Copley v. United States

Decision Date12 May 2020
Docket NumberNo. 18-2347,18-2347
Citation959 F.3d 118
Parties Matthew A. COPLEY; Jolinda M. Copley, Debtors - Appellees, v. UNITED STATES of America, Defendant - Appellant, and USBC-Richmond (United States Bankruptcy Court) Party-in-Interest.
CourtU.S. Court of Appeals — Fourth Circuit

Richard E. Zuckerman, Principal Deputy Assistant Attorney General, Bruce R. Ellisen, Bethany B. Hauser, Tax Division, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C.; G. Zachary Terwilliger, United States Attorney, OFFICE OF THE UNITED STATES ATTORNEY, Alexandria, Virginia, for Appellant. Martin C. Conway, CONWAY LAW GROUP PC, Woodbridge, Virginia, for Appellees.

Before KEENAN, WYNN, and RICHARDSON, Circuit Judges.

Vacated and remanded by published opinion. Judge Keenan wrote the opinion, in which Judge Wynn and Judge Richardson concurred.


This case requires us to resolve a conflict between the federal tax offset program (the offset program) and the bankruptcy code. Under the offset program, the Secretary of the Treasury has the discretion to set-off "any" tax overpayment against a taxpayer’s preexisting tax liabilities. 26 U.S.C. § 6402(a). And, with limited exceptions not applicable here, the bankruptcy code provides that exempt property cannot be used to satisfy "any" of the bankruptcy debtor’s prepetition debts. 11 U.S.C. § 522(c). We must determine which of these statutory directives controls when a bankruptcy debtor claims, as exempt property, a tax overpayment that the government seeks to set-off under the offset program. This question is one of first impression in this circuit and has divided the bankruptcy courts.

In the present case, both the district court and the bankruptcy court resolved the statutory conflict in favor of the bankruptcy debtors, Matthew and Jolinda Copley (the Copleys), who filed for bankruptcy in 2014 and claimed their 2013 tax overpayment as exempt property. The bankruptcy court recognized that the government had a statutory right to offset the Copleys’ tax overpayment, and further recognized that the bankruptcy code preserves creditors’ set-off rights under a separate provision, 11 U.S.C. § 553(a). Nevertheless, the court determined that the Copleys’ interest in their tax overpayment became part of the bankruptcy estate when they filed their petition, and that the Copleys’ right to exempt the overpayment under Section 522(c) "supersedes the setoff rights of the United States [preserved] under § 553." The bankruptcy court thus ordered the government to remit payment to the Copleys, and the district court affirmed.

Upon our review, we agree that the Copleys’ interest in their tax overpayment became part of the bankruptcy estate. However, based on the plain language of the various statutes, particularly the plain language of 11 U.S.C. § 553(a), we conclude that the government’s right to offset the Copleys’ tax overpayment under 26 U.S.C. § 6402(a) cannot be subordinated or otherwise affected by the Copleys’ attempts to claim the overpayment as exempt property. Accordingly, we vacate the district court’s judgment and remand for further proceedings consistent with the principles expressed in this opinion.


The relevant facts are not in dispute. On May 29, 2014, the Copleys filed a bankruptcy petition under Chapter 7 of the bankruptcy code. In their petition, the Copleys listed the Internal Revenue Service (IRS) as a priority creditor, and identified preexisting tax debt in the amount of $13,547.10. The Copleys claimed, as property exempt from collection, their tax overpayment from the most recent fiscal year, 2013, in which their withholdings exceeded their tax liability by $3,208.00. The Copleys claimed this exemption pursuant to Virginia Code § 34-4, which permits a bankruptcy debtor to claim protection for "money and debts due the householder not exceeding $5,000 in value."1 The government did not object to the Copleys’ claim.

On June 6, 2014, after purportedly securing their interest in the tax overpayment in accordance with Virginia law, the Copleys filed their 2013 tax returns. Consistent with their bankruptcy filing, the Copleys reported a joint tax liability of $7,054 and a total of $10,262 in withholdings, reflecting a tax overpayment of $3,208. In response, the IRS confirmed the amount of their overpayment but did not send the Copleys a refund. Instead, the IRS explained that it had "exercised [its] discretion under 26 U.S.C. § 6402 to setoff [the Copleys’] tax overpayment for the 2013 tax year" against their preexisting tax liabilities. The Copleys countered by filing an amended complaint in bankruptcy court, seeking to compel the government to remit the overpayment to them.

As noted above, the bankruptcy court determined that the Copleys’ interest in their tax overpayment was property of the bankruptcy estate and, once claimed as exempt property, could not be subject to set-off by the government under the offset program. After the district court affirmed the bankruptcy court’s judgment, the government filed the present appeal.


In reviewing the judgment of a district court sitting in review of a bankruptcy court, we apply the same standard of review that was applied by the district court. Three Sisters Partners, L.L.C. v. Harden (In re Shangra-La, Inc.) , 167 F.3d 843, 847 (4th Cir. 1999). That is, we review the bankruptcy court’s legal conclusions de novo, its factual findings for clear error, and any discretionary decisions for abuse of discretion.2 Stancill v. Harford Sands Inc. (In re Harford Sands Inc .), 372 F.3d 637, 639 (4th Cir. 2004) ; Meyer Med. Physicians Grp., Ltd. v. Health Care Serv. Corp ., 385 F.3d 1039, 1041 (7th Cir. 2004).

The government challenges two legal conclusions made by the bankruptcy court and the district court: (1) that the Copleys’ 2013 tax overpayment became part of their bankruptcy estate when they filed for bankruptcy; and (2) that the Copleys’ right to exempt the tax overpayment supersedes the government’s right to offset the overpayment against their preexisting tax debt. We address the government’s arguments in turn.


We begin with the government’s contention that the Copleys’ 2013 tax overpayment never became part of the bankruptcy estate and, thus, could not have been exempted under the dual provisions of Virginia Code § 34-4 and 11 U.S.C. § 522(b)(1). See Owen v. Owen , 500 U.S. 305, 308, 111 S.Ct. 1833, 114 L.Ed.2d 350 (1991) ("No property can be exempted (and thereby immunized) ... unless it first falls within the bankruptcy estate."). According to the government, a taxpayer can only have a property interest in a tax refund , not a tax overpayment , and the taxpayer can only have an interest in a refund if the overpayment exceeds preexisting tax liabilities. Because the Copleys’ overpayment did not exceed their preexisting tax liabilities, the government asserts that their interest in a refund was valueless and, therefore, did not become part of the bankruptcy estate. We disagree.

The scope of a bankruptcy estate is expansive. It "consists of all the interests in property, legal and equitable, possessed by the debtor at the time of filing, as well as those interests recovered or recoverable through transfer and lien avoidance provisions." Owen , 500 U.S. at 308, 111 S.Ct. 1833. The bankruptcy estate also encompasses a "debtor’s right to bring a legal claim." Vieira v. Anderson (In re Beach First Nat’l Bancshares, Inc.) , 702 F.3d 772, 776 (4th Cir. 2012).

Given this broad scope, we agree with the bankruptcy court that the uncontested sequence of events in this case compel the conclusion that the Copleys’ interest in their 2013 tax overpayment became part of the bankruptcy estate. A set-off of a bankruptcy debtor’s claim is not accomplished "until three steps have been taken: (i) a decision to effectuate a setoff, (ii) some action accomplishing the setoff, and (iii) a recording of the setoff." Citizens Bank of Md. v. Strumpf , 516 U.S. 16, 19, 116 S.Ct. 286, 133 L.Ed.2d 258 (1995). It is undisputed that at the time the Copleys filed their bankruptcy petition, the government had not taken any of these steps.

The fact that the Copleys’ interest in their overpayment remained subject to possible setoff at the time of their bankruptcy filing did not remove the overpayment from the bankruptcy estate. The "defense of setoff" preserved in the bankruptcy code is precisely that, a defense. Id. at 20, 116 S.Ct. 286. It allows a creditor with a valid claim against a bankruptcy debtor to assert the value of that claim as a defense to a demand to pay a separate debt owed to the debtor. Id . ; see also 11 U.S.C. § 542(b). Thus, unless and until a defense of set-off is successfully exercised, the debtor’s own claim against the creditor remains valid and cannot be considered valueless. And, if the creditor’s claim against the debtor is disallowed or the right of offset is otherwise not asserted, the debtor will recover fully.3

Moreover, nothing in the bankruptcy code indicates that property interests subject to setoff are excluded from the bankruptcy estate. To the contrary, the offset provisions of the bankruptcy code suggest that such debt is part of the estate. The language of 11 U.S.C. § 542(b) is particularly instructive. Section 542(b) provides that any "entity that owes a debt that is property of the estate ... shall pay such debt to ... the trustee, except to the extent that such debt may be offset under section 553 of this title against a claim against the debtor." 11 U.S.C. § 542(b) (emphasis added). The phrase "such debt" in this provision has only one possible antecedent: "debt that is property of the estate." Id. By its terms, therefore, Section 542 effectively indicates that "debt [that] may be offset," generally speaking, "is property of the estate." Id.

Our conclusion is not affected by the Fifth Circuit’s decision in IRS v. Luongo (In re Luongo) , 259 F.3d 323 (5th Cir. 2001), on which the...

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