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In re Smith

February 24, 2009

IN RE JANERAE F. SMITH, DEBTOR.
JANERAE F. SMITH, APPELLANT,
v.
R. KIMBALL MOSIER, TRUSTEE, APPELLEE.



Appeal from the United States Bankruptcy Court for the District of Utah Bankr. No. 06-24973.

The opinion of the court was delivered by: McFEELEY, Bankruptcy Judge.

PUBLISH

Chapter 7

OPINION

Before McFEELEY, NUGENT, and McNIFF, Bankruptcy Judges.

Debtor/Appellant Janerae F. Smith appeals from the bankruptcy court's Order Disallowing Debtor's Claimed Exemption in Tax Refunds ("Order") entered May 14, 2007. In disallowing Smith's claimed exemption, the bankruptcy court concluded that certain tax refunds representing excess withholding from distributions of otherwise exempt income could not be traced as proceeds from an exempt fund under Utah Code Ann. § 78B-5-507 (2008).*fn2

At the time of this appeal, there was no controlling precedent in the appellate courts of the State of Utah on the issue of whether pursuant to Utah Code Ann. § 78B-5-507 (2008) monies refunded to a taxpayer as overpayment of taxes are exempt when monies with which the tax deposit was made were exempt. This Court, on its own motion and in accordance with Utah Rule of Appellate Procedure 41, certified that question to the Utah Supreme Court. The Utah Supreme Court consented to answer the certified question, and on January 23, 2009 issued its opinion holding 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."*fn3 Accordingly, we now REVERSE.

I. JURISDICTION

We have jurisdiction to hear timely filed appeals from "final judgments, orders, and decrees" of bankruptcy courts within the Tenth Circuit, unless one of the parties elects to have the district court hear the appeal. 28 U.S.C. § 158(a)(1), (b)(1),and (c)(1); Fed. R. Bankr. P. 8002. The parties have consented to this Court's jurisdiction because they did not elect to have the appeal heard by the United States District Court for the District of Utah. 28 U.S.C. § 158(b)-(c); Fed. R. Bankr. P. 8001(e). An order is considered final when it "ends the litigation on the merits and leaves nothing for the court to do but execute the judgment."*fn4 The bankruptcy court's Order which disallowed Appellant's claimed exemption is a final order subject to appeal under 28 U.S.C. § 158(a)(1).*fn5 The appeal, filed within ten days of the date the Order was entered, was timely filed.*fn6

II. FACTS

The facts underlying the question of law on appeal are undisputed. Debtor/Appellant Janerae F. Smith's only source of income was distributions from social security and qualified pension plans in the approximate amount of $50,031.00. Smith filed a case under Chapter 7 of the Bankruptcy Code on December 22, 2006, and Appellee, R. Kimball Mosier, was appointed as the Chapter 7 Trustee ("Trustee").

Smith's income tax liability for 2006 was $3,746.00. However, $7,058.00 was withheld from the exempt income she received, and these monies were deposited with the tax authorities. When filing her tax returns, Smith discovered that she had overpaid her taxes and was entitled to a $3,312.00 refund. She therefore filed an Amended Schedule C in her bankruptcy case, simultaneously claiming that the excess taxes she paid were exempt under Utah Code Ann. 78B-5-505(1)(a)(xiv) (2008). The Trustee objected to Smith's claimed exemption in her tax refund, and the bankruptcy court sustained the objection, finding that the monies deposited with the tax authorities were not traceable.

III. DISCUSSION

Utah has opted out of the federal exemption scheme provided in 11 U.S.C. § 522(d).*fn7 In analyzing the issue of whether overpayment of taxes representing otherwise exempt funds remain exempt upon refund, the Utah Supreme Court recognized that, as a general rule, tax refunds are not exempt from a debtor's bankruptcy estate.*fn8 In this case, it is undisputed that the retirement income from which Smith's taxes were withheld was exempt under Utah law.*fn9 Utah's exemption statutes provide that certain classes of exempt property, including the retirement income at issue here, "remains exempt . . . in any other form into which it is traceable"*fn10 and ...


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