REFUNDED WITHHOLDING IS NOT EXEMPT, BANKRUPTCY PANEL AFFIRMS.

CORNISH, Chief Judge.

Debtor appeals the bankruptcy court's order granting the trustee's objection to debtor's claimed exemptions in his 2009 federal tax refund attributable to withholdings of tax from unemployment compensation and a distribution of retirement funds. Having reviewed the record and applicable law, we affirm the bankruptcy court's order for reasons other than those stated by the trial court.²

Subsequently, Debtor amended his Schedule C to claim an exemption of that portion of his 2009 federal tax refund attributable to taxes withheld from his unemployment compensation.⁵ He also claimed as exempt that portion of the refund attributable to taxes withheld from a distribution from his employer's 401(k) plan.⁶ Trustee then objected to Debtor's claimed exemptions, arguing the taxes withheld did not retain their character as exempt pursuant to 11 U.S.C. § 522(b).⁷ The parties stipulated to the facts and admission of Debtor's 2009 federal income tax return.⁸ A telephonic hearing was held on the matter after which the bankruptcy court entered an order granting Trustee's objection to Debtor's claimed exemptions.⁹ That order caused this timely appeal.

A decision is considered final "if it 'ends the litigation on the merits and leaves nothing for the court to do but execute the judgment.'"¹¹ A bankruptcy court's order disallowing a debtor's claimed exemption is final for purposes of appellate review.¹²

On appeal, Debtor argues that funds withheld as taxes from exempt sources of income retain their exempt character when refunded to a debtor as overpayments by the Internal Revenue Service. To support this argument, Debtor cites In re Smith,¹⁷ a decision of this Court applying Utah law, In re Sparks,¹⁸ a bankruptcy court case applying Ohio law, and the general proposition that "exemption statutes are to be liberally construed so as to effect their beneficent purposes."¹⁹ While we certainly agree that exemption statutes are to be construed liberally, the cases Debtor points to are distinguishable because the state exemption laws of Utah and Ohio differ from those of Wyoming.

In Smith, a debtor claimed an exemption for a refund resulting from an overpayment of taxes withheld from exempt retirement income.²⁰ The trustee objected and the bankruptcy court sustained the objection and disallowed the exemption.²¹ When debtor appealed to this Court, we certified the following question to the Utah Supreme Court:

In Sparks, an Ohio bankruptcy court addressed the issue of "[w]hether an income tax refund directly traceable to" Ohio Public Employee Retirement System benefits, Ohio unemployment compensation benefits, and social security benefits was exempt.²⁷ As in the appeal before us, the debtor in Sparks argued that funds withheld as taxes from exempt sources of income retained their exempt character.²⁸ The Sparks trustee argued that "once otherwise exempt funds are withheld and paid to the government, the funds are transformed and may only be exempted under statutory sections specifically applicable to tax refunds."²⁹ Relying on In re Cook,³⁰ another Ohio bankruptcy court case, the Sparks bankruptcy court ruled that the tax refund was exempt.³¹

The bankruptcy court's decision in Sparks was premised on two critically related points. First, the court recognized that the legislative purpose and policy underlying the Ohio exemption statutes at issue is "to protect funds intended primarily for maintenance and support of the debtor's family."³² Second, and more importantly, the Sparks bankruptcy court was able to rely on the Ohio Supreme Court's express sanctioning of the concept of tracing exempt funds in circumstances where those funds are intended for the support and maintenance of individuals.³³

In Daugherty v. Central Trust Co.,³⁴ the Ohio Supreme Court ruled that exempt funds do not lose exempt status when deposited in a personal checking account if the source of the funds is known or reasonably traceable.³⁵ The Sparks bankruptcy court reasoned that "[i]n this context, there is no discernable critical distinction between exempt funds held in a bank or investment account and funds retained in the U.S. Treasury and returned as a tax refund as long as those funds are reasonably traceable."³⁶ As a result, the bankruptcy court denied the trustee's objection, ruling that "allowing the claimed exemptions and thereby maintaining the original character of the funds as retirement and employee benefits is entirely consistent with the legislative purpose to promote the maintenance and support of individuals."³⁷

Unfortunately for Debtor, Wyoming's Supreme Court has not recognized the tracing concept in case law as the Ohio Supreme Court has done. Nor do Wyoming's exemption statutes contain "tracing language" like the Utah statutes. Accordingly, we believe the result in this case is dictated by the Tenth Circuit's analysis in the Annis decision.³⁸

In Annis, the debtor sought to exempt her federal and state income tax refunds resulting from wage withholdings pursuant to the Oklahoma statute exempting earnings from personal services.³⁹ The debtor argued that "at no time was the returned money itself a tax (. . . the withholding exceeded tax liability). The money instead at all times remained the employee's wages, albeit wages held by the government for the employee."⁴⁰ The bankruptcy court agreed and ruled the tax refunds were exempt. The trustee appealed to this Court, arguing the refunds did not satisfy the requirement of the statute. This Court reversed, and the debtor appealed to the Tenth Circuit.

On appeal to the Tenth Circuit, the debtor again argued that the withholdings from wages retained their exempt character when withheld and then refunded to the debtor by the Internal Revenue Service. The Tenth Circuit responded that

Since it involved a claimed exemption of a refund generated by taxes withheld from wages under Oklahoma law, Annis may not at first blush appear controlling here. However, the Tenth Circuit's analysis is equally applicable to the facts and law of this case because the taxes withheld from Debtor's unemployment compensation and retirement distribution are governed by the same Internal Revenue Code language.

The taxes withheld from Debtor's unemployment compensation were done so pursuant to 26 U.S.C. § 3402(p)(2). That section provides as follows:

Similarly, the taxes withheld from Debtor's retirement income distribution were done so pursuant to 26 U.S.C. § 3405(c). That section provides as follows:

Absent any language in the Wyoming exemption statutes or in Wyoming case law to establish the exempt character of Debtor's tax refund if it can be reasonably traced to exempt sources, we see no way to distinguish the Tenth Circuit's reasoning in Annis. Accordingly, we are compelled to affirm the bankruptcy court's order denying the Debtor's claimed exemptions.⁴⁸

¹ The parties did not request oral argument, and after examining the briefs and appellate record, the Court has determined unanimously that oral argument would not materially assist in the determination of this appeal. Fed. R. Bankr. P. 8012. The case is therefore ordered submitted without oral argument.

² Our analysis differs somewhat from that of the bankruptcy court. However, an appellate court is "free to affirm . . . on any grounds for which there is a record sufficient to permit conclusions of law, even grounds not relied upon" by the trial court. Griess v. Colo., 841 F.2d 1042, 1047 (10th Cir. 1988) (internal quotation marks omitted).

³2009 Form 1040 at l. 72, in Appellant's App. at 75.

⁴See id. at ll. 61 & 63 and Forms W-2, 1099-R & 1099-G, in Appellant's App. at 75, 85, 86, 88.

⁵Amended Schedule C, in Appellant's App. at 60 (Debtor claimed as exempt "Unemployment Compensation & the proceeds thereto (including tax refunds derived therefrom)" pursuant to Wyoming Statutes § 27-3-319).

⁶Second Amended Schedule C, in Appellant's App. at 66 (Debtor claimed as exempt "Income tax refund derived from 401(k) Distribution" pursuant to 26 U.S.C. § 401).

⁷Trustee's Objections to Claim of Exemption, in Appellant's App. at 65 and 71.

⁸Joint Stipulation of Facts, in Appellant's App. at 72.

⁹Order Sustaining the Trustee's Objections to Debtor's Claimed Exemptions, in Appellant's App. at 108.

¹⁰ 28 U.S.C. § 158(a)(1), (b)(1), and (c)(1); Fed. R. Bankr. P. 8002; 10th Cir. BAP L.R. 8001-3.

¹¹Quackenbush v. Allstate Ins. Co., 517 U.S. 706, 712 (1996) (quoting Catlin v. United States, 324 U.S. 229, 233 (1945)).

¹²In re Smith, 401 B.R. 487, 488 (10th Cir. BAP 2009).

¹³Pierce v. Underwood, 487 U.S. 552, 558 (1988).

¹⁴Salve Regina Coll. v. Russell, 499 U.S. 225, 238 (1991).

¹⁵ Unemployment compensation is exempt pursuant to Wyoming Statutes § 27-3-319, which provides in relevant part as follows:

Retirement benefits are exempt pursuant to Wyoming Statutes § 1-20-110, which provides in relevant part as follows:

¹⁶Manchester v. Annis (In re Annis), 232 F.3d 749 (10th Cir. 2000).

¹⁷ 401 B.R. 487 (10th Cir. BAP 2009).

¹⁸ 410 B.R. 602 (Bankr. S.D. Ohio 2009).

¹⁹ Appellant's Brief at 8 (citing In re Lindell-Heasler, 154 B.R. 748, 751 (D. Wyo. 1992)).

²⁰In re Smith, 201 P.3d 1001, 1002 (Utah 2009).

²¹Id.

²²Id. (footnote omitted).

²³ Utah Code Ann. § 78B-5-505(xiv) (2008) (emphasis added).

²⁴ Utah Code Ann. § 75B-5-507(2) (emphasis added).

²⁵Smith, 201 P.3d at 1002.

²⁶In re Smith, 401 B.R. 487, 490 (10th Cir. BAP 2009).

²⁷In re Sparks, 410 B.R. 602, 603 (Bankr. S.D. Ohio 2009).

²⁸ The debtor claimed the refunds were exempt pursuant to Ohio Rev. Code § 2329.66(A)(10)(a) (Ohio Public Employee Retirement System benefits); Ohio Rev. Code § 2329.66(A)(9)(c) (Ohio unemployment compensation benefits); and Ohio Rev. Code § 2329.66(A)(17) (social security benefits and § 401(k) benefits). Sparks, 410 B.R. at 604.

²⁹Sparks, 410 B.R. at 604.

³⁰ 406 B.R. 770 (Bankr. S.D. Ohio 2009) (a case decided only a few months earlier by another judge in the same district).

³¹Sparks, 410 B.R. at 607.

³²Id. at 606 (citing In re Cook, 406 B.R. at 776).

³³Sparks, 410 B.R. at 606.

³⁴Daugherty v. Cent. Trust Co. of Northeastern Ohio, N.A., 504 N.E.2d 1100 (Ohio 1986).

³⁵Id. at 1103.

³⁶Sparks, 410 B.R. at 607.

³⁷Id.

³⁸Manchester v. Annis (In re Annis), 232 F.3d 749 (10th Cir. 2000).

³⁹Id. at 750 (the statute construed is Okla. Stat. Ann. tit. 31, § 1.1 (1995)).

⁴⁰Id. at 752.

⁴¹Id.

⁴²Id.

⁴³Id. at 753. Prior to the Annis decision, the United States Court of Appeals for the Eighth Circuit, construing an exemption claimed under a Missouri garnishment statute, reached a similar conclusion in In re Wallerstedt, 930 F.2d 630 (8th Cir. 1991) ("We . . . hold that the Wallerstedts' tax refunds are no longer earnings and are not exempt from the bankruptcy estate under Missouri law."). See also In re Benn, 491 F.3d 811, 816 (8th Cir. 2007) ("Section 513.427 does not create an exemption for tax refunds, and no other Missouri statute or non-bankruptcy federal exemption statute permits a debtor to exempt tax refunds from the bankruptcy estate.").

⁴⁴ 26 U.S.C. § 3402(p)(2) (emphasis added).

⁴⁵Annis, 232 F.3d at 752 (citing 26 U.S.C. § 3402(a)(1)) (emphasis added).

⁴⁶ 26 U.S.C. § 3405(c).

⁴⁷ 26 U.S.C. § 3405(f) (emphasis added).

⁴⁸ As pointed out by Judge Henry in his Annis concurrence, the argument that funds withheld as taxes from exempt sources of income retain their character when refunded to the debtor is not illogical, but we are constrained to leave the definition of exemptions in opt-out states to state lawmakers. See Annis, 232 F.3d at 753-54.