First-time homebuyer IRS credit is not dischargeable

A $7,500 first-time homebuyer credit that is recaptured by the IRS over the next 15 years is a tax that is not dischargeable in bankruptcy.

Background

The debtor purchased a home with his mother and his sister in 2008. In his income tax return for that year, he claimed a first-time homebuyer credit of $7,500. The debtor paid the recapture tax in the amount of $500 per year in his tax returns for the years 2010 through 2014. He and the co-owners sold the property in 2016. This gave rise to an acceleration of the recapture tax, in the amount of $5,000. The debtor did not file tax returns for 2015 or 2016 because he had no income and was not required to file returns for those years.

The debtor filed a voluntary petition under Chapter 7 with this court on Oct. 17, 2017. He did not list the IRS as a creditor in his schedules. The Chapter 7 trustee filed a report of no distribution. The debtor received a discharge and the case was closed Jan. 29, 2018. 

On Dec. 18, 2020, the debtor filed a motion to reopen his case. Debtor asserts that the recapture tax is not really a tax at all, and therefore, was discharged in his bankruptcy case. The motion is fully briefed.

Analysis

The decision to reopen this case turns on futility, and whether or not the recapture tax is a tax. If, as the IRS argues, the recapture tax is a tax, then there is no dispute that the tax is nondischargeable and there would be no reason to reopen the case. If, on the other hand, the debtor is correct and the amount owed is not a tax, then the liability would be dischargeable, and the case should be reopened to afford th debtor that relief.

The Housing and Economic Recovery Act of 2008 provided a tax credit to first time homebuyers in the amount of $7,500. The credit is then recaptured over the 15 years following the purchase of the property. Two bankruptcy courts have addressed the issue of whether the recapture tax for the first-time homebuyer credit is a tax, coming to opposite results.

Employing the functional approach, this court finds that the recapture obligation is a tax. The liability arose from a credit against the debtor’s 2008 tax obligation. But for the first-time homebuyer credit, the debtor would have had an additional tax obligation in the amount of $7,500 in that year. 

The government did not actually loan the debtor $7,500 to purchase the home and then request repayment of that amount over a 15-year period. Rather, the credit arose from the debtor’s income tax obligation in 2008. In this sense, the debtor’s argument that the recapture tax is revenue neutral is incorrect. The recapture raises the same revenue for the government that it would have been entitled to receive as a result of the debtor’s 2008 tax return. The court finds that the recapture tax is a tax. The court, therefore, will deny the debtor’s motion to reopen as futile.

Debtor’s motion to reopen denied.

In re Shin, No. 17-13509, Feb. 16, 2021. EDVA Bankr. at Alexandria (Kenney). VLW No. 020-4-023. 7 pp.