Exemption for Government Assistance: How Needy Is Needy?

Hanson v. Seaver (In re Hanson), 903 F.3d 793 (8th Cir. 2018) –

A chapter 7 trustee objected to a debtor’s exemption claim for a state property tax refund. The bankruptcy court sustained the objection; the Bankruptcy Appellate Panel affirmed on appeal; and the debtor filed a further appeal to the Eighth Circuit.

Under section 522 of the Bankruptcy Code an individual debtor may exempt property from the bankruptcy estate using either federal exemptions or state exemptions. In this case the debtor elected to use state exemptions.

One category of property that could be exempted under state law included “[a]ll government assistance based on need.” Rather than define what this meant, the statute provided a nonexclusive laundry list of programs that qualified as examples. The debtor argued that her property tax refund also fell within this exemption.

The property tax refund act provided for refunds in three circumstances: (1) homeowners whose taxes exceeded a specified percentage of household income, (2) renters whose rent constituting property taxes exceeded a specified percentage of household income, and (3) homeowners whose property taxes had substantially increased. The debtor fell within the first category. (Note that although the statute referred to a “refund,” it was actually a payment by the government rather than a refund of monies paid by the taxpayer.)

The court noted that the maximum refund for the first category was $2,710, with the amount decreasing for higher household incomes. A household with income of ~$41,000 was eligible for the maximum amount, and the refund phased out so that a household with income in excess of ~$110,500 was not eligible for a refund. The renter refund in the second category phased out for household incomes of ~$60,000; and the third category was generally available to anyone whose property taxes increased more than 12% regardless of income.

In determining whether the debtor’s property tax rebate qualified for an exemption, the court reviewed the long list of programs identified as qualifying examples. It concluded: “there is only one reasonable interpretation of ‘government assistance based on need’: benefits that aim to provide the basic necessities to the needy” (e.g. low income, disabled, or elderly people living in the state).

Turning to the property tax refund program, the court identified several considerations that led it to the conclusion that the refund was not based on need. First, households with income in excess of $100,000 were eligible. Although the court would not disqualify a program merely because it also benefited non-low income families, this was a consideration. Further, income was not relevant at all to the third category. The court rejected the debtor’s argument that it should consider the first category without regard to the third category, and instead considered the context.

Finally, the history of the legislation was telling. Interpreting a prior version of the statute, the state Supreme Court indicated that the intent was to equalize property burdens across the state. Although the statute was passed to help the poor, it was also intended to help the middle class. In addition, the statute as it evolved was amended several times to make it more available to higher income homeowners. The income phaseout was $35,000 in 1987. It almost tripled over the next 25 years.

Thus, the Eighth Circuit concluded that the property tax refund program was not providing a benefit to the needy so that it did not qualify for the state exemption. Accordingly, the court affirmed the judgment of the lower court.

The debtor’s argument was not specious, and in the abstract pursuing the appeals might seem justified. However, as a practical matter with only $1,500 at issue, it would be interesting to know the costs of litigating the issue before three courts.

Vicki R Harding, Esq.

About BankruptcyRealEstateInsights

Vicki R. Harding was a partner in the Detroit office of Pepper Hamilton LLP who moved to Arizona seeking warmer weather. Ms. Harding continues to handle commercial transactions with an emphasis on real estate and bankruptcy issues (but no longer owns a snow shovel).
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