IN RE: ALAN D. MORGAN PAMELA T. MORGAN a/k/a Pamela G. Tingle CASE NO. 94-50570

UNITED STATES BANKRUPTCY COURT 

FOR THE EASTERN DISTRICT OF KENTUCKY

LEXINGTON DIVISION

IN RE:

ALAN D. MORGAN

PAMELA T. MORGAN

a/k/a Pamela G. Tingle CASE NO. 94-50570

DEBTORS

MEMORANDUM OPINION

This case was heard by the court on January 18, 1995, on the motion of the United States of America, Internal Revenue Service, for an order retroactively annulling the stay imposed by 11 U.S.C. § 362 to allow the United States to set off a tax refund in the amount of $1,316.00 it owes to the debtors for the tax period inding December 31, 1993, against a claim of the United States in the amount of $4,444.68 for 1992 income taxes owed by the debtors.

The debtors filed a petition for relief under chapter 7 of the Bankruptcy Code on April 15, 1994. The court accepts the proposition that the claim of the debtors against the United States for a tax refund arose on December 31, 1993, rather than when the debtors subsesquently filed their tax return for the tax period ending December 31, 1993 and claimed the refund. Both the claim of the IRS against the debtors and the claim of the debtors against the IRS arose prepetition and are mutual debts. The IRS relies on 11 U.S.C. § 553, which, while recognizing that a right of setoff is stayed by 11 U.S.C. § 362, preserves the right of a creditor to offset a mutual debt owing by such creditor to the debtor that

arose before the commencement of the case against a claim of such creditor against the debtor that arose before the commencement of the case.

There appears to be no dispute about the fact the debtors owe $4,444.68 to the United States for income taxes for 1992. Based on the allegations made in the motion of the IRS for relief from stay,

the claim of the IRS is allowed in that amount.

This is a chapter 7 case in which the only assets of the estate to be administered by the trustee appear to be federal and state tax refunds.

Section 724(b) of the Bankruptcy Code, 11 U.S.C. § 724(b), provides that property in which the estate has an interest and that is subject to a lien that is not avoidable under title 11 and that secures an allowed claim for a tax, or proceeds of such property, shall be distributed --

Section 506 of the Bankruptcy Code recognizes that an allowed claim of a creditor secured by a lien on property in which the estate has an interest, or that is subject to setoff under section 553 of this title is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property, or to the extent of the amount subject to setoff, as the case may be. 11 U.S.C. § 506(a).

A "lien" means a charge against or interest in property to secure payment of a debt. 11 U.S.C. § 101(37). The United States of America, Internal Revenue Service, has a "lien" that is not avoidable under 11 U.S.C. § 724 on the tax refund in question. The lien may arise from an assessment against the debtor for back income taxes for 1992. The IRS also has a possessory lien by reason of the fact the Government has possession of the refund monies in question.

In view of the fact the allowed tax claim of the United States secured by the lien in this instance is subordinated by section 724(b) of the Bankruptcy Code to the administrative expense claims of the trustee and the attorney for the trustee, the court finds the motion of the United States of America, Internal Revenue Service, for relief from stay should be denied.

Dated: Feb. 2, 1995.

By the court -

Joe Lee, Chief Judge

Copies to:

Charles A. Keen, Esq.

David Middleton, Esq.

Stephen Palmer, Esq.

UNITED STATES BANKRUPTCY COURT

FOR THE EASTERN DISTRICT OF KENTUCKY

LEXINGTON DIVISION

IN RE:

ALAN D. MORGAN

PAMELA T. MORGAN

a/k/a Pamela G. Tingle CASE NO. 94-50570

DEBTORS

ORDER

For the reasons stated in the memorandum opinion of the court this day entered, the motion of the United States of America, Internal Revenue Service, for an order retroactively annulling the automatic stay to permit the United States to setoff a tax refund owed to the debtors against tax indebtedness the debtors owe to the United States should be and hereby is overruled. The tax refund owed to the debtors should instead be remitted to the trustee in bankruptcy of the estates of the debtors in conformity with 11 U.S.C. § 542(b) because the Government's right of setoff under 11 U.S.C. § 553 is qualified and subordinated to administsrative expense claims and certain other claims in a chapter 7 bankruptcy case.

Dated: Feb. 2, 1995.

By the court -

Joe Lee, Chief Judge

Copies to:

Charles A. Keen, Esq.

David Middleton, Esq.

Stephen Palmer, Esq.