The Court addressed the question of whether a Debtor's claimed exemption in her tax overpayment supersedes the government's right to setoff of the overpayment against a prior unpaid tax liability. The IRS challenged the Court's jurisdiction to address the Debtor's complaint, claiming sovereign immunity was not waived under Section 505 of the Bankruptcy Code. However, the Court found that 11 U.S.C. § 106(a) specifically waived sovereign immunity for actions brought in connection with 11 U.S.C. § 522 and 11 U.S.C. § 553, which formed the basis of the complaint. In addition, Section 106 allows the Bankruptcy Court to "hear and determine any issue arising with respect to the application" of those provisions to the IRS. Accordingly, the Court found sovereign immunity was abrogated as to the resolution of these matters and that the Court had jurisdiction to proceed to resolve the matter on the merits. As to the merits of the case, recognizing a growing split of authority on the issue, the Court ruled that the Debtor's right to claim an exemption in her tax overpayment pursuant to 11 U.S.C. § 522 is subordinate to the government's nonbankruptcy right of setoff preserved by 11 U.S.C. § 553.
Monday, April 3, 2017