Benson v. United States (In re Benson)
| Decision Date | 03 April 2017 |
| Docket Number | Case No. 16–70245,Adv. Proc. No. 16–07023 |
| Citation | 566 B.R. 800 |
| Parties | IN RE: Kerie LeeAnn BENSON, Debtor. Kerie LeeAnn Benson, Plaintiff, v. United States of America, Defendant. |
| Court | U.S. Bankruptcy Court — Western District of Virginia |
Mark A Black, Brumberg Mackey & Wall PLC, Roanoke, VA, for Plaintiff.
Kieran O. Carter, Department of Justice, Tax Division, Washington, DC, for Defendant.
This matter comes before the Court on Cross–Motions for Summary Judgment filed by the Debtor, Kerie LeeAnn Benson (the "Debtor"), and the United States of America, represented by trial counsel of the Tax Division of the Department of Justice. The parties submitted a joint stipulation of facts, and each has submitted well-reasoned briefs on the issues presented. The Court heard oral argument on February 21, 2017 and the matter is ripe for resolution.
Kerie LeeAnn Benson filed her voluntary petition under Chapter 7 of the Bankruptcy Code on March 2, 2016 along with all required schedules. On Schedule E/F, the Debtor identified the Internal Revenue Service (the "IRS") as a creditor holding unsecured claims for federal income taxes for the 2006 and 2011 tax years in the cumulative amount of $12,730.26. The parties agree that the federal income tax liabilities for 2006 and 2011 were non-priority claims.
According to the IRS's records, the Debtor filed her 2006 federal income tax return on June 4, 2007 and self-reported $16,221.00 in income tax liabilities. As of May 9, 2016, a date which will become important later, the Debtor still owed $10,882.18 in federal income tax liabilities for the 2006 tax year.
On Schedules A/B and C, the Debtor listed her expected federal income tax refund for the 2015 tax year as $1.00 and claimed it as exempt pursuant to Va. Code Ann. § 34–4. The Chapter 7 Trustee conducted the Section 341 meeting of creditors on April 8, 2016. The Debtor then filed a homestead deed with the Clerk of the Circuit Court of Pulaski County, Virginia on April 11, 2016 claiming $1.00 of her 2015 federal income tax refund as exempt.
The Debtor filed her income tax return for the 2015 tax year with the IRS on April 16, 2016. After filing this return, the Debtor believed she was due a federal income tax refund of $967.00. The Debtor amended her Schedules A/B and C on April 20, 2016 to reflect her expected refund and, on April 25, 2016, amended her homestead deed to claim as exempt $967.00 of her expected 2015 federal income tax refund.
However, after applying the Earned Income Tax Credit, the Debtor discovered she had an overpayment of $6,417.00 for the 2015 tax year. When the Debtor became aware of the overpayment, she believed that she was due a refund of $6,417.00. Accordingly, she amended Schedules A/B and C for a second time on May 10, 2016 and claimed $6,417.00 of her expected refund as exempt under Va. Code Ann. §§ 34–26(9) and 34–4.1 On May 19, 2016, the Debtor further amended her homestead deed to claim $5,993.00 of her expected refund as exempt. The Debtor also amended Schedule C on May 20, 2016 to increase her claimed exemption under Va. Code Ann. § 34–4.
However, the IRS processed the Debtor's 2015 tax return on May 9, 2016. As of May 9, 2016, the Debtor had an overpayment of $6,417.00, and the IRS offset the overpayment by the full amount against the 2006 tax liability. Also on May 9, 2016, the IRS mailed a "Notice CP49" to the Debtor informing her that See Ex. D.
The Debtor claimed her refund as exempt because she intended to assert an exemption in any overpayment she had with respect to her federal income tax liability for the tax year 2015. The parties do not agree on the question of whether the Debtor could shield the 2015 federal income tax overpayment from offset under 26 U.S.C. § 6402 by claiming the overpayment as exempt and by recording a homestead deed. The United States agrees it did not file an objection to any of the Debtor's claimed exemptions on Schedule C.
As a threshold matter, the IRS contends that this Court lacks jurisdiction over this matter because this is an action for a refund of a tax overpayment and the United States has not waived its sovereign immunity. Instead, the IRS argues that the Debtor's recourse, if any, is limited to a suit in District Court under 28 U.S.C. § 1346(a)(1) or in the Court of Federal Claims under 28 U.S.C. § 1491. See United States' Memorandum in Support of its Motion for Summary Judgment ("IRS Brief"), at p. 8. The Court disagrees.
The Debtor initiated this action under 11 U.S.C. § 522(c), seeking turnover of an alleged improper offset by the United States against a federal income tax overpayment by the Debtor. (Complaint, ¶¶ 16–25). Section 106(a) of the Bankruptcy Code is a specific waiver of sovereign immunity. That section states as follows:
11 U.S.C. § 106(a). Because the IRS and the United States are governmental units within the meaning of this provision, they have waived immunity as set forth therein. See 11 U.S.C. § 101(27) ; Harchar v. United States (In re Harchar) , Case No. 98–13277, Adv. 2006 WL 3196846 (Bankr. N.D. Ohio Oct. 4, 2006).
The IRS observes that this case is really about 11 U.S.C. § 505, which addresses the determination of tax liabilities, and is within Section 106's enumerated waiver provisions. However, the IRS contends that the Debtor does not fit within the strictures of Section 505, in that Section 505 only addresses the trustee's ability to seek a refund for the benefit of the estate after a specified time and is devoid of any reference to the Debtor's ability to seek a refund. See 11 U.S.C. § 505(a)(2)(B). Thus, because the Debtor here does not fall within the allowable parameters of Section 505, she does not fall within the immunity waiver of Section 106. This is too narrow of a reading of Section 106(a).2
The issue is not whether the Debtor or the estate was entitled to a refund. Indeed, the IRS conceded at oral argument that but for the setoff, the Debtor would have been entitled to a refund in the amount it offset from the tax overpayment. Rather, this case is about the enforceability of an exemption and how it intersects with the IRS's ability to exercise a setoff. At least two of the statutes expressly enumerated in Section 106(a), 11 U.S.C. § 522 and 11 U.S.C. § 553, are directly implicated in this case, wherein the Court is asked to determine whether the Debtor has an enforceable exemption in the tax overpayment that entitles her to a refund over the IRS's claim of offset. The Court is not being asked to calculate the Debtor's tax liability of any year in any manner. Those issues are stipulated. Instead, the issues at hand go to the crux of the functions of Sections 522 and 553, both expressly within the Section 106 waiver provisions. Moreover, Congress went further, adding to Section 106 the provision that the court "may hear and determine any issue arising with respect to the application" of those sections to the IRS. 11 U.S.C. § 106(a)(2). In addition, the court may issue an order or judgment against the IRS, 11 U.S.C. § 106(a)(3), and may enforce that order or judgment, 11 U.S.C. § 106(a)(4).3
Such an application of Section 106 dovetails with a practical view of the interplay of the Bankruptcy Code and the tax laws in connection with a debtor before the bankruptcy court. The IRS is alleged to have taken action post-petition to assert a pre-petition claim against the Debtor against an asset the Debtor contends she has exempted from the estate—an action which it contends is preserved by an express provision of the Bankruptcy Code, 11 U.S.C. § 553. See IRS Brief, pp. 10–12. On the other hand, the Debtor contends the action taken by the IRS runs afoul of the Debtor's right to exempt that asset from the estate by the application of express provisions of the Bankruptcy Code and of applicable state law. See 11 U.S.C. § 522 and Va. Code Ann. §§ 34–4 and 34–26(9).4 See Benson's Memorandum in Support of Motion for Summary Judgment ("Debtor's Brief"), at pp. 6–12. To this Court, the obvious purpose of Section 106(a), and the...
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