings under Okla. Stat. tit. 31,
§ 1.1.
The logical appeal of the argument, however, rests on the assumption that the
withholding is not itself a “tax” and, therefore, the money never changed its form and
remained, at all times, wages of the employee. That assumption is inconsistent with the
wording of the Internal Revenue Code and Oklahoma’s revenue statute. Specifically, the
Internal Revenue Code deems the money withheld from an employee’s wages to
constitute a “tax”: “Except as otherwise provided in this section, every employer making
payment of wages shall deduct and withhold upon such wages a tax determined in
7
accordance with tables or computational procedures prescribed by the Secretary.” 26
U.S.C. § 3402(a)(1) (emphasis added). The withholding “tax” is then credited against any
“tax liability” imposed under the Code: “The amount withheld as tax under chapter 24
shall be allowed to the recipient of the income as a credit against the tax imposed by this
subtitle.” 26 U.S.C. § 31 (emphasis added). If the withholding “tax” exceeds “tax
liability” under the Code, then the Commissioner refunds the difference. See 26 U.S.C. §
6402. Oklahoma’s statutory scheme contains similar provisions.4
As is apparent, then, the initial withholding itself constitutes a “tax,” with the
refund constituting the return of an assessed tax. In the circumstances, the Debtor and the
bankruptcy court were wrong to assert that the money never changed form but, instead, at
all times remained wages of the employee (albeit, wages held for the employee by the
government). Instead, once the wages were withheld as a “tax,” they lost their character
as “wages.” Cf. Linn, 52 B.R. at 65 (“A metamorphosis occurs wherein what were once
wages are now taxes. . . . It is taxes, not wages, which are being withheld.”) (emphasis in
original); see also Miles, 153 B.R. at 73-74 (following Linn); In re Lancaster, 161 B.R.
4
See Okla. Stat. tit. 68, § 2385.2 (“Every employer making payment of wages shall
deduct and withhold from the wages paid each employee a tax in an amount determined in
accordance with a table fixing graduated rates of tax to be withheld. . . .”) (emphasis added);
id. at § 2385.5 (“The amount deducted and withheld as a tax under section 2385.2 of this title
during a calendar year shall be allowed as a credit to the recipient of the income as income
tax paid.”) (emphasis added); id. at § 2385.17 (“Any amount withheld or paid by estimate in
excess of the amount due shown by a return filed by any employee shall be refunded to said
employee.”).
8
308, 309 (Bankr. S.D. Fla. 1993) (“The mere fact that a debtor’s taxes are paid from his
wages does not mean that the monies which may be due as a refund retain their
identification as wages.”).
Okla. Stat. tit. 31, § 1.1, however, does not apply to “wages,” but to any “earnings
from personal services.” The Debtor therefore suggests that the term broadly includes
assets, such as a tax refund, which are derived from wages, even if the assets are not
themselves wages. The Debtor’s suggestion, however, appears to stretch the meaning of
“earnings from personal services” beyond the ordinary, common, and contemporary
meaning of that phrase. See State Bank of S. Utah v. Gledhill (In re Gledhill), 76 F.3d
1070, 1077 (10th Cir. 1996) ("Courts properly assume, absent sufficient indication to the
contrary, that Congress intends the words in its enactments to carry their ordinary,
contemporary, common meaning.") (citation and internal quotation marks omitted).
Under that definition, a person who used their wages to purchase a home could assert that
the house constitutes “earnings from personal services,” or a person who invests their
wages in the stock market could argue that the stock purchased constitutes “earnings from
personal services.” In either circumstance, the property derived from the employee’s
wages would constitute “earnings from personal services” under the Debtor’s theory.
Such a broad exemption, however, would swallow the rule: almost everything the debtor
owned would be exempt from the bankruptcy estate because it is derived from a person’s
wages.
9
Indeed the Supreme Court has rejected such a broad interpretation of the term
“earnings” and “disposable earnings.” In Kokoszka the Court said that the legislative
history fully supported the view that the terms “earnings” and “disposable earnings,” as
used in 15 U.S.C. §§ 1672 and 1673, “did not include a tax refund, but were limited to
‘periodic payments of compensation and [do] not pertain to every asset that is traceable in
some way to such compensation.’” Kokoszka, 417 U.S. at 651; cf. Lieshout v. Verill (In
re Verill), 17 B.R. 652, 655 (Bankr. D. Md. 1982) (“Income tax withholdings are simply
not wages within the meaning of the statute, but a debt due the Bankrupt that is related to
the amount of wages earned.”).
The BAP noted that there is no legislative history to guide the court concerning the
meaning of the pertinent language in Okla. Stat. tit. 31, § 1.1. See Annis, 229 B.R. at 805
(“There is no legislative history to guide the Court concerning the meaning or import of
the language in the Oklahoma statute.”). We therefore follow the reasoning from
Kokoszka and hold that withholdings are not themselves “earnings from personal
services,” for purposes of the Oklahoma statute. We note that our holding today – that a
tax refund does not constitute such “earnings from personal services” – is consistent with
holdings from other courts that have considered similar questions. See Wallerstedt, 930
F.2d at 632-33; Lancaster, 161 B.R. at 309; Miles, 153 B.R. at 73-74; In re Truax, 104
B.R. 471, 472 (Bankr. M.D. Fla. 1989); In re Orndoff, 100 B.R. 516, 519 (Bankr. E.D.
10
Cal. 1989); Linn, 52 B.R. at 65; In re Verill, 17 B.R. at 655.5 We agree with this well
established body of law and affirm the BAP.
AFFIRMED.
5
In Barowsky v. Serelson (In re Barowsky), 946 F.2d 1516 (10th Cir. 1991), this court
decided the question whether the pre-petition portion of a debtor’s tax refund is property of
the bankruptcy estate when the relevant tax year did not end until after the bankruptcy
petition was filed. We held that it is property of the estate. We did not there decide,
however, a further question like the one involved here – whether such a refund is exempt
under a statutory exemption like Oklahoma’s for earnings from personal services.
11
No. 99-6116, In Re: Darlene Olinda Annis
HENRY, Circuit Judge, concurring.
I agree with the majority's well-reasoned opinion. The law compels this result.
But I also agree with the opinion's conclusion that the bankruptcy court's holding
has a “logical appeal.” As the Eighth Circuit concluded in an analogous case, “The
practical reality to the taxpayers, who have had more of their earnings withheld than
necessary to satisfy their tax liabilities, is simply a return of that excess to them.”
Wallerstedt v. Sosne, 930 F.2d 630, 631 (8th Cir. 1991). It seems odd that the return of a
taxpayer's money, to which the government is not entitled, is a “tax.”
I concur separately only to call this to the attention of the policy makers in
Oklahoma. If they are dissatisfied with this result, they should evaluate whether
Oklahoma law can be changed to make these returned withholdings available for the
undue hardship exemption. It may be that the description of these withholdings as a “tax”
by the Internal Revenue Code is not necessarily dispositive, and the state may be able to
exempt these earnings.