562 B.R. 658
Bankr. E.D. Va.2016Background
- Debtor filed a Chapter 7 petition on May 25, 2016; she had filed a 2014 Form 1040 on April 4, 2016 showing a $4,169 overpayment.
- On May 2, 2016 the IRS applied (set off) that 2014 overpayment against the Debtor’s 2012 tax liability.
- Debtor listed the 2014 refund as an exempt asset on Schedule C (Virginia exemption).
- Debtor moved to recover the setoff as an involuntary preference/turnover under 11 U.S.C. §§ 522(h) and 553(b).
- IRS contended (1) the taxpayer has no right to an overpayment/refund until the IRS determines to refund or offset under IRC § 6402(d), and (2) the IRS did not “improve its position” within the 90–day preference period under § 553(b).
Issues
| Issue | Debtor's Argument | IRS's Argument | Held |
|---|---|---|---|
| Whether the debtor had a legal property right in the 2014 overpayment at filing | Debtor: overpayment is property of the estate and she had a right to the refund/exemption prior to the IRS offset | IRS: taxpayer has no refund right until IRS applies or determines refund under IRC § 6402(d) | Court: debtor had a legal right in the overpayment (follows Sexton/Copley line) |
| Whether the IRS setoff improved its position within 90 days before filing (§ 553(b)) | Debtor: right to refund arose when she filed the 2014 return (April 4, 2016), within 90 days, so IRS improved position | IRS: debtor’s refund right accrued at end of taxable year (Dec 31, 2014), so no improvement within 90 days | Court: no improvement in position during the 90 days; denied turnover motion |
| Whether § 553 controls over § 547 for setoffs | Debtor invoked preference principles but relied on § 522(h) and § 553(b) | IRS: setoff issues governed by § 553, not § 547 | Court: Agreed setoffs are governed by § 553; § 547 inapplicable |
| Whether any exception to § 553 (creditor incurred debt to obtain setoff) applies | Debtor suggested timing of return filing matters | IRS: it did not incur the refund obligation to obtain setoff; no evidence of bad purpose | Court: no showing IRS incurred debt to obtain setoff; exception inapplicable |
Key Cases Cited
- In re Sexton, 508 B.R. 646 (Bankr. W.D. Va. 2014) (debtor’s overpayment is property of the estate; IRS must seek stay relief before setoff)
- In re Copley, 547 B.R. 176 (Bankr. E.D. Va. 2016) (debtor entitled to exempt/recover tax overpayment despite Treasury Offset Program)
- U.S. Dep’t of Agric. Rural Hous. Serv. v. Riley (In re Riley), 485 B.R. 361 (D.R.I. 2012) (taxpayer’s refund right accrues at end of taxable year)
- In re Glenn, 207 B.R. 418 (E.D. Pa. 1997) (tax refund interest accrues on last day of taxable year)
- Dillard Ford, Inc. v. Ford, 940 F.2d 1507 (11th Cir. 1991) (setoff questions governed by § 553 rather than § 547)