Before the Bankruptcy Court in the Ruhl case was a chapter 7 trustee’s motion for turnover of a tax refund.  The question for the Court was whether a debtor’s wife, who did not join in a bankruptcy case, owned half of a tax refund claimed by a chapter 7 trustee.
In Ruhl, the Court concluded that the trustee was entitled to the full refund based on the Internal Revenue Code (“IRC”) and Illinois property law.  The decision sets forth the principles a bankruptcy court will apply to determine what property belongs to the bankruptcy estate. It also illustrates how courts can reach different conclusions in applying those principles and that there is a split in the views of Illinois courts as to ownership rights in a joint tax refund.
When a bankruptcy case is filed, an estate of property interests is created, which includes “all legal or equitable interests of the debtor as of the commencement of the case.”  The extent of property of the estate is determined by applicable non-bankruptcy law. 
The Court first found that the rules of the IRC provide that in the case of an overpayment, a refund is payable to the person who made the overpayment. It found nothing in the IRC rules that permitted the sharing of a tax refund even when a joint return is filed. 
Applying Illinois law, the Court then noted that it is clear that Illinois does not treat marriage as establishing community ownership rights in a married couple’s property.  Based on this, it found that the debtor alone was the recipient and owner of the wages he earned. The Court did note that Illinois recognizes a form of “marital property” acquired by spouses during a marriage, but this type of ownership only vests at the time of marriage dissolution proceedings. 
Before reaching its conclusion, the Court distinguished the reasoning of two Illinois courts which had reached a contrary result with regard to a joint tax refund. Those courts held that if a married couple filed a joint tax return, a presumption arises under Illinois law that “any refund should be treated as equally apportioned marital property.” 
First, the Court was not persuaded that joint liability for any taxes due under a joint return necessitated that any refund not go to the person who made the payment. Second, although a joint filing may result in lower tax liability, it noted that tax refunds are made to the person who made the tax payment, not to the persons who reduced the amount of taxes due. Finally, the Court distinguished the Illinois opinions speaking of marriage as a partnership. It found those cases set in the context of divorce proceedings and did not deal specifically with the question of earnings or tax refunds due on account of those earnings, which the Court found to be clearly addressed by Illinois statute. 
 Id. at *4.
 Id. at *2; 11 U.S.C. § 541.
 Id. (citing Butner v. United States, 440 U.S. 48, 55 (1979)).
 Id. (citing 26 U.S.C. § 6402(a)).
 Id. at *3 (citing 750 ILCS 65/1, 65/7).
 Id. (citing 750 ILCS 5/503(e) (2008)).
 Id. (citing In re Innis, 331 B.R. 784, 789 (Bankr. C.D. Ill. 2005); In re Vongchanh, No. 09 B 70050, 2009 WL 1852452 at *3 (Bankr. N.D.Ill. June 29, 2009)).
 Id. at *3-4.