Smith v. Mosier

1 The Utah Exemption Act was recodified in 2008 as Utah Code
sections 78B-5-501 to -513. Because no substantive changes were
(continued...)
2009 UT 3
This opinion is subject to revision before final
publication in the Pacific Reporter.
IN THE SUPREME COURT OF THE STATE OF UTAH
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In re Janerae F. Smith, No. 20070892
Debtor.
Janerae F. Smith,
Appellant,
v.
F I L E D
R. Kimball Mosier, Trustee,
Appellee. January 23, 2009
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Certification from the Federal Court
Attorneys: David L. Miller, Layton, for appellant
R. Kimball Mosier, George B. Hofmann, Salt Lake City,
for appellee
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On Certification from the United States Bankruptcy
Appellate Panel of the Tenth Circuit,
The Honorable Mark B. McFeeley,
The Honorable Robert E. Nugent,
The Honorable Peter J. McNiff
NEHRING, Justice:
INTRODUCTION
¶1 We consented to answer the following question certified
to us by the United States Bankruptcy Appellate Panel of the
Tenth Circuit:
Whether pursuant to Utah Code section [78B-5-
507 (2008)1] monies refunded to a taxpayer as

1 (...continued)
made, we cite the most recent version.
No. 20070892 2
an overpayment of taxes are exempt when the
monies with which the tax deposit was made
were exempt?
¶2 We hold that in the case of exempt retirement income,
refunds from the overpayment of taxes remain exempt because the
recordation of taxes and refunds is a reasonable method of
tracing.
BACKGROUND
¶3 Neither party disputes the facts in this case. We
recite the facts as they were presented to us in the Tenth
Circuit’s certification order. In 2006, Janerae Smith’s only
sources of income were distributions from social security and
qualified pension plans in the amount of $50,031. On December
22, 2006, Ms. Smith filed for bankruptcy under Chapter 7 of the
Bankruptcy Code. R. Kimball Mosier was appointed as the Chapter
7 Trustee.
¶4 Ms. Smith’s income tax liability for 2006 was $3,746.
However, $7,058 was withheld from the exempt income she received,
and these monies were deposited with the tax authorities. When
filing her tax returns, Ms. Smith discovered that she had
overpaid her taxes and was entitled to a $3,312 refund. She
therefore filed an Amended Schedule B in her bankruptcy case,
simultaneously claiming that the excess taxes she paid were
exempt under Utah Code section 78B-5-505(1)(a)(xiv) (2008) as
traceable proceeds from an exempt fund. Mr. Mosier filed an
Objection to Debtor’s Claimed Exemption. A hearing was held, and
the United States Bankruptcy Court for the District of Utah
entered an order disallowing Ms. Smith’s claim. Ms. Smith
appealed to the United States Bankruptcy Appellate Panel of the
Tenth Circuit, which certified the above question to this court.
We have jurisdiction to answer certified questions from the
federal court pursuant to Utah Code section 78A-3-102(1).
STANDARD OF REVIEW
¶5 “When a federal court certifies questions of state law,
we answer the legal questions presented without resolving the
underlying dispute.” Tabor v. Metal Ware Corp., 2007 UT 71, ¶ 5,
168 P.3d 814 (internal quotation marks omitted).
ANALYSIS

3 No. 20070892
¶6 The federal court asks us if, under Utah law, monies
refunded to a taxpayer as an overpayment of taxes are exempt when
the monies from which the tax payments were withheld were exempt.
We hold that they are exempt because the recordation of taxes and
refunds is a reasonable method of tracing.
¶7 The federal court asks us to rule on this issue because
Utah has elected to replace the exemptions authorized by federal
law with those provided by state law. See 11 U.S.C. § 522(b)(2)
(2006) (“Property listed in this paragraph is property that is
specified under subsection (d), unless the State law that is
applicable to the debtor . . . specifically does not so
authorize.”); Utah Code Ann. § 78B-5-513 (2008) (“No individual
may exempt from the property of the estate in any bankruptcy
proceeding the property specified in Subsection (d) of Section
522 of the Bankruptcy Reform Act (Public Law 95-598), except as
expressly permitted under this part.”); see also id. §§ 78B-5-501
to -513 (Utah Exemptions Act). We note at the outset of our
analysis that “exemption statutes are liberally construed in
favor of the debtor to protect him and his family from hardship.”
Russell M. Miller Co. v. Givan, 325 P.2d 908, 909-10 (Utah 1958);
see also In re Neiheisel, 32 B.R. 146, 167-68 (Bankr. D. Utah
1983) (“When a Utah statute grants an exemption, the Utah Supreme
Court has consistently applied a liberal construction in favor of
debtors to protect debtors and their families from hardship.”).
¶8 Utah’s exemption law provides that certain classes of
property and money are exempt from the bankruptcy estate, the
fund that may be accessed to pay creditors. Utah Code Ann.
§ 78B-5-505. Additional debtor protection is provided in a few
special classes of exemptions, including retirement income. Id.
§ 78B-5-507(2). The statute states that the money or property
exempt under one of these special classes “remains exempt . . .
in any other form into which it is traceable.” Id. Mr. Mosier
argues that the funds at issue, after being placed in the United
States Treasury, are not traceable because they lost any unique
identity when they merged into the vast sea of government funds.
As a result, the funds lost their status as exempt property. Ms.
Smith, on the other hand, argues that the money sent to the
treasury and returned in the form of a tax refund was traceable
to its source, the exempt retirement payments. The core question
for us to answer is whether money sent to the treasury for
payment of taxes is traceable when it is refunded as a tax
overpayment.
¶9 Tracing is a procedure that attempts to identify the
source and nature of money or an asset that has been removed from
its point of origin. Courts have used tracing in various areas

2 We recognize that first-in first-out and last-in last-out
produce essentially the same result. The statute does not refer
to last-in first-out, though it is a commonly used method of
tracing.
No. 20070892 4
of the law, such as bankruptcy and divorce, to identify and
segregate property that has been commingled with other property
or in some way lost its identity. See William Stoddard, Note,
Tracing Principles in Revised Article 9 § 9-315(B)(2): A Matter
of Careless Drafting, or an Invitation to Creative Lawyering?, 3
Nev. L.J. 135, 135 (2002). Tracing is used, for example, when
money from a particular transaction that a court is reviewing has
been commingled in a bank account with other funds. Several
tracing methods can be used to determine if the money from the
transaction under review is still in the account.
¶10 Utah Code section 78B-5-507(3) describes the methods
for determining whether money, once exempt under Utah’s
bankruptcy exemption law, retains its exempt status after leaving
the direct control of the initial recipient. The statute
approves two specific tracing methods: first-in first-out or
last-in last-out.2 Utah Code Ann. § 78B-5-507(3)(a). It also
recognizes that exempt property may remain exempt if the debtor
utilizes “any other reasonable method of tracing.” Id. § 78B-5-
507(3)(b). Ms. Smith argues, and we agree, that money withheld
by the Internal Revenue Service and then returned as a refund is
reasonably traceable. This is because the money is never really
lost. By filling out forms to have taxes withheld and then
filling out forms for a refund, Ms. Smith has kept track of the
amounts paid and received. We concede that it is impossible to
reasonably segregate any particular fund of money once it is
swept into the maw of the federal treasury. We nevertheless also
recognize that the IRS maintains an individualized accounting of
funds paid into the treasury by each taxpayer and similarly
identifies the recipient of funds paid to taxpayers for
overpayment of taxes. The money is not, as Mr. Mosier asserts,
hopelessly commingled in the federal treasury and lost as to its
original identity. Rather, we view the system similar to how one
keeps track of money in a bank account.
¶11 When an individual makes a deposit into a bank account,
the actual money is not kept in a box with the depositor’s name
on it. Rather, it is taken by the bank and commingled with the
bank’s other assets and used by the bank for business purposes.
The individual and the bank, however, keep track of the amount of
money because it has been assigned to a particular account.
Similarly, the IRS keeps accounts of everyone who has paid taxes
and how much has been paid. When an individual requests a refund

5 No. 20070892
because of overpayment, the IRS is able to check the amount of
taxes paid against the amount of taxes due and then return any
excess that it received. It seems very reasonable to us that
such money is traceable to its original status.
¶12 As a general principle of bankruptcy law, tax refunds
are not exempt. The United States Supreme Court held that a tax
refund is property that passes to the bankruptcy trustee under
the Bankruptcy Act. Kokoszka v. Belford, 417 U.S. 642, 652
(1974). In deciding this, the Court stated that “‘[i]t is the
twofold purpose of the Bankruptcy Act to convert the estate of
the bankrupt into cash and distribute it among creditors and then
to give the bankrupt a fresh start with such exemptions and
rights as the statute left untouched.’” Id. at 645-46 (quoting
Burlingham v. Crouse, 228 U.S. 459, 473 (1913)). The Tenth
Circuit clarified the reasoning for not allowing tax refunds to
be exempt when it stated, “In these cases, the pre-petition
portion of the refund essentially represents excessive tax
withholding which would have been other assets of the bankruptcy
estate if the excessive withholdings had not been made.”
Barowsky v. Serelson (In re Barowsky), 946 F.2d 1516, 1518 (10th
Cir. 1991). This is also the general rule in Utah. If Ms.
Smith’s tax refund was not traceable to exempt retirement income,
the refund would not be exempt.
¶13 Mr. Mosier argues that based on Manchester v. Annis (In
re Annis), 232 F.3d 749 (10th Cir. 2000), we should hold that Ms.
Smith’s tax refund is not exempt. In that case, the Tenth
Circuit, ruling on an Oklahoma bankruptcy case, held that exempt
money paid as taxes did not remain exempt when it was refunded
because the original withheld funds were taxes and had lost their
character as “earnings from personal services,” which would, in
some circumstances, be exempt under Oklahoma law. Id. at 753.
The court recognized that under Oklahoma’s exemption statutes,
once exempt property was converted to a different form, it lost
its exempt status. Id.
¶14 Manchester is inapposite because, unlike Oklahoma law,
Utah law provides that exempt money or property “remains exempt
. . . in any other form into which it is traceable.” Utah Code
Ann. § 78B-5-507(2). In our view, it would be very possible, if
not highly likely, that the result in Manchester would have been
decided differently had it been governed by Utah law. The Utah
Legislature made clear that money or property may be converted
into other forms and retain its exempt status when it wrote that
exempt money or property “remains exempt . . . in any other form
into which it is traceable.” Utah Code Ann. § 78B-5-507(2).
Thus, even though Ms. Smith’s exempt retirement income may have
been converted into taxes and then into a tax refund before being

No. 20070892 6
returned to her, it was reasonably traceable through the entire
process and remains exempt. We therefore hold that exempt
retirement income, withheld for the purpose of paying taxes,
remains exempt when it is refunded to the taxpayer as an
overpayment of taxes.
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¶15 Chief Justice Durham, Associate Chief Justice Durrant,
Justice Wilkins, and Justice Parrish concur in Justice Nehring’s
opinion.