§ 122.1 — Tax Refunds

Revised: June 15, 2004

[1]

Many Chapter 13 debtors become entitled to tax refunds after confirmation. In the year of filing, the refund is attributable in whole or in part to wages earned prior to confirmation. In later years, the tax refund will be purely attributable to postconfirmation earnings. The issue is whether confirmation of a plan that provides for payment of prepetition taxes precludes the taxing authority from setting off any refund owing to the debtor.

[2]

A tax refund is property of the Chapter 13 estate under 11 U.S.C. §§ 541(a) and 1306(a) whether it accrues before or after the petition.1 Some jurisdictions have local rules or general orders that permit the IRS to set off its prepetition tax claim against prepetition tax refunds that become payable after the petition or even after confirmation.2 Other courts have local rules that require just the opposite—tax refunds are payable to the Chapter 13 trustee for distribution to creditors consistent with the disposable income test in § 1325(b).3 Absent a local rule, and if neither the plan nor the order of confirmation provides otherwise,4 it has been held that a tax refund vests in the debtor free and clear of any claim or interest of the IRS under § 1327(b) and (c).5 The full effect of § 1327 on tax refunds will depend on the wording of the plan and on whether the taxing authority’s right of setoff arises before or after the petition.

[3]

With respect to prepetition tax refunds and prepetition taxes, the IRS has a secured claim to the extent of its right of setoff under § 506(a).6 To the extent of its prepetition right of setoff, the IRS must be treated as a secured claim holder through the plan and is entitled at confirmation under § 1325(a)(5) to the present value of the allowed amount of its secured claim.7 If the plan does not surrender the prepetition tax refund,8 then the debtor’s right to use the tax refund will depend on whether the plan satisfies the rights of the secured creditor. For example, the debtor might offer the IRS a substitute security interest in other property in exchange for the debtor’s use of the refund.9 To the extent of its prepetition setoff right, the taxing authority is not a priority claim holder because § 507(a)(8) applies only to “unsecured claims of governmental units.”10 At confirmation, the taxing authority is entitled to treatment as a secured claim holder under § 1325(a)(5) with respect to the portion of its claim secured by a setoff—typically, full payment in installments with interest11—and to full payment in installments without interest with respect to the unsecured, priority portion of its claim.12

[4]

In the typical case, the debtor has no unencumbered collateral to offer, and the plan is silent with respect to the secured portion of the tax claim that is subject to setoff in a tax refund. Instead, the plan treats the entire prepetition tax claim as an unsecured, priority claim to be paid in full through the plan. Notwithstanding the absence of any provision preserving the right of setoff or continuing the government’s possession of the refund, a numerical majority of reported decisions hold that § 553 preserves the right of setoff, defeating or at least conditioning the effects of confirmation under § 1327.13

[5]

A fair number of courts have held that confirmation of a plan that provides full payment of a prepetition tax precludes the taxing authority’s setoff in a refund if not preserved by the plan. For example, in United States v. Norton,14 the U.S. Court of Appeals for the Third Circuit held that the IRS violated the stay by withholding and eventually applying a tax refund to payment of a prepetition tax liability that was provided for with full payment as a priority claim through the confirmed Chapter 13 plan. Citing § 1327, the Third Circuit observed that the tax refund vested in the debtor at confirmation free and clear of the claims or interests of the IRS:

Upon confirmation, the IRS became bound to [the] plan and to the payment schedule that would satisfy its claim in full. . . . To allow the IRS to retain their overpayment as extra security on the debt would seriously compromise the powers of the bankruptcy court, the capacity of debtors to rehabilitate, and the equitable distribution that the Bankruptcy Code is designed to foster.15
[6]

Holden v. United States (In re Holden)16 reaches a similar conclusion with some important embellishments. The debtor in Holden filed Chapter 13 in May of 1996 and scheduled a prepetition tax claim for tax year 1992. After the petition, the debtor filed a return for tax year 1996 and was entitled to a refund. The IRS froze the debtor’s refund for tax year 1996. In the meantime, a plan was confirmed that treated the IRS as a priority claim holder with full payment of the 1992 claim.

[7]

The bankruptcy court concluded that the IRS was bound by confirmation to accept payment in full through the plan and the IRS violated the automatic stay by freezing the debtor’s tax refund. The IRS stipulated that the refund for the 1996 tax year arose postpetition, thus the IRS had no setoff right with respect to its prepetition claim for the 1992 tax year. This is especially important because a tax refund for the tax year in which the debtor files the Chapter 13 case always arises postpetition and lacks mutuality with respect to any prepetition tax claim. Absent mutuality, there was no right of setoff in Holden and the debtor’s entitlement to the tax refund was sustained by the bankruptcy court.

[8]

The cases preserving the right of setoff in a prepetition tax refund even when the confirmed plan is contrary or silent are a variety of the cases discussed above17 in which courts have declined to allow § 1327(a), (b) and (c) to have their statutory effects when the result would be to limit the lien rights of a secured claim holder. If the IRS had notice that the plan substituted a right to full payment without interest for its right of setoff in the debtor’s prepetition tax refund, and the IRS did not object, the IRS should be bound by confirmation to accept payments through the plan in full satisfaction of its claim.

[9]

The right of setoff that is preserved in § 553 is no more or less subject to the effects of confirmation under § 1327 than are other provisions of the Code that define the rights of creditors. For example, the nondischargeability of a student loan in a Chapter 13 case—fully assured by §§ 1328(a)(2) and 523(a)(8)—can be lost at confirmation when the plan provides for a finding of undue hardship and the student loan creditor fails to object to confirmation.18 The right of setoff in § 553 is subject to the same effects of confirmation. Secured status by virtue of a setoff right in a refund affords the taxing authority an entitlement to present value interest if the debtor pays the secured portion of the tax claim in installments through the plan under § 1325(a)(5).19 The priority unsecured portion of the taxing authority’s prepetition claim is entitled to full payment in installments but without interest.20 A plan provision for payment of the entire prepetition tax claim as a priority claim even though part of the claim is secured by a prepetition refund takes away the taxing authority’s right to interest on the secured portion. As noted elsewhere, many courts have held that a confirmed plan providing for payment of a secured claim holder without interest must be challenged before confirmation, else payment without interest is binding on the secured claim holder.21 The same should be true for the portion of a prepetition tax claim that is secured by right of setoff—the taxing authority is bound by a provision for payment in full without interest if no objection is raised at confirmation.

[10]

Upon timely objection, the taxing authority can defeat confirmation of any plan that fails to respect its rights as a secured claim holder with a setoff in a prepetition tax refund. It is not likely that bankruptcy courts would require the IRS to pay a cash refund to the debtor and then await repayment through installments under the plan.22 However, if the IRS is fully informed and fails to object to a plan that does not preserve its lien on the refund, the IRS should be bound by its inaction to release the refund.

[11]

When the IRS opposes loss of its right to setoff at confirmation, the plan might provide that with each payment of the allowed secured claim through the plan, the IRS must release a portion of the refund equal to the principal received from the debtor. The IRS can be expected to object that it is entitled to retain the refund until the tax claim is paid in its entirety, including the priority (unsecured) portion. This is a variation on the contentious question whether a Chapter 13 debtor is entitled to the free and clear effect of confirmation under § 1327(c) when the plan pays the allowed secured portion of an undersecured creditor’s claim, or at some later time when the entire debt is paid (or discharged) by the completion of payments under the plan.23 The intellectually honest outcome is that the IRS is no different from an undersecured car lender—as its secured claim is paid through the plan, its setoff right is satisfied and it must release the refund to the debtor.

[12]

This analysis of setoff becomes more complicated when exemptions are added to the mix. There is disagreement whether the IRS’s § 553 right to set off a prepetition tax claim against a prepetition tax refund is limited by a debtor’s exemptions under § 522(c). It has been characterized as the majority view that an exemption under § 522(c) defeats setoff under § 553.24 Contrary decisions point out that there is no exception for exempt property in the federal statutes that give the IRS the right to apply a refund against unpaid taxpayer liabilities.25

[13]

A Chapter 13 debtor’s best position is to take both attacks: claim the tax refund exempt and make specific provision in the plan to treat the tax claim as a priority or general unsecured claim. Arguably, the government must both timely object to the exemption26 and object to confirmation of the plan to protect its right of setoff from § 522(c) and from the effects of confirmation.

[14]

Different analysis applies when a plan providing for full payment of a prepetition tax claim is tested with respect to a postpetition tax refund. A postpetition tax refund is really a mistake in calculation of withholding for postpetition taxes. In a perfect world, there would be no such mistakes and there would be no postpetition tax refunds to worry taxing authorities and Chapter 13 debtors. In the real world, withholding is miscalculated, and Chapter 13 debtors are entitled to postpetition tax refunds.

[15]

An overwithholding of the debtor’s wages for income taxes would be property of the Chapter 13 estate under § 1306.27 Absent a contrary provision in the plan or order of confirmation, when the plan provides for payment of prepetition tax claims—and to accomplish confirmation under § 1322(a)(2), the plan must provide for full payment of tax claims entitled to priority under § 50728—confirmation of the plan vests all postpetition tax refunds in the debtor free and clear of prepetition claims for taxes.29

[16]

The disposable income test in § 1325(b)30 supports the view that postpetition tax refunds are free and clear of the claims of taxing authorities, except as provided otherwise in the plan or the order of confirmation. Although not without controversy, many jurisdictions interpret the disposable income test to require that postpetition tax refunds must be committed to funding the plan.31 This is a reasonable interpretation of projected income in § 1325(b)(1)(B) because an income tax refund is nothing more than accidental overwithholding of the debtor’s income that would otherwise be available either to pay living expenses or to pay creditors. To implement the disposable income test and to overcome the vesting effect in § 1327(b),32 some jurisdictions include in the plan a provision that all income tax refunds to which the debtor becomes entitled during the life of the plan will be paid to the trustee for distribution to creditors.33 If the plan is silent with respect to postpetition tax refunds, § 1327(b) would have its ordinary effect and any postconfirmation refund would vest in the debtor free and clear of the claims of creditors provided for by the plan.

[17]

Confirmation of a plan that commits postpetition tax refunds can have temporal effects beyond the usual statutory requirements for confirmation. In Midkiff v. Dunivent (In re Midkiff),34 the confirmed plan defined disposable income to include “income tax refunds to which the debtors are entitled during the first 36 months of the plan.”35 The debtors otherwise completed payments at the end of 36 months and received a discharge. After discharge, the debtors’ tax refund for the calendar year that included the end of the plan was paid by the IRS to the Chapter 13 trustee. The Bankruptcy Appellate Panel for the Tenth Circuit, affirmed by the Court of Appeals, concluded that the tax refund was captured by the confirmed plan notwithstanding that the refund was actually “received by” the trustee outside the three years required by the disposable income test in § 1325(b).36

[18]

Midkiff would require Chapter 13 trustees to keep Chapter 13 cases open after three years of regular payments when a tax refund is due the debtor for the last calendar year of the plan after confirmation. This is not good news for Chapter 13 trustees (or for debtors). In jurisdictions that include tax refunds in the disposable income commitment required of Chapter 13 debtors, Midkiff would be incentive for debtors to more carefully calculate tax withholding.

[19]

Also, as mentioned above, a tax refund for a postpetition year is not subject to setoff with respect to a prepetition tax liability of the debtor under ordinary principles of setoff. A taxing authority cannot be a secured claim holder by virtue of § 553 in a tax refund for a postpetition tax year if the only tax owing is a prepetition claim.

[20]

No reported decision has been found addressing whether § 1327 precludes a taxing authority from exercising a right of setoff with respect to a postpetition tax refund to collect a postpetition tax liability. This is not an academic question. Chapter 13 debtors make both kinds of miscalculations: they overwithhold and accrue postpetition tax refunds; they underpay and incur postpetition tax liabilities. These two circumstances are not likely to occur in the same postpetition year, but what about the debtor who underpays taxes in one year and then becomes entitled to a tax refund for the next postpetition year?

[21]

If the order of confirmation provides that tax refunds are committed to funding the plan,37 the taxing authority will be hard pressed to prevail in the assertion of a right to set off the postpetition refund against the debtor’s postpetition tax liability. The tax collector would be bound by the plan under § 1327(a).38 The postpetition tax refund would belong to all creditors by virtue of the plan provision. The taxing authority may be able to collect its postpetition taxes from any property that vested in the debtor at confirmation under § 1327(b), including from postpetition wages that are not committed to funding the plan.39

[22]

This outcome is not startling. Careful withholding for income tax purposes would produce no postpetition tax refund and would maximize the disposable income available to all creditors to fund the plan. That the debtor overwithholds and generates a postpetition tax refund should not work only to the advantage of the taxing authority but should be shared with all creditors consistent with the plan.


 

1  This proposition seems obvious from a reading of 11 U.S.C. §§ 541 and 1306; however, the reported decisions are not quite unanimous on the point. See Holden v. United States (In re Holden), 217 B.R. 161, 164 (D. Vt. 1997) (“A tax refund is a debt which becomes the property of the estate.” Tax refund for 1996 payable in 1997 is property of estate in a case filed in 1996 where the IRS asserts an administrative freeze to collect its prepetition claim and the confirmed plan proposes to pay that claim in full.); In re Grissom, 137 B.R. 689 (Bankr. W.D. Tenn. 1992) (Postconfirmation tax refund is property of the estate.); In re Johnson, 136 B.R. 306 (Bankr. M.D. Ga. 1991) (“The right to the portion of a tax refund that accrued prepetition is property of the bankruptcy estate even though the tax year has not ended. The fact that the refund amount does not become fixed until the end of the tax year does not limit the broad sweep of § 541(a) of the Bankruptcy Code.”); In re Price, 134 B.R. 313 (Bankr. N.D. Ill. 1991) (Tax refund related to earnings from postpetition services performed by the debtor is property of the Chapter 13 estate under § 1306.); Mack v. Pennsylvania Dep’t of Welfare, 46 B.R. 652 (Bankr. E.D. Pa. 1985) (Tax refund is property of estate to the extent that the wages to which the refund is allocable are property of the estate.); In re Holcomb, 18 B.R. 839 (Bankr. S.D. Ohio 1982) (Income tax refund is property of the estate.). But see Murry v. Commissioner, 15 B.R. 325 (Bankr. E.D. Ark. 1981) (Tax refund is not property of Chapter 13 estate where IRS has valid right of setoff.). See § 72.1 [ Setoffs and Recoupments ] § 58.12  Setoffs and Recoupments for discussion of preconfirmation setoff by IRS.

 

2  See Ferguson v. IRS (In re Ferguson), 83 B.R. 676 (Bankr. E.D. Mo. 1988); In re Dominguez, 67 B.R. 526 (Bankr. N.D. Ohio 1986) (IRS is not in violation of stay when it exercises prepetition setoff right against prepetition tax refund in a district with a general order permitting the IRS to set off tax refunds against tax liability.).

 

3  See discussion of disposable income before and after BAPCPA beginning at § 91.1  In General§ 92.1  In General§ 93.1  Section 1325(b)(2)(A) and (B): “Amounts Reasonably Necessary to Be Expended—” When CMI Is Less Than Median Family Income§ 94.1  Big Picture: Too Many Issues§ 95.1  In General§ 96.1  Average Monthly Payments on Account of Secured Debts§ 97.1  Total Priority Debts and Divide by 60§ 98.1  Additional Expenses or Adjustments to CMI and § 99.1  In GeneralSee, e.g., In re Beltz, 263 B.R. 525, 527 (Bankr. W.D. Ky. 2001) (Debtors are not entitled to keep Federal Child Tax Credit received after confirmation of a plan that required assignment of tax refunds to the trustee. The Federal Child Tax Credit enacted as part of the Taxpayer Relief Act of 1997 and codified at 26 U.S.C. § 24 is not public assistance for purposes of exemption under Kentucky law. “Local Rule 13.4 requires any Debtor with a plan confirmed at less than 100% to turn over all federal and state income tax refunds to the trustee during the plan.”).

 

4  See, e.g., In re O’Brien, 181 B.R. 71, 74–75 (Bankr. D. Ariz. 1995) (Where plan provided that “net tax refunds for the first 36 months will be turned over to the Trustee,” any such refund received by the debtor would remain property of the estate notwithstanding the vesting effect of confirmation under § 1327(b). “[A]t the time of confirmation 11 U.S.C. § 1327(b) ‘vests’ all of the property of the estate in the debtor. Black’s Law Dictionary states that the term ‘vests’ means ‘to give an immediate, fixed right of present or future enjoyment.’ Since Section 1306(b) already provides the debtor with possession of bankruptcy estate property, the term ‘vests’ in this context must mean that the bankruptcy estate generally ceases to exist, and the debtor has the sole ownership, control, and enjoyment of the property. . . . Since the tax refunds are critical to the execution of the plan, the tax refunds received within the time period allotted, whether before or after confirmation, remain property of the estate. However, any tax refunds received after confirmation and the thirty-six months of the plan are not property of the estate.”).

 

5  See In re McCray, 172 B.R. 154, 156 (Bankr. S.D. Ga. 1994) (Tax refund received by debtor after confirmation is not property of the estate. “Since this case has been confirmed and the funds in question were received by Debtor following confirmation, it is correct to declare that the right to these funds has vested in Debtor. Such a vesting in Debtor precludes any determination that the funds would be properly considered as ‘property of the estate.’”).

 

6  11 U.S.C. § 506(a) provides that “an allowed claim of a creditor . . . that is subject to setoff under section 553 of this title, is a secured claim to the extent . . . of the amount subject to setoff.” See § 72.1 [ Setoffs and Recoupments ] § 58.12  Setoffs and Recoupments. See also Hooper v. United States (In re Hooper), 152 B.R. 309, 310 (Bankr. D. Colo. 1993) (“The IRS levy of prepetition wages gave it a secured interest in those wages. It did not give the IRS title to those funds, however, and the IRS is required to turnover [sic] those funds to the estate if the Debtor provides adequate protection.”).

 

7  See discussion beginning at § 76.1  Valuation, Claim Splitting and Dewsnup and § 77.1  “Value, As of the Effective Date of the Plan” Means Interest.

 

8  See § 74.5  Surrender or Sale of Collateral before BAPCPA and § 74.6  Surrender, Sale, Vesting in Lienholder and Payment with Property after BAPCPA.

 

9  See 11 U.S.C. §§ 1322(b)(8), 1325(a)(5)(C).

 

10  11 U.S.C. § 507(a)(8). See § 73.2  What Claims Are Priority Claims?§ 73.3  Priority Claims Added or Changed by BAPCPA§ 73.7  Secured Priority Claims?, § 136.1  Treatment of Priority Claims, § 136.2  Taxes before BAPCPA§ 136.3  Taxes after BAPCPA, § 136.18  Secured Priority Claims before BAPCPA and § 136.19  Secured Priority Claims after BAPCPABut see Gust v. United States (In re Gust), 197 F.3d 1112 (11th Cir. 1999) (per curiam) (The reference to “unsecured claims of governmental units” in § 507(a)(8) does not render the IRS’s secured claim dischargeable under § 523(a)(1)(A). The bankruptcy court correctly concluded that “‘Section 523(a)(1)(A) addresses ‘debt’ arising from ‘a tax’, ‘of a kind’ specified in § 507(a)(8), not debt evidenced by a claim described in § 507(a)(8).’”).

 

11  See § 74.1  General Rules before BAPCPA§ 74.2  General Rules Changed by BAPCPA and § 77.1  “Value, As of the Effective Date of the Plan” Means Interest.

 

12  See § 73.4  Deferred Payments Are Permitted, § 73.5  Interest Not Required, with Exceptions, § 73.6  Treatment of Priority Claims Changed by BAPCPA, § 136.1  Treatment of Priority Claims, § 136.2  Taxes before BAPCPA§ 136.3  Taxes after BAPCPA, § 136.16  Postpetition Interest on Priority Claims before BAPCPA and § 136.19  Secured Priority Claims after BAPCPA.

 

13  See United States v. Munson, 248 B.R. 343 (C.D. Ill. 2000) (IRS’s right to set off prepetition tax refund against prepetition debt survives confirmation of plan that treated the prepetition tax claim as a priority debt and defeats debtor’s claim of exemption in the refund. Acknowledging a split among the circuits, district court cites In re Escobedo, 28 F.3d 34 (7th Cir. 1994), for the proposition that “[t]he Seventh Circuit has . . . rejected the notion that a validly confirmed Chapter 13 plan should be accorded res judicata effect over any subsequently discovered errors, suggesting limits to the invincibility of a confirmed plan.” With respect to the setoff of a prepetition tax refund and a prepetition tax debt: “The plain language of § 553 states that, except for certain exceptions that are inapposite here, ‘this title does not affect any right of a creditor to offset a mutual debt’ . . . . Section 1327, which established the effect of the confirmation of a Chapter 13 plan, is necessarily included in ‘this title.’ . . . Thus, giving precedence to § 1327 would ignore and render meaningless the plain language of § 553. . . . [C]onfirmation of a Chapter 13 plan does not alter or extinguish a creditor’s right to setoff.”); In re Bare, 284 B.R. 870, 874–75 (Bankr. N.D. Ill. 2002) (Confirmed plan that provided full payment for priority claims but that was silent with respect to IRS’s setoff right does not preclude IRS from setting off prepetition tax refund against prepetition tax liability. “Section 553 provides that ‘this title does not affect any right of a creditor to offset a mutual debt,’ and the words ‘this title’ necessarily implicate § 1327 . . . . Because § 1327 . . . [is] restrained from facilitating the elimination of setoff rights, the IRS’ failure to enter an objection must bear no relevance to the Court’s determination of their setoff rights after confirmation. . . . [C]onfirmation of a debtor’s plan of reorganization does not extinguish prepetition setoff rights, especially of secured creditors where the plan does not specifically treat those setoff rights, irrespective of whether any given holder of the right fails to assert it prior to confirmation. . . . Under [In re Escobedo, 28 F.3d 34 (7th Cir. 1994)], then, the Court finds that it is not constrained by § 1327(a) or the doctrine of res judicata in revisiting the Debtors’ confirmed plan for the limited purpose of ruling on any provisions of the plan that prove to be invalid under the Bankruptcy Code.”); In re Sedlock, 219 B.R. 207 (Bankr. N.D. Ohio 1998) (Confirmation of plan that provides for payment of IRS’s claims does not preclude postconfirmation relief from the stay to permit the IRS to set off a tax refund against its general unsecured nonpriority claim. Although exercise of setoff is discretionary, debtors provided no equitable grounds to deny setoff, especially where debtors’ late filing of tax returns created the whole situation.); In re Kirkpatrick, 214 B.R. 314, 316 (Bankr. S.D. Ohio 1997) (IRS’s right of setoff in postconfirmation tax refund is subject to automatic stay, and IRS cannot prove cause for relief from the stay when confirmed plan proposed to pay IRS claim in full; however, refund is cash collateral that the debtor must adequately protect, and § 1327(c) does not relieve the debtor of this condition on the debtor’s use of the tax refund. “Monies which comprise the refund are cash collateral which provide security for the IRS claim to the extent of the refund amount. Despite the fact that IRS cannot set off the refund against the debtor’s prepetition liability, however, IRS is not required to surrender its collateral (the refund) to the debtor until it has been paid an equivalent amount by the trustee. It is not that § 553 of the Bankruptcy Code trumps § 1327(c). It does not. Section 1327(c) remains subject to the requirements of § 363, however, and if the debtor wishes to use the IRS security (the overpayment of tax), the debtor must adequately protect the IRS for that amount.”); Womack v. United States (In re Womack), 188 B.R. 259, 262 (Bankr. E.D. Ark. 1995) (Confirmation of plan that pays IRS in full does not defeat IRS’s right of setoff in prepetition tax refund. Provision in § 553 that “this title does not affect any right of a creditor to offset a mutual debt” defeats the effect of confirmation under § 1327 because “‘[t]his title necessarily includes section 1327 which establishes the effect of confirmation. Thus, based upon the unequivocal language of section 553, confirmation does not alter a creditor’s right to setoff.”); In re Warwick, 179 B.R. 582, 584–85 (Bankr. W.D. Ark. 1995) (Setoff is a statutory exception to the effect of confirmation under § 1327. In a Chapter 13 case filed in April of 1994, the IRS had claims for income taxes for 1984, 1985 and 1986 and was holding a tax refund for 1993. “The debtor argues that the United States may not set off the refund against the tax debt because the chapter 13 plan providing for full payment of the debt, has been confirmed. Section 553 states that ‘Except as otherwise provided in this section and in sections 362 and 363 of this title, this title does not affect any right of a creditor to offset a mutual debt. . .  .’ ‘This title’ necessarily includes section 1327 which establishes the effect of confirmation. Thus, based upon the unequivocal language of section 553, confirmation does not alter a creditor’s right to setoff.”); In re Olson, 175 B.R. 30, 32 (Bankr. D. Neb. 1994) (Although IRS is bound by confirmed plan because it failed to object, plan that treats the IRS as only a priority unsecured claim holder does not defeat the government’s right of setoff in the debtors’ tax refund. “This Court holds that a creditor who has a right to a setoff does not forfeit that right upon confirmation of the Chapter 13 plan. . . . [T]his Court follow[s] the reasoning set forth in [Simmons v. Savell (In re Simmons),] 765 F.2d 547, 552 (5th Cir. 1985), which stated that a debtor must object to a proof of claim in accordance with Bankruptcy Rules 3007, 9004 and 9014 to put the creditor on notice that the claim is in dispute. . . . Since the Code and the Rules do not contemplate the use of a plan as a means for objecting to proofs of claims, . . . the debtors’ plan does not act as an objection to the proof of claim, and therefore, if no objection has been made prior to confirmation, the claim must be deemed allowed for purposes of the plan. . . . The debtors’ confirmed plan does not void the IRS’s setoff right because the debtors failed to object to the IRS’s setoff claim that was set forth in the IRS’s amended proof of claim.”); In re Whitaker, 173 B.R. 359, 362–63 (Bankr. S.D. Ohio 1994) (Rejecting In re Alexander, 31 B.R. 389 (Bankr. S.D. Ohio 1983), confirmation of a plan that calls for full payment of the IRS’s priority claim does not preclude setoff of the debtors’ prepetition tax refund against the debtors’ prepetition tax liability. “[T]his Court holds the IRS’s establishment of its right to setoff pursuant to 11 U.S.C. § 553(a) is cause for relief from the automatic stay. . . . Section 553(a) is clear that the right of setoff is not made subject to the provisions of § 1327(a). Under § 553(a), a valid prepetition right of setoff continues to exist notwithstanding § 1327(a). . . . [Section] 1327(a) does not affect or alter a creditor’s prepetition right to setoff. . . . A creditor will not be required to object to confirmation of a plan, then to bargain with the debtor for language allowing setoff . . . when such right to setoff existed prepetition and is preserved by § 553(a). . . . [T]his Court holds that § 553 takes precedence over § 1327, and an order confirming a chapter 13 plan does not bar a creditor from seeking setoff pursuant to § 553.”); In re Orlinski, 140 B.R. 600, 603, 604 (Bankr. S.D. Ga. 1991) (IRS is entitled to relief from the stay to set off prepetition debt and prepetition refund notwithstanding confirmation of plan providing for full payment of the IRS’s claim. “Under § 553(a), a valid prepetition right of setoff continues to exist notwithstanding § 1327(a), subject only to the provisions of §§ 362, 363, and the rest of § 553. . . . [N]owhere in § 553(a) is the right of setoff in a Chapter 13 case made contingent on whether the debtor’s Chapter 13 plan has been confirmed.” Because none of the exceptions to the exercise of the right of setoff in § 553(a) applies, “the IRS’s right of setoff, preserved by § 553(a) is ‘cause’ for relief from the stay to permit the setoff.”); In re Johnson, 136 B.R. 306, 311 (Bankr. M.D. Ga. 1991) (Confirmation of plan calling for payment in full of prepetition tax claim does not necessarily preclude IRS from setting off prepetition tax refund. Setoff is permissive. If Chapter 13 debtor can provide the IRS with adequate protection, then IRS will be refused the right of setoff and will be required to pay the refund to the debtor. Confirmed plan calling for full payment of the prepetition tax claim is apparently not sufficient adequate protection because court set further hearing “to consider whether the debtor can meet her burden to demonstrate that the IRS is adequately protected.”); In re Dominguez, 67 B.R. 526 (Bankr. N.D. Ohio 1986) (IRS is entitled to set off prepetition tax refund against prepetition dischargeable tax liability notwithstanding confirmed plan paying 10% of unsecured claims.); Murry v. Commissioner, 15 B.R. 325 (Bankr. E.D. Ark. 1981) (IRS is entitled to relief from the automatic stay to set off a refund check against debtor’s tax liability.).

 

14  717 F.2d 767 (3d Cir. 1983).

 

15  717 F.2d at 774. Accord United States v. Reynolds, 38 B.R. 725 (W.D. Va. 1984); In re Gonzalez, 42 B.R. 401 (Bankr. N.D. Ga. 1984); In re Burrow, 36 B.R. 960 (Bankr. D. Utah 1984); In re Hackney, 20 B.R. 158 (Bankr. D. Idaho 1982); In re Holcomb, 18 B.R. 839 (Bankr. S.D. Ohio 1982); Mealey v. Department of Treasury, 16 B.R. 800 (Bankr. E.D. Pa. 1982).

 

16  236 B.R. 156 (Bankr. D. Vt. 1999).

 

17  See discussion beginning at § 121.1  Overview.

 

18  See § 120.2  11 U.S.C. § 1327(a): Binding Effect on Creditors and Debtors, § 158.2  Student Loans and § 159.6  Student Loans: § 523(a)(8)See, e.g., Great Lakes Higher Education Corp. v. Pardee (In re Pardee), 193 F.3d 1083 (9th Cir. 1999); Andersen v. Higher Educ. Assistance Found. (In re Andersen), 215 B.R. 792 (B.A.P. 10th Cir. 1998), aff’d, 179 F.3d 1260 (10th Cir. 1999).

 

19  See § 111.1 [ “Value, As of the Effective Date of the Plan” Means Interest ] § 77.1  “Value, As of the Effective Date of the Plan” Means Interest.

 

20  See § 73.5  Interest Not Required, with Exceptions§ 73.6  Treatment of Priority Claims Changed by BAPCPA § 136.16  Postpetition Interest on Priority Claims before BAPCPA and § 136.17  Postpetition Interest on Priority Claims after BAPCPA.

 

21  See § 120.2  11 U.S.C. § 1327(a): Binding Effect on Creditors and Debtors, § 120.4  11 U.S.C. § 1327(c): Free and Clear Effect on Liens and § 120.5  Effects of Confirmation after BAPCPA.

 

22  See Hooper v. United States (In re Hooper), 152 B.R. 309, 310 (Bankr. D. Colo. 1993) (IRS levy on debtor’s prepetition wages gave the IRS a security interest in those wages. The debtor’s proposed Chapter 13 plan provided for payment in full of the IRS claim; however, the court refused to required the IRS to turn over the funds it held to the Debtor. “We are not dealing with a piece of tangible personal property here, such as an automobile, but rather with cash. If it was just an automobile, the Debtor’s plan may very well provide adequate protection. But when the property at issue is cash, it is very difficult for this Court to find that a promise to pay the cash in the future is adequate protection for a creditor with the cash in hand at present.”).

 

23  See § 74.12  Lien Retention before BAPCPA§ 74.13  Lien Retention after BAPCPA, Including in No-Discharge Cases, § 120.4  11 U.S.C. § 1327(c): Free and Clear Effect on Liens and § 120.5  Effects of Confirmation after BAPCPA.

 

24  United States v. Jones (In re Jones), 230 B.R. 875 (M.D. Ala. 1999). Accord In re Pace, 257 B.R. 918 (Bankr. W.D. Mo. 2000) (Distinguishing United States v. Energy Resources Co., 495 U.S. 545, 110 S. Ct. 2139, 109 L. Ed. 2d 580 (1990), IRS’s § 553 right to set off prepetition tax claim against prepetition tax refund is limited by debtors’ exemption under § 522(c): IRS can set off refund against priority portion of tax claim but cannot set off the refund against its general unsecured tax claim; IRS cannot have a secured claim under § 506(a) because its setoff right is trumped by the debtors’ exemption.). See also § 136.2  Taxes before BAPCPA and § 136.3  Taxes after BAPCPA.

 

25  See, e.g., In re Bourne, 262 B.R. 745 (Bankr. E.D. Tenn. 2001) (Citing Bosarge v. United States Department of Education, 5 F.3d 1414 (11th Cir. 1993), the government’s statutory right under 26 U.S.C. § 6402(d) to offset a debtor’s tax refund against liability to the government trumps state law exemption claims under the supremacy clause.). See also § 136.2  Taxes before BAPCPA and § 136.3  Taxes after BAPCPA.

 

26  See § 49.2 [ Timing and Procedure ] § 48.4  Timing and Procedure.

 

27  See § 46.1  What Is Property of the Chapter 13 Estate?§ 46.2  Property of the Chapter 13 Estate—Changes by BAPCPA and § 46.3  Postpetition Earnings.

 

28  See § 73.1  Plan Must Provide Full Payment, § 136.1  Treatment of Priority Claims, § 136.2  Taxes before BAPCPA and § 136.3  Taxes after BAPCPA.

 

29  See §§ 230.1 [ 11 U.S.C. § 1327(b): Vesting Effect on Property of Estate ] § 120.3  11 U.S.C. § 1327(b): Vesting Effect on Property of Estate and 231.1 [ 11 U.S.C. § 1327(c): Free and Clear Effect on Liens ] § 120.4  11 U.S.C. § 1327(c): Free and Clear Effect on Liens. See, e.g., In re McCray, 172 B.R. 154, 156 (Bankr. S.D. Ga. 1994) (Tax refund received by debtor after confirmation is not property of the estate. “Since this case has been confirmed and the funds in question were received by Debtor following confirmation, it is correct to declare that the right to these funds has vested in Debtor. Such a vesting in Debtor precludes any determination that the funds would be properly considered as ‘property of the estate.’”).

 

30  See discussion of disposable income before and after BAPCPA beginning at § 91.1  In General§ 92.1  In General§ 93.1  Section 1325(b)(2)(A) and (B): “Amounts Reasonably Necessary to Be Expended—” When CMI Is Less Than Median Family Income§ 94.1  Big Picture: Too Many Issues§ 95.1  In General§ 96.1  Average Monthly Payments on Account of Secured Debts§ 97.1  Total Priority Debts and Divide by 60§ 98.1  Additional Expenses or Adjustments to CMI and § 99.1  In General.

 

31  See discussion of disposable income before and after BAPCPA beginning at § 91.1  In General§ 92.1  In General§ 93.1  Section 1325(b)(2)(A) and (B): “Amounts Reasonably Necessary to Be Expended—” When CMI Is Less Than Median Family Income§ 94.1  Big Picture: Too Many Issues§ 95.1  In General§ 96.1  Average Monthly Payments on Account of Secured Debts§ 97.1  Total Priority Debts and Divide by 60§ 98.1  Additional Expenses or Adjustments to CMI and § 99.1  In General.

 

32  See §§ 207.1 [ Retention of Property of the Estate: Overcoming 11 U.S.C. § 1327(b) ] § 113.11  Retention of Property of the Estate: Overcoming 11 U.S.C. § 1327(b) and 230.1 [ 11 U.S.C. § 1327(b): Vesting Effect on Property of Estate ] § 120.3  11 U.S.C. § 1327(b): Vesting Effect on Property of Estate.

 

33  See In re Beltz, 263 B.R. 525, 527 (Bankr. W.D. Ky. 2001) (“Local Rule 13.4 requires any Debtor with a plan confirmed at less than 100% to turn over all federal and state income tax refunds to the trustee during the plan.”).

 

34  271 B.R. 383 (B.A.P. 10th Cir. 2002), aff’d, 342 F.3d 1194 (10th Cir. 2003).

 

35  271 B.R. at 384.

 

36  See discussion of disposable income and plan length before and after BAPCPA beginning at § 91.1  In General§ 92.1  In General§ 93.1  Section 1325(b)(2)(A) and (B): “Amounts Reasonably Necessary to Be Expended—” When CMI Is Less Than Median Family Income§ 94.1  Big Picture: Too Many Issues§ 95.1  In General§ 96.1  Average Monthly Payments on Account of Secured Debts§ 97.1  Total Priority Debts and Divide by 60§ 98.1  Additional Expenses or Adjustments to CMI, § 99.1  In General and § 100.1  Applicable Commitment Period Calculation.

 

37  See discussion of disposable income before and after BAPCPA beginning at § 91.1  In General§ 92.1  In General§ 93.1  Section 1325(b)(2)(A) and (B): “Amounts Reasonably Necessary to Be Expended—” When CMI Is Less Than Median Family Income§ 94.1  Big Picture: Too Many Issues§ 95.1  In General§ 96.1  Average Monthly Payments on Account of Secured Debts§ 97.1  Total Priority Debts and Divide by 60§ 98.1  Additional Expenses or Adjustments to CMI and § 99.1  In General.

 

38  See § 229.1 [ 11 U.S.C. § 1327(a): Binding Effect on Creditors and Debtors ] § 120.2  11 U.S.C. § 1327(a): Binding Effect on Creditors and Debtors.

 

39  See § 122.4  Effects of Confirmation on Postpetition Claims and § 124.5  Postpetition Claims and Relief from the Stay. The taxing authority may also have the option of asserting a postpetition claim under § 1305. See also § 137.1  Postpetition Claims before BAPCPA and § 137.2  Postpetition Claims after BAPCPA.