Jesus M. Cano

UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
In re: 	JESUS M. CANO, 	No. 13-08-11860 JA
Debtor.
ORDER ON CHAPTER 13 TRUSTEE’S MOTION TO DISMISS
THIS MATTER is before the Court on the Supplemental Motion to Dismiss (Docket No.
113) filed by the Chapter 13 Trustee. 	The Court held a final hearing on the Motion to Dismiss
on September 19, 2011, and took the matter under advisement. The Chapter 13 Trustee seeks
dismissal of the Debtor’s Chapter 13 case based on the Debtor’s failure to turn over to the
Chapter 13 Trustee state and federal tax refunds for tax years 2008 and 2010 as required under
the terms of the Debtor’s confirmed Chapter 13 plan. The Debtor introduced evidence at the
final hearing that the Internal Revenue Service (“IRS”) applied an overpayment of $8,323.00
attributable to tax year 2008 (the “2008 tax refund”) to the Debtor’s unpaid taxes for tax years
2005 and 2006. 	The Debtor asserts that because he did not receive the tax refund for tax year
2008, he is not obligated to turnover $8,323.00 to the Chapter 13 Trustee and his case should not
be dismissed. 	The Chapter 13 Trustee contends that because the Debtor did not schedule any
pre-petition tax obligation or otherwise give the IRS notice of the bankruptcy case, the IRS setoff
the 2008 tax refund instead of making it available to pay other creditors. 	The Chapter 13
Trustee requests the Court to dismiss the Debtor’s Chapter 13 case because of the Debtor’s
failure to schedule the claim of the IRS or otherwise give the IRS notice of the bankruptcy case.
After consideration of the evidence presented at the final hearing held September 19,
2011, and being otherwise sufficiently informed, the Court concludes that the Motion to Dismiss
should be denied, and in connection therewith FINDS AND CONCLUDES:
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1. 	The Debtor filed a voluntary petition under Chapter 13 of the Bankruptcy Code
on June 10, 2008. 1
2. 	The Debtor did not list the IRS as a creditor in the schedules filed on the petition
date or otherwise give the IRS notice of the commencement of the bankruptcy case.
3. 	The Order Confirming Chapter 13 Plan Dated June 10, 2008 included the
following provisions: 1) Debtors shall provide a copy of their state and federal tax returns
annually to the trustee within 10 days of filing and shall remit annually to the trustee the amount
of all state and federal tax refunds, less only any taxes owed for such year, for tax years 2008
through 2011 inclusive; 2) the Debtor has satisfied the requirements of 11 U.S.C. § 1325(a)(9)
in that all Federal, State and local tax returns have been filed; and 3) that the Debtor will make
three payments of $280.00 beginning June 18, 2008, and fifty-seven payments of $417.00
beginning October 1, 2008. See Docket No. 49.
4. 	On July 28, 2010, the Chapter 13 Trustee filed a Motion to Dismiss, asserting
that the Debtors had failed to provide the Chapter 13 Trustee with copies of tax returns and have
failed to turn over to the Chapter 13 Trustee “any net refunds for tax years 2008 and 2009.” 	See
Docket No. 72.
5. 	On April 26, 2011, an Order on Chapter 13 Trustee’s Motion to Dismiss was
entered that stated that the Chapter 13 Trustee had received copies of the following tax returns
for the Debtors:
Jesus Cano 	Federal tax return 	tax year 2008 	“married filing
separately”
Jesus Cano 	Amended state tax
return
tax year 2008 	“married filing jointly”
Jesus Cano 	State tax return 	tax year 2009 	“single”
Theresa Maltos 	Federal tax return 	tax year 2008 	“head of household”
1 Jesus Cano and Theresa Maltos filed a joint petition. Theresa Maltos was dismissed from this bankruptcy case on
July 11, 2011. See Docket No. 111.
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Theresa Maltos 	State tax return 	tax year 2008 	“head of household”
Unsigned 	Amended Federal Tax
Return
tax year 2008 	“married filed jointly”
Unsigned 	Amended State tax
return
tax year 2008 	“married filed jointly”
See Docket No. 107.
6. 	The Chapter 13 Trustee filed the Supplemental Motion to Dismiss on July 19,
2011.
7. 	The deadline for a governmental unit to file a proof of claim in the Debtor’s
bankruptcy case was December 7, 2008.
8. 	The IRS did not file a proof of claim in the Debtor’s bankruptcy case.
9. 	The Debtor did not know that he owed federal taxes for pre-petition tax years
when he filed his voluntary petition.
10. 	At some time in 2009, the Debtor learned that the IRS was claiming that he owed
taxes for tax years 2005 and 2006.
11. 	The Debtor does not believe that he owes federal taxes for tax years 2005 and
2006 and sent information to the IRS attempting to establish that no taxes were due.
12. 	The Debtor did not know that he was obligated to amend his schedules and notify
the IRS of the pendency of the bankruptcy case upon learning that the IRS was asserting that he
owed taxes for pre-petition tax years.
13. 	After learning of the disputed claims of the IRS, the Debtor did not file an
amended schedule to list the pre-petition tax claims of the IRS, or otherwise give the IRS notice
of the bankruptcy case.
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14. 	A letter from the IRS dated September 3, 2010 states that an overpayment of
$8,323.00 relating to the Debtor’s 2008 tax return was applied to outstanding taxes due for tax
years 2005 and 2006.
15. 	The Debtor did not receive any funds from the IRS as a refund for tax year 2008
because the IRS applied the 2008 tax refund to his obligations to the IRS for tax years 2005 and
2006.
16. 	The right to a tax refund arises at the end of the tax year. See In re Midkiff, 271
B.R. 383, 386 (10 th Cir. BAP 2002)(“A debtor’s right to a federal income tax refund arises at the
end of the tax year and not on the day of the filing of the tax return.”)(citing In re Glenn, 207
B.R. 418, 420 (E.D.Pa. 1997) and In re Haizlett, 261 B.R. 393, 395 (Bankr.W.D.Pa. 2000)).
See also, In re Graybeal, 1993 WL 851378, *3 (Bankr.W.D.Okla. 1993)(discussing two
conflicting lines of cases and concluding that the end of the taxable year is the date the right to
refund arises).
17. 	The Debtors’ right to the tax refund for tax year 2008 arose post-petition, at the
end of the tax year on December 31, 2008.
18. 	“The [Bankruptcy] Code permits the IRS to offset refunds attributable to tax years
prior to filing against claims for pre-petition taxes, even ‘if the refund was not technically owing
until after the commencement of the debtor’s case.’” In re Blagg, 372 B.R. 502, 510
(Bankr.D.Kan. 2007)(quoting 5 Collier on Bankruptcy ¶ 553.03(2)(b)(i))(remaining citation
omitted).
19. 	However, there very well may be a lack of mutuality that would prevent the IRS
from setting off the entire 2008 tax refund against 2005 and 2006 taxes. See 11 U.S.C. § 553
(providing that mutual debts that arise before the commencement of the case are subject to
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setoff); In re Franklin Sav. Corp., 177 B.R. 356, 358 (Bankr.D.Kan. 1995)(explaining that a
creditor’s right to setoff exists when (i) the debt owed by the creditor to the debtor arose pre-
petition; (ii) the claim of the creditor against the debtor also arose pre-petition; (iii) the debt and
the claim are mutual obligations; and (iv) a right to setoff of the debts exists under non
bankruptcy law). 	See also, Davidovich v. Welton (In re Davidovich), 901 F.2d 1533, 1537 (10 th
Cir. 1990)(explaining that the doctrine of setoff “grants a creditor the right ‘to offset a mutual
debt owing by such creditor to the debtor’ so long as both debts arose before the commencement
of the bankruptcy action and are indeed mutual.”)(quoting Tradex, Inc. v. U.S. (In re IML
Freight, Inc.), 65 B.R. 788, 791 (Bankr.D.Utah 1986)).2
20. 	Generally, a debtor is not obligated to recover an improper offset for the benefit
of the bankruptcy estate. 	Cf. In re Henderson, 2007 WL 4410222, *3 n.18 (Bankr.D.Kan.
2007)(a Chapter 7 case)(citing Blagg, 371 B.R. at 511), aff’d, In re Sherlock, 2008 WL 4277719
(D.Kan. 2008).
21. 	The Chapter 13 Trustee’s record of the Debtor’s payment history admitted into
evidence at the final hearing held September 19, 2011, reflects two payments in an amount
different than the regular monthly plan payment: 1) a payment of $74.00 on September 21,
2010; and 2) a payment of $137.00 on October 15, 2010. 	These payments represent the state
and federal tax refunds for tax year 2009.
2 There is case law suggesting that a Chapter 13 debtor’s tax refund attributable to pre- and post-petition periods
should be pro-rated for purposes of offset. See, e.g., Wilson v. Internal Revenue Service (In re Wilson), 29 B.R. 54
(Bankr.W.D.Ark. 1982)(holding that federal tax refund could be offset against debtor’s unpaid federal taxes,
prorated to take into account the post-petition period attributable to the refund). For purposes of determining what
portion of a federal tax refund constitutes property of the Chapter 7 bankruptcy estate, some courts pro-rate the
portion of the refund attributable to pre-petition taxes. See, e.g., In re Middendorf, 381 B.R. 774, 778
(Bankr.D.Kan. 2008)(explaining that “the tax refund is allocated proportionately between pre- and post-petition
based on the number of calendar days before and after the petition . . . [so that] if the debtor files in the middle of the
year, the estate receives 50 percent of the refund and the debtor receives 50 percent of the refund.”).
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22. 	No evidence of the amount of the 2010 state and federal tax refunds was
presented at the final hearing on September 19, 2011.
23. 	As of September 19, 2011, the Debtor is one monthly payment in arrears under
the confirmed plan in the amount of $417.00.
WHEREFORE, IT IS HEREBY ORDERED that the Motion to Dismiss is DENIED,
conditioned upon the following:
A. 	Payment of the arrears in the amount of $417.00 to the Chapter 13 Trustee on or
before December 1, 2011.
B. By December 31, 2011, either:
1) 	Payment by the Debtor of $4,161.50 to the Chapter 13 Trustee, representing
one-half of the amount of the tax refund for the 2008 tax year 3 ; or
2) 	At the Debtor’s expense the Debtor commencing and diligently prosecuting
an adversary proceeding against the Internal Revenue Service seeking return
of the 2008 refund for the benefit of the estate to the extent attributable to a
post-petition period; or
3) 	The Debtor obtaining from the Chapter 13 Trustee her written direction that
she wishes to commence such an adversary proceeding instead of the Debtor.
FURTHER ORDERED, that if the Debtor fails to comply with either of the two
requirements set forth above, the Chapter 13 Trustee may submit an order dismissing this
Chapter 13 case without further notice or a hearing.
_________________________________
ROBERT H. JACOBVITZ
United States Bankruptcy Judge
Date entered on docket: October 26, 2011
3 If the Debtor makes this payment to the Chapter 13 Trustee and the Trustee recovers all or a part of the 2008 tax
refund, the Debtor may seek reimbursement.
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COPY TO:
David N. Hernandez 	Kelley L. Skehen
Attorney for Debtor 	Chapter 13 Trustee
2221 Rio Grande Blvd. NW, #100 	625 Silver Avenue SW, Suite 350
Albuquerque, NM 87104 	Albuquerque, NM 87102
Jesus M. Cano
2708 Fantozzi Road SW
Albuquerque, NM 87105
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