Matthew Copley v. United States, 959 F.3d 118

Matthew and Jolinda Copley filed Chapter 7 on May 29, 2014, listing the IRS as a priority creditor and prepetition tax debt of $13,547.10.
They reported a 2013 tax overpayment of $3,208 on return filed after the bankruptcy petition and claimed that overpayment as exempt under Virginia law (Va. Code § 34-4) via 11 U.S.C. § 522(b).
The IRS confirmed the overpayment but invoked 26 U.S.C. § 6402(a) to set off the overpayment against the Copleys’ preexisting tax liabilities instead of issuing a refund.
Bankruptcy court and district court ruled for the Copleys, holding the overpayment was estate property and that the claimed exemption under § 522(c) barred the IRS offset.
Fourth Circuit agreed the overpayment became property of the estate but held that § 553(a) preserves the IRS’s statutory offset right under § 6402(a), so the exemption did not prevent the setoff.
Judgment vacated and remanded for proceedings consistent with the Fourth Circuit’s interpretation.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Did the 2013 tax overpayment become property of the bankruptcy estate?	Copleys: Yes — their claim to the overpayment existed at filing and thus entered the estate.	U.S.: No — only a refund (not a mere overpayment subject to setoff) becomes estate property; because liabilities equaled/ exceeded the overpayment, there was no estate interest.	Held: Yes — the overpayment claim was property of the estate; setoff had not been effectuated prepetition.
Does the debtor’s exemption under 11 U.S.C. § 522(c) prevent the IRS from offsetting the overpayment under 26 U.S.C. § 6402(a)?	Copleys: Exemption provides that exempt property cannot satisfy prepetition debts, so § 522(c) bars IRS setoff.	U.S.: § 553(a) preserves creditors’ prepetition offset rights; § 6402(a) authorizes IRS to offset any overpayment, so exemption cannot defeat statutory offset.	Held: The IRS’s offset prevails — § 553(a) preserves the government’s § 6402(a) setoff right and § 522(c) cannot be read to affect that right.

Owen v. Owen, 500 U.S. 305 (1991) (property cannot be exempted unless it first becomes part of the bankruptcy estate)
Citizens Bank v. Strumpf, 516 U.S. 16 (1995) (setoff is a defense and is not effectuated until exercised; bankruptcy preserves the defense)
IRS v. Luongo (In re Luongo), 259 F.3d 323 (5th Cir. 2001) (contrasting context where IRS had already effected setoff; refund did not become estate property)
Desert Palace, Inc. v. Costa, 539 U.S. 90 (2003) (start statutory interpretation with plain text)
Lamie v. U.S. Trustee, 540 U.S. 526 (2004) (enforce plain statutory language per its terms)
Conn. Nat’l Bank v. Germain, 503 U.S. 249 (1992) (construe statutes to give effect to each when possible)