This matter is before the court on the motion of the plaintiff chapter 7 trustee of the estate of the debtor Harold E. Sergent for summary judgment against the defendant United States of America Department of the Treasury, Internal Revenue Service ("IRS"), and on the countermotion of the IRS for summary judgment dismissing the complaint.

FINDINGS OF FACT:

On November 2, 1990 Harold E. Sergent filed a petition for relief under chapter 11 of the Bankruptcy Code. His case was converted to a case under chapter 7 on March 15, 1991. Lucinda Masterton Hall (now Lucinda Masterton), the plaintiff in this adversary proceeding, is the trustee in bankruptcy in Harold E. Sergent's chapter 7 bankruptcy case.

On June 21, 1991 Sergent's wife, Linda S. Sergent, filed a petition for relief under chapter 11 of the Bankruptcy Code. Her case was converted to a case under chapter 7 on May 22, 1992. The defendant, Stephen Palmer, is the trustee in Linda S. Sergent's chapter 7 bankruptcy case.

On April 15, 1989, prior to the commencement of their bankruptcy cases, the Sergents filed with the IRS their joint application for an extension of time within which to file their 1988 federal income tax return, and thereby obtained an extension until August 15, 1989 to file such return.

The joint application indicated the Sergents were claiming as a credit on their tax liability for 1988 the sum of $35,004, comprised of $18,504 in federal income tax withheld and $16,500 in prior estimated tax payments.

With their joint application there was remitted to the IRS an additional payment of $150,000.

On August 15, 1989 the Sergents jointly requested a further extension of time until October 16, 1989 within which to file their 1988 federal income tax return.

The aforementioned extension requests were submitted by the debtors through their accountants, Coopers & Lybrand.

Prior to 1988 the Sergents customarily had filed joint federal income tax returns as a married couple.

On October 16, 1989, with the assistance of their accountants, the Sergents filed separate income tax returns for 1988.

Harold E. Sergent's 1988 federal income tax return lists his taxable income as $1,574,088. The amount of the tax he owed was computed as $443,770, less federal income tax withheld of $21,182, leaving a balance owing of $424,226.

Linda S. Sergent's 1988 federal income tax return lists her taxable income as $1,113,479. The amount of tax she owed was computed as $315,346. She claimed an investment credit of $48,596 for restoring an historic building. She also claimed as a credit estimated tax payments of $16,500 and the additional payment of $150,000 remitted with the April 15, 1989 extension request submitted jointly by her and her husband. After deduction of these credits and addition of certain penalties and interest her tax liability was shown as $111,934.

The aforementioned returns were filed by the Sergents 17 days prior to the commencement of Mr. Sergent's bankruptcy case on November 2, 1989.

On November 13, 1989 the IRS notified Harold E. Sergent that the $16,500 in estimated tax payments and the additional payment of $150,000 remitted with the April 15, 1989 joint extension request had been applied to the taxes shown owing by his 1988 federal income tax return. These payments reduced his tax liability, after addition of certain penalties and interest, to $286,267. According to the IRS the $166,500 in tax credits were applied to the income taxes owed by Mr. Sergent because his social security number appeared first on the joint application of the Sergents for an extension of time within which to file their 1988 federal income tax return.

By letter dated November 14, 1989, 12 days after the commencement of his bankruptcy case, Mr. Sergent informed the IRS that it had erred in applying the $166,500 in credits to reduce the amount of income tax he owed. He requested that these credits be applied to the income tax owed by his wife, Linda S. Sergent, for 1988, as shown by her tax return.

The complaint of the trustee, which is grounded on title 11 U.S.C. §§ 548, 549 and 550, seeks to recover from the defendant IRS and the defendant Linda S. Sergent the $166,500 utilized as credits on her 1988 federal income tax return.

The trustee alleges that the transfer of these tax credits by the debtor Harold E. Sergent to his wife occurred on October 16, 1989 when Linda S. Sergent filed her 1988 federal income tax return. Thus, according to the complaint, the transfer is avoidable under title 11 U.S.C. § 548(a)(2) as a transfer within one year of bankruptcy of an interest of the debtor in property for less than reasonably equivalent value while the debtor was insolvent.

Alternatively, the trustee alleges that the transfer of these tax credits is avoidable under title 11 U.S.C. § 549 as a transfer of property of the estate made after the commencement of this case that was not authorized by title 11 or this court.

The trustee requests judgment against the IRS in the amount of $166,500 as the initial transferee of the funds representing the tax credits and against Linda S. Sergent as the beneficiary of the transfer.

The trustee further objects to the allowance of the proofs of claim for taxes filed by the IRS in Mr. Sergent's bankruptcy case unless the IRS turns over the $166,500 to her as trustee of the bankruptcy estate of Mr. Sergent. The claim or claims of the IRS, as amended, for taxes owed by Mr. Sergent exceed the amount of $286,267 stated in the November 13, 1989 notice of the IRS.

The complaint alleges that the $150,000 additional payment of April 15, 1989 and the $16,500 in estimated tax payments made on or prior thereto were made by the defendant debtor Harold E. Sergent. See Complaint, paragraphs 9 and 10. However, by his answer to the complaint the defendant debtor denies that he made these payments. By her answer Linda S. Sergent also denies the allegation that Harold E. Sergent made these payments. The answer of the IRS denies the allegation that these payments were made solely by the debtor Harold E. Sergent.

There is no documentary evidence in the record establishing who actually made these payments or how they were made.

The IRS contends the fund represented by the payments in question, whether such payments were made by Mr. Sergent or by the Sergents jointly, is not property of the bankruptcy estate of either of the debtors.

The IRS further contends that since neither of the debtor taxpayers is due a refund for overpayment of taxes these estimated tax payments are not recoverable by Mr. Sergent's trustee in bankruptcy.

CONCLUSIONS OF LAW:

This matter is not ripe for summary judgment in favor of either of the movants.

There is a disputed issue of fact as to whether the payments which the plaintiff trustee seeks to recover from the IRS for the benefit of the estate of the debtor Harold E. Sergent were made by Mr. Sergent. There is no documentary evidence in the record indicating how the payments were made or who made the payments. The fact that the defendant trustee of the bankruptcy estate of the debtor Linda S. Sergent did not oppose entry of summary judgment in the amount of the payments against her bankruptcy estate does not resolve the disputed issue of fact between the plaintiff and the IRS with respect to who made the payments.

The court rejects the argument of the IRS that the deposits with the IRS represented by these payments are not bankruptcy estate property. A bankruptcy estate is comprised of all legal or equitable interests of the debtor in property as of the commencement of the case. On the date of bankruptcy either Mr. Sergent or perhaps both he and his wife had an equitable interest in the $166,500 on deposit with the IRS, at least to the extent of a taxpayer's right to have these monies properly credited against taxes owed. The IRS recognized Mr. Sergent's equitable interest therein when it credited the estimated tax payments as directed by Mr. Sergent.

The complaint of the trustee requests, inter alia, such relief as is just. At a minimum the plaintiff trustee is entitled to a determination as to whether the IRS should be directed to apply the estimated tax payments in question in a manner that reduces the claim of the IRS against the estate of Harold E. Sergent.

Dated:

By the court -

___________________________

JOE LEE

CHIEF JUDGE

Copies to:

Ann E. Samani, Esq.

Charles H. Keen, Esq.

David E. Middleton, Esq.

Stephen Palmer, Esq.

Laura Day DelCotto, Esq.

U. S. Trustee