By: Timothy Fox
St. John's Law Student
American Bankruptcy Institute Law Review Staff
In Nichols v. Birdsell,
the Ninth Circuit held that a taxpayer’s pre-bankruptcy 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. In Nichols, the debtors filed their 2001 tax return two weeks before filing their Chapter 7 bankruptcy and, pursuant to sections 6402(b) and 6513(d) of the Tax Code, irrevocably elected to apply their anticipated refund to the 2002 tax year. The following year, the debtors used nearly the entirety of the 2001 credit to satisfy their 2002 income tax obligation. The trustee instituted the suit against the debtors to recover the 2001 overpayment, advancing theories under sections 542(a) and 548(a)(1) of the Bankruptcy Code.
Analogizing the present case to its previous decision in Feiler v. Sims (In re Feiler),
the Ninth Circuit rejected debtors’ argument that the irrevocable nature of the election and their resulting inability to access the funds was a bar to the assertion by the trustee that the tax credit was property of the estate.