Internal Revenue Ser v. Luongo ( 2001 )

  •                       Revised August 9, 2001
                          FOR THE FIFTH CIRCUIT
                                  No. 00-10475
                   In the Matter of: CONSTANCE LUONGO,
                                   * * * * *
              Appeal from the United States District Court
                   for the Northern District of Texas
                              July 18, 2001
    Before BARKSDALE, EMILIO M. GARZA and BENAVIDES, Circuit Judges.
    BENAVIDES, Circuit Judge:
                    Factual and Procedural Background
         This case involves a debtor’s claim to recover an income tax
    overpayment for her 1997 tax year.     Pursuant to 26 U.S.C. §
    6402(a) of the Internal Revenue Code1 and 11 U.S.C. § 553(a) of
          Section 6402(a) of the I.R.C. provides:
         In the case of any overpayment, the Secretary . . . may credit
         the amount of such overpayment . . . against any liability in
         respect of an internal revenue tax on the part of the person
         who made the overpayment and shall . . . refund any balance to
         such person.
    the Bankruptcy Code,2 the Internal Revenue Service (“IRS”) setoff
    her overpayment against her unpaid 1993 tax liability, a
    liability which had been discharged under § 727 of the Bankruptcy
    Code.    After the setoff occurred, the debtor moved to reopen her
    case, and filed amended schedules which for the first time listed
    her 1997 income tax overpayment as an exempt asset under § 522.
    The IRS did not file any objection to the reopening of the case
    or the amended schedules.    The bankruptcy court granted the
    motion to reopen and her schedules were amended.    The
    plaintiff/debtor, Constance Luongo, then brought an action in the
    bankruptcy court to recover her 1997 tax overpayment.     She
    asserted that the setoff executed by the IRS was improper because
    (1) the 1993 tax debt had been discharged in bankruptcy, and (2)
    the 1997 tax overpayment had been exempted from her bankruptcy
    estate.    In response, the IRS argued that the bankruptcy court
    lacked jurisdiction or that it should abstain from hearing the
    matter.    The IRS further asserted that Bankruptcy Code § 553
    preserved the IRS’ right to setoff under § 6402(a),
    notwithstanding the discharge of debtor’s unpaid 1993 tax debt or
    her attempt to exempt the 1997 overpayment.    The case was
    submitted to the bankruptcy court on cross-motions for summary
         The bankruptcy court adopted the opinion in Alexander v.
           “Although no federal right of setoff is created by the
    Bankruptcy Code, 11 U.S.C. § 553(a) provides that, with certain
    exceptions, whatever right of setoff otherwise exists is preserved
    in bankruptcy.” Citizens Bank of Maryland v. Strumpf, 
    516 U.S. 16
    116 S. Ct. 286
    , 289 (1995).
    Internal Revenue Service, 
    225 B.R. 145
     (Bankr. W.D. Ky. 1998),
    and granted plaintiff’s motion for summary judgment.    Construing
    the conflicting mandates of the two sections in favor of the
    debtor, the bankruptcy court in Alexander held that the language
    in § 522(c) that “property exempted under this section is not
    liable . . . for any debt of the debtor that arose . . . before
    the commencement of the case . . .” took precedence over the
    language of § 553(a) that “this title [the Bankruptcy Code] does
    not affect any right of a creditor to offset. . . .”    The IRS
    appealed and the district court reversed.    The district court
    held that based on the clear and unambiguous language of § 553(a)
    the IRS’ right of setoff was unaffected by Luongo’s claims that
    the tax overpayment is exempt property and the tax liability was
    discharged in the bankruptcy proceeding.    Appellant Luongo filed
    a timely notice of appeal.
         While neither the district court nor the bankruptcy court
    afforded the IRS’ jurisdictional claims meaningful discussion in
    their respective opinions, we address these claims first as they
    are necessarily antecedent to any determination of the merits.
    In so doing, we conclude that the bankruptcy court had
    jurisdiction to resolve the debtor’s tax dispute and did not
    abuse its discretion in not abstaining.    Further, we hold (1)
    that the IRS permissibly setoff Appellant’s prepetition tax
    overpayment against her discharged debt and (2) that Appellant
    could not exempt the overpayment under § 522.    Because we find
    that Appellant could not properly exempt the overpayment at
    issue, we do not reach the exemption issue decided below -- that
    is, whether § 522(c) prevents a creditor from exercising its
    right to setoff preserved in § 553.      The judgment of the district
    court is AFFIRMED.
                      I. Jurisdiction and Abstention
         The IRS contends first that the bankruptcy court lacked
    jurisdiction to consider this matter, or in the alternative,
    should have abstained.    Section 505 authorizes bankruptcy courts
    to determine the amount or legality of any tax liability of the
    estate or the debtor.    11 U.S.C. § 505(a)(1).3   This authority,
    however, is not unlimited.    Section 505(a)(2)(B) provides that
    the bankruptcy court may not determine –
         (B) any right of the estate to a tax refund, before the
         earlier of –
              (i) 120 days after the trustee properly requests
              such refund from the governmental unit from which
              such refund is claimed; or
              (ii) a determination by such governmental unit of such
    The IRS contends that the language of § 505(a)(2)(B) precludes a
    bankruptcy court from deciding the personal tax liability of the
    debtor.   It relies on the inclusion of the terms “the estate” and
    “the trustee” to argue that § 505 contemplates that only a
    trustee may obtain a tax refund in bankruptcy court, and then
           Section 505(a)(1) provides:
         Except as provided in paragraph (2) of this subsection, the
         court may determine the amount or legality of any tax, any
         fine or penalty relating to a tax, or any addition to tax,
         whether or not previously assessed, whether or not paid, and
         whether or not contested before and adjudicated by a judicial
         or administrative tribunal of competent jurisdiction.
    only if the trustee is seeking a refund on behalf of the estate.
         Initially, we note that the IRS’ reading of this subsection
    is contrary to the broad grant of jurisdiction in § 505(a)(1)
    permitting a bankruptcy court to determine “the amount or
    legality of any tax, any fine or penalty relating to a tax, or
    any addition to tax, whether or not previously assessed, whether
    or not paid, and whether or not contested before and adjudicated
    by a judicial or administrative tribunal of competent
    jurisdiction.”   Furthermore, the legislative statements
    accompanying § 505 make clear that the section “authorizes the
    bankruptcy court to rule on the merits of any tax claim involving
    an unpaid tax, fine, or penalty relating to a tax, or any
    addition to a tax, of the debtor or the estate.”   124 Cong.Rec. H
    11110 (daily ed. Sept. 28, 1978) (remarks of Rep. Edwards
    introducing the House amendment)(emphasis added), reprinted in,
    1978 U.S.C.C.A.N. 5787, 6436, 6490.   And under the paragraph
    heading “Jurisdiction of the tax court in bankruptcy cases,” the
    legislative statements instruct that “the bankruptcy judge will
    have authority to determine which court will determine the merits
    of the tax claim both as to claims against the estate and claims
    against the debtor concerning his personal liability for
    nondischargeable taxes.”   124 Cong.Rec. 32414 (1978) (Statement
    of Representative Edwards), reprinted in 1978 U.S.C.C.A.N. 6436,
    6492-93 (emphasis added); 124 Cong.Rec. 34014 (1978) (Statement
    of Senator DeConcini), reprinted in 1978 U.S.C.C.A.N. 6505, 6562;
    see also Begier v. IRS, 
    496 U.S. 53
    , 64-65 n. 5, 
    110 S. Ct. 2258
    2266 n. 5, 
    110 L. Ed. 2d 46
     (1990) (“Because of the absence of a
    conference and the key roles played by Representative Edwards and
    his counterpart floor manager Senator DeConcini, we have treated
    their floor statements on the Bankruptcy Reform Act of 1978 as
    persuasive evidence of congressional intent.”).   The IRS cites no
    case supporting its restrictive reading of the bankruptcy court’s
    jurisdiction under § 505.   On the contrary, absent the express
    statutory limitations in § 505(a)(2)(A) and (B), bankruptcy
    courts have universally recognized their jurisdiction to consider
    tax issues brought by the debtor, limited only by their
    discretion to abstain.4   In re Hunt, 
    95 B.R. 442
    , 445 (Bankr.
           The dissent would dismiss Luongo’s action on the ground that
    the bankruptcy court’s jurisdiction extends only to claims for
    refunds that benefit the estate. We cannot agree. The dissent’s
    conclusion would have a far-reaching impact on the scope of the
    bankruptcy court’s jurisdiction over tax matters. Yet, no court
    has recognized such a limitation. Several courts have, however,
    recognized the right of a debtor to bring a refund action. See In
    re Ryan, 
    64 F.3d 1516
    , 1520 (11th Cir. 1995) (allowing Chapter 7
    debtor to maintain a refund action in bankruptcy court upon
    compliance with treasury regulations); In re Gribben, 
    158 B.R. 920
    924 (S.D.N.Y. 1993) (concluding that Ҥ 106(a) waives the
    Government’s sovereign immunity where a bankrupt debtor seeks a
    refund in circumstances where the IRS has exercised the right under
    § 553(a) of the Bankruptcy Code to offset that refund against other
    tax liabilities.”).
         Section 505(a)(2)(B), like § 505(a)(2)(A), limits the
    jurisdictional grant in § 505(a)(1). Section 505(a)(1) grants the
    bankruptcy court jurisdiction over any tax claim, including refund
    claims; § 505(a)(2)(B) then prescribes the limits particular to the
    bankruptcy court’s ability to determine a refund. The intended
    purpose of subsection (a)(2)(B) was to prevent a refund claim from
    languishing in the administrative processes, not to restrict the
    scope of the bankruptcy court’s jurisdiction over tax refunds to
    those benefitting the estate. In re St. John’s Nursing Home, Inc.,
    154 B.R. 117
    , 120 (Bankr.D.Mass. 1993). Section 505(a)(2)(B) thus
    permits the bankruptcy court to make a determination of a refund if
    the taxing authority does not act upon a refund claim within 120
    days. Although not disputed by the parties, we note, in response
    to the dissent, that Luongo complied with the requirements of §
    505(a)(2)(B) by filing her annual tax return.      See 26 C.F.R. §
    301.6402-3(a)(5) (1994) (“A properly executed individual . . .
    income tax return . . . shall constitute a claim for refund or
    credit . . . for the amount of the overpayment disclosed by such
    return”).   The IRS, by setting off the overpayment against the
    discharged tax liability, made a “determination” in accordance with
    § 505(a)(2)(B) of Luongo’s refund-request for the overpayment.
         Even the dissent’s focus on the language “the right of the
    estate to a refund” does not support its position that §
    505(a)(2)(B) deprives the bankruptcy court of jurisdiction to hear
    Luongo’s claim. In this regard, the dissent mistakenly concludes
    that property listed as exempt by the debtor does not fall in this
    category.   On the contrary, it is a fundamental principle of
    bankruptcy law that only property of the estate may be exempted by
    the debtor. Owen v. Owen, 
    500 U.S. 305
    , 308 (1991). The estate
    comprises “all legal or equitable interests of the debtor in
    property as of the commencement of the case.” 11 U.S.C. § 541(a).
    In the present case, any overpayment made by Luongo occurred
    prepetition and any right to a refund is therefore property of the
    estate. Kokoszka v. Belford, 
    417 U.S. 642
    , 645-58, 94 Sct. 2431,
    2433-35 (1974). Upon proper recognition that exempted property
    first enters the estate and that the estate has a right to any
    refund in the present case, it becomes clear that our holding does
    not read the term “right of the estate” out of the statute as
    alleged by the dissent.
         The dissent concedes that Luongo could bring a claim for a
    determination of her tax liability. The dissent, however, would
    not allow Luongo to bring her refund claim.          The dissent’s
    distinction apparently derives, in part, from its premise that
    general unsecured creditors, not the debtor, are the intended
    beneficiaries of § 505(a). Relying on this premise, the dissent
    endeavors to rewrite the language of § 505(a)(2)(B) by converting
    “the right of the estate to a refund” into “a refund that benefits
    the estate.” While seemingly a benign distinction, the dissent’s
    erroneous limitation of the estate to “property which will be used
    to pay the creditors,” renders it significant.       The dissent’s
    ultimate result is thus to permit only refunds that benefit
    creditors, not “what Luongo seeks through her action– a refund
    solely for her own benefit.” Under the dissent’s interpretation,
    even the trustee could not seek a refund if the debtor had listed
    it as exempt on her schedules, thereby preventing the bankruptcy
    court from protecting the debtor’s use of exemptions to gain a
    fresh start regardless of who filed the refund action.          The
    dissent’s limitation on the bankruptcy court’s jurisdiction also
    ignores the fact that a bankruptcy court is entitled to determine
    the debtor’s nondischargeable tax liability. Congress’ allowance
    N.D. Tex. 1989) (“[T]he reported decisions uniformly recognize
    the Bankruptcy Court’s jurisdiction to determine a debtor’s tax
    liability . . . .”).
           The bankruptcy court’s ability to abstain is premised on
    Congress’ use of the word “may” in § 505.    In re Beisel, 
    195 B.R. 378
    , 379 (Bankr. S.D. Ohio 1996) (“Section 505(a)(1) allows but
    does not require the Bankruptcy Court to determine a debtor’s tax
    liabilities.”).    The factors frequently cited by the courts in
    deciding whether to abstain include the complexity of the tax
    issues to be decided, the need to administer the bankruptcy case
    in an orderly and efficient manner, the burden on the bankruptcy
    court’s docket, the length of time required for trial and
    decision, the asset and liability structure of the debtor, and
    the prejudice to the taxing authority.    In re Hunt, 95 B.R. at
    445.    Several courts have also taken into consideration what they
    identify as the two-fold purpose of § 505: (1) “affording a forum
    for the ready determination of the legality or amount of tax
    claims, which determination, if left to other proceedings, might
    delay conclusion of the administration of the bankruptcy estate,”
    In re Diaz, 
    45 B.R. 137
    , 138 (Bankr. S.D. Fla. 1984), and (2)
    “providing an opportunity for the trustee, on behalf of the
    creditor, to contest the validity and amount of a tax claim when
    the debtor has been unwilling or unable to do so.”    In re
    of the bankruptcy court to make such a determination undermines the
    dissent’s assertion that § 505 serves the limited purpose of
    allowing the bankruptcy court to adjudicate tax matters affecting
    the estate or benefitting creditors.
    133 B.R. 547
    , 554 (Bankr. M.D. Fla.1991); see also City
    of Amarillo v. Eakens, 
    399 F.2d 541
    , 543-44 (5th Cir. 1968) (“The
    amendment, by authorizing redeterminations in those instances
    where the tax claim was never appealed, serves to protect
    creditors of the bankrupt from the bankrupt’s lack of
         The bankruptcy courts that have focused on these
    requirements consider general unsecured creditors, not the
    debtor, the intended beneficiaries of § 505(a).     In re Williams,
    190 B.R. 225
    , 227 (Bankr. W.D. Pa. 1995); In re Tropicano Inc.,
    128 B.R. 153
    , 161 (Bankr. W.D. Tex. 1991).   These courts conclude
    that when neither of the above two purposes would be served by a
    bankruptcy court determination of a chapter 7 debtor’s tax
    liability, abstention is warranted.   These cases improperly view
    § 505 in isolation without proper deference to the other goals of
    the Bankruptcy Code.   The bankruptcy court’s responsibility in
    administering the estate is not only to achieve a fair and
    equitable distribution of assets to the creditors, but also to
    “relieve the honest debtor from the weight of oppressive
    indebtedness and permit him to start afresh.”     Local Loan v.
    292 U.S. 234
    , 244, 
    54 S. Ct. 695
    , 699 (1934).    Thus, a court
    should consider the impact of the abstention not only on the
    general administration of the estate, but also on the debtor.     In
    re Smith, 
    122 B.R. 130
    , 133-134 (M.D. Fla. 1990) (declining to
    exercise discretion because it would not assist the debtor to
    have a fresh start in life).
         Another touchstone of the abstention inquiry is the
    substantive law governing the material issues.    When bankruptcy
    issues are at the core of a dispute, it would be absurd for a
    bankruptcy court to abstain from deciding those matters over
    which it has particular expertise.    On the other hand, simply
    because tax law is somehow implicated does not automatically
    trigger abstention.   Just as bankruptcy courts are often called
    upon to apply state law in resolving bankruptcy matters, so too
    may they apply tax law in appropriate circumstances.5   In tax
    cases, the issue of abstention often arises with respect to
    questions of dischargeability.   Many of the courts that have
    abstained cite the legislative history that:
         . . . in the case of nondischargeable Federal income
         taxes, the IRS would be required to issue a deficiency
         notice to an individual debtor, and the debtor could
         then file a petition in the Tax Court–or a refund suit
         in a district court–as the forum in which to litigate
         his personal liability for a nondischargeable tax.
    124 Cong. Rec. H 11110 (Sept. 28, 1978, remarks of Rep. Edwards);
    S 17427   (Oct. 6, 1978, identical remarks of Sen. DeConcini).
    This quote and the cases relying on it are predicated on the non-
    dischargeability of the tax.   Where the determination of
    dischargeability or other bankruptcy specific issues is fully
    resolved, we agree with the IRS that there is no reason why the
    suit cannot be heard by a district court, the Tax Court, or the
          “Bankruptcy courts routinely interpret state law in order to
    resolve disputes in bankruptcy cases.” In re Wilson, 
    85 B.R. 722
    727 (Bankr.E.D.Pa.1988). For example, the bankruptcy court may
    avoid a preference under 11 U.S.C. § 547 or a fraudulent transfer
    under 11 U.S.C. § 548, even though these defenses are intertwined
    with state law.
    Court of Federal Claims.6   Our case, on the other hand, is more
    analogous to those cases where the court was faced with the
    preliminary bankruptcy question of whether the tax liability was
    dischargeable.    See In re Shapiro, 
    188 B.R. 140
    , 143 (Bankr. E.D.
    Pa. 1995)(concluding that while the bankruptcy court is the
    appropriate forum to determine the bankruptcy issue of
    dischargeability, it would be inappropriate for the bankruptcy
    court to decide the amount of the debtor’s non-dischargeable
    liability, which relies on non-bankruptcy law); In re Wood, 
    1994 WL 759753
     (Bankr. N.D. Ga. Nov. 21, 1994) (court abstained from
    fixing the amount of the debt but set a trial with regard to the
    issue of dischargeability); In re Gosciniak, 
    1994 WL 585928
    , at
    *3 (Bankr. S.D. Ind. May 25, 1994) (court ruled on
    dischargeability but abstained from deciding amount of
    liability).    In the instant case, Appellant was not requesting
    the bankruptcy court to determine the amount of her tax
    liability, but instead whether her tax overpayment, by virtue of
    exemption or dischargeability, was protected from setoff by the
           In In re Shapiro, the bankruptcy court noted several cases
    which follow the increasing trend of “dismissing a pending
    adversary proceeding which does not involve bankruptcy law
    issues, upon dismissal of the bankruptcy case itself.”     188 B.R.
    at 148 (citing Chapman v. Currie Motors, Inc., 
    65 F.3d 78
           Taxpayers can appeal adverse determinations by the IRS to
    the Tax Court or Court of Federal Claims, or they can pay any
    assessment and bring suit in the district court. I.R.C. § 7422.
    Cir. 1995)).    In Chapman, the Seventh Circuit found that the
    bankruptcy court properly abstained from deciding a “related to”
    proceeding where the resolution of the matter did not rely on
    bankruptcy law and neither party alleged that the objectives of
    the Bankruptcy Code would be impaired.    65 F.3d at 82.   We find
    such reasoning persuasive.   Accordingly, we hold that where
    bankruptcy issues predominate and the Code’s objectives will
    potentially be impaired, bankruptcy courts should generally
    exercise jurisdiction.7   Conversely, absent any bankruptcy issues
    or implication of the Code’s objectives, it is usually
    appropriate for the bankruptcy court to decline or relinquish
    jurisdiction.   We recognize, of course, that there may be
    instances where exceptional factors involving judicial economy,
    fairness and convenience to the litigants, or the simplicity of
    the non-bankruptcy issues involved may counsel otherwise.       See In
    re Smith, 
    866 F.2d 576
    , 580 (3d Cir. 1989).    Such instances
    should be rare and we trust bankruptcy courts will exercise their
    jurisdiction prudently.
         We now consider the application of this standard to the
    present case.   This Court reviews the bankruptcy court’s decision
    not to abstain for an abuse of discretion.    Matter of Howe, 
    913 F.2d 1138
    , 1143 (5th Cir. 1990).    In this case, Appellant
           Such bankruptcy objectives include, but are not limited to,
    ensuring the efficient administration and equitable distribution of
    the estate for the benefit of the creditors and protecting the
    debtor’s right to a fresh start. See In re Henderson, 
    18 F.3d 1305
    , 1307 (5th Cir. 1994) (recognizing “the Bankruptcy Code’s
    important objective of allowing the debtor to gain a fresh start in
    his financial life.”).
    received a discharge of her 1993 tax liability pursuant to § 727
    of the Bankruptcy Code.   The IRS then exercised its right to
    setoff established in § 6402 of the I.R.C. and preserved in § 553
    of the Bankruptcy Code.   Finally, Appellant claimed her tax
    overpayment as an exempt asset under § 522 of the Bankruptcy
    Code.   We begin the abstention inquiry by identifying the
    material issues: first, whether Appellant could exempt her tax
    overpayment under § 522; second, whether § 522(c) immunizes
    exempt property from setoff; and third, whether §§ 524(a)(2) and
    553 of the Bankruptcy Code permit a creditor to setoff against
    discharged debt.   The resolution of these issues, although
    involving the IRS’ right to setoff under § 6402(a) of the I.R.C.,
    was governed predominantly by bankruptcy law.   Notably, there is
    no dispute over the amount of the parties’ respective tax
    liabilities or that outside of bankruptcy the IRS would have the
    right to setoff.   Instead, the resolution of this matter required
    the bankruptcy court to interpret conflicting sections of the
    Bankruptcy Code and to determine the proper scope of the parties’
    rights to dischargeability, exemption, and setoff.   Such
    determinations are best made by the bankruptcy court.   The second
    prong of the abstention inquiry also counsels in favor of the
    bankruptcy court retaining jurisdiction.   Appellant’s rights to
    the integrity of her discharge and to the use of her exemptions
    are integral to the Code’s objective in providing a fresh start.
    Under the circumstances presented here, the bankruptcy court’s
    decision not to abstain was clearly proper.
                         II. IRS’ Right to Setoff
         On May 19, 1998, Appellant Luongo filed for relief under
    Chapter 7 of the Bankruptcy Code.    At the time of her filing she
    owed the IRS $3,800 in unpaid taxes from her 1993 tax year.    On
    August 15, 1998, Appellant filed her 1997 income tax return
    showing an overpayment of $1,395.94.    The bankruptcy court
    entered an order on September 10, 1998 discharging Appellant’s
    personal liability for her 1993 income tax deficiency.
    Subsequently, in November 1998, the IRS executed its claim to
    setoff and applied all of Appellant’s 1997 tax overpayment to her
    unpaid 1993 tax liability.8
         Appellant first argues that the discharge of her 1993 tax
    liability under § 524(a)(2) bars the IRS from executing its claim
    to setoff.   Section 524(a)(2) provides:
         (a) A discharge in a case under this title –
         (2) operates as an injunction against the commencement or
         continuation of an action, the employment of process, or an
         act, to collect, recover, or offset any such debt as a
         personal liability of the debtor, whether or not discharge
         of such debt is waived;
    11 U.S.C. § 524(a)(2) (emphasis added).    There is an apparent
    inconsistency between § 524(a)(2)’s prohibition on offsets and §
    553's recognition of setoff rights.    Section 553(a) provides:
         (a) Except as otherwise provided in this section and
            A setoff or offset is “[a] deduction; a counterclaim; a
    contrary claim or demand by which a given claim may be lessened or
    canceled.”     BLACK’S LAW DICTIONARY 1085 (6th Ed. 1990). Setoff is
    distinguished from recoupment in that a setoff is “[a] counter-
    claim demand which defendant holds against plaintiff, arising out
    of a transaction extrinsic of plaintiff’s cause of action.” BLACK’S
    LAW DICTIONARY 1372 (6th Ed. 1990).
         sections 362 and 363 of this title, this title does not
         affect any right of a creditor to offset a mutual debt by
         such creditor to the debtor that arose before the
         commencement of the case under this title against a claim of
         such creditor against the debtor that arose before the
         commencement of the case . . . .
         We agree with the vast majority of courts considering the
    relationship between § 524(a) and § 553 that a debtor’s discharge
    in bankruptcy does not bar a creditor from asserting its right to
    setoff.   See In re Davidovich, 
    901 F.2d 1533
     (10th Cir. 1990); In
    re Buckenmaier, 
    127 B.R. 233
     (9th Cir. B.A.P. 1991); Posey v.
    Dept. of Treasury, 
    156 B.R. 910
     (W.D.N.Y. 1993); Reich v.
    Davidson Lumber Sales Emp. Ret. Plan, 
    154 B.R. 324
     (D. Utah
    1993); In re Thompson, 
    182 B.R. 140
     (Bankr. E.D. Va. 1995); In re
    134 B.R. 562
     (Bankr. E.D. Tex. 1991); In re Morgan, 
    77 B.R. 81
     (Bankr. S.D. Miss. 1987); In re Conti, 
    50 B.R. 142
    (Bankr. E.D. Va. 1985); In re Ford, 
    35 B.R. 277
     (Bankr. N.D. Ga.
    1983); In re Shaw Constr. Corp., 
    17 B.R. 744
     (Bankr. E.D. Pa.
    1982); Krajci v. Mt. Vernon Consumer Discount Co., 
    16 B.R. 464
    (Bankr. E.D. Pa. 1981). But see In re Dezarn, 
    96 B.R. 93
    , 95
    (Bankr. E.D. Ky. 1988); In re Johnson, 
    13 B.R. 185
    , 189 (Bankr.
    M.D. Tenn. 1981).   It is impossible for us to ignore the clear
    statement of § 553 that “this title [the Bankruptcy Code] does
    not affect any right of a creditor to offset . . . .”   We
    interpret this statement to allow a discharged debt to be setoff
    upon compliance with the terms and conditions provided in § 553,
    notwithstanding § 524(a)’s post-discharge bar.   This
    interpretation avoids the “possible injustice in requiring a
    creditor to file its claim for satisfaction in the bankruptcy
    court, while at the same time compelling the same creditor to pay
    in full its debt to the bankruptcy estate.”     In re Davis, 889
    F.2d at 661 (quoting In re Southern Indus. Banking Corp., 
    809 F.2d 329
    , 332 (6th Cir.1987)).   Our interpretation also creates
    an equitable balance by preventing affirmative action to collect
    the discharged debt, while preserving the creditor’s right to
    raise a discharged debt as a defense to a recovery action brought
    by the debtor.   “In these circumstances, where the creditor’s use
    of § 553 is defensive, the spirit of § 524(a)(2), ‘to eliminate
    any doubt concerning the effect of the discharge as a total
    prohibition on debt collection efforts’ is not violated.”     In re
    Ford, 35 B.R. at 280 (quoting S.Rep. No. 598, 95th Cong., 2d
    Sess. 80 (1978), U.S.C.C.A.N. 1978, 5866).
         In order to establish a valid right to setoff under § 553,
    the IRS must prove: (1) a debt owed by the creditor to the debtor
    which arose prior to the commencement of the bankruptcy case; (2)
    a claim of the creditor against the debtor which arose prior to
    the commencement of the bankruptcy case; and (3) the debt and
    claim must be mutual obligations.     Braniff Airways, Inc. v. Exxon
    814 F.2d 1030
    , 1035 (5th Cir. 1987).    The second and third
    conditions are easily satisfied in the present case.    First,
    Appellant owed the IRS $3,800 arising out of her 1993 tax year.
    Second, the debts involved are between the same parties standing
    in the same capacity, the requisite for mutuality.
         The final condition is that the IRS’ debt to Appellant arose
    prior to the commencement of the bankruptcy case.    Creditors are
    limited by the terms of § 553 to offsetting debts owed the debtor
    prepetition.9   In re Eggemeyer, 
    75 B.R. 20
    , 22 (Bankr. S.D. Ill.
    1987) (“The discharge of a debt in a bankruptcy proceeding does
    not affect the creditor’s right to setoff, provided the right of
    setoff existed at the time the bankruptcy petition was filed.”).
    Whether a debt arises prepetition is governed by when the debt
    accrued, not when the action for recovery was brought.    “A tax
    obligation accrues when the event that triggers liability has
    occurred.”   Matter of Midland Indus. Service Corp., 
    35 F.3d 164
    167 (5th Cir. 1994).   As of December 31, 1997 all of the events
    necessary to establish Appellant’s tax liability for her 1997 tax
    year had occurred.10   The date she actually filed her return is
    not relevant in determining when the debt arose.11   Id. at 167
    ("[A] tax claim is incurred on the date it accrues rather than
    the date it is assessed or becomes payable.").    Thus, her
    bankruptcy petition having been filed on May 19, 1998, the
    overpayment (the debt owed the debtor by the creditor) arose
    prior to the commencement of the case.
         Practical considerations reinforce a rule governing setoff
           Any incentive for a creditor to garner assets of the debtor
    in anticipation of a pending bankruptcy is abated by the trustee’s
    power to avoid such preferences under § 547.
            The reference to December 31 does not imply that tax
    liability or overpayments cannot be established on a pro rata basis
    throughout the year. We need not consider that question in the
    present case.
             The right to setoff exists provided that the debt is owed
    at the time the petition is filed even though it was not due or
    liquidated.     Braniff Airways, 814 F.2d at 1035-36; COLLIER ON
    BANKRUPTCY, ¶ 553.03[1][d] at 553-16, [f] at 553-18 (15th ed. 1996).
    against discharged debt that disregards the timing of the
    debtor’s action in favor of when it accrued.     A contrary
    conclusion would open the proverbial floodgates to all manner of
    deception.12   Specifically with regard to taxes, allowing
    dischargeability to act as a bar would permit a debtor to shelter
    assets from his creditors by making substantial overpayments to
    the IRS during a given tax year.      The debtor could withhold the
    filing of his tax return until after he had filed for bankruptcy
    and received a discharge.   Post-discharge, the debtor could
    obtain his tax refund free from the claims of his creditors.13
    Such a result would not comport with the equitable nature of the
    Bankruptcy Code.   Accordingly, we find the IRS’ debt to Appellant
    as a result of her overpayment during the 1997 tax year arose
    prepetition.   Having established a valid right of setoff under §
    553, the IRS permissibly offset Appellant’s overpayment against
           “If the court in [In re Johnson, 
    13 B.R. 185
    , 189 (Bankr.
    M.D. Tenn. 1981)] were correct in its interpretation of § 553, then
    a debtor could prevent a creditor from effecting a setoff by
    waiting to file suit on a prepetition transaction until after he
    had filed a petition for relief.      We conclude that the proper
    interpretation of § 553 is that it allows the setoff of mutual
    debts both of which arose before bankruptcy, regardless of when
    suit thereon is instituted. This would, thus, allow a creditor to
    raise a discharged debt as a defense to an action brought by the
    debtor, regardless of when that action is instituted, if that
    action is based on a claim or cause of action which arose before
    bankruptcy.” In re Shaw Construction Corp., 17 B.R. at 748.
           In the present case, Appellant reopened her bankruptcy case
    and listed the overpayment as an asset. In cases where the debtor
    does not list the claim as an asset, yet later commences a
    proceeding based on that claim, she would likely be judicially
    estopped from prosecuting her action. See In re Coastal Plains,
    179 F.3d 197
     (5th Cir. 1999).
    her discharged 1993 tax liability.
         After the IRS executed its setoff rights, Appellant moved to
    reopen her case and filed amended schedules exempting the 1997
    tax overpayment.   Appellant’s second claim is that by virtue of
    the exemption of her tax overpayment, the IRS is prohibited from
    exercising its right to setoff.    The commencement of the
    bankruptcy case creates a bankruptcy estate, which includes all
    “legal and equitable interests of the debtor.”     11 U.S.C. § 541;
    Owen v. Owen, 
    500 U.S. 305
    , 308 (1991); Martin v. United States,
    159 F.3d 932
    , 934 (5th Cir. 1998).     Bankruptcy Code section 522
    then permits a debtor to exempt certain property of the
    bankruptcy estate.   11 U.S.C. § 522(b).    Property exempted under
    § 522 is removed from the estate for the benefit of the debtor.
    Thus, it is axiomatic that property cannot be exempted unless it
    was first part of the estate:
         An exemption is an interest withdrawn from the estate
         (and hence from creditors) for the benefit of the
         Property that is properly exempted under § 522 is (with
         some exceptions) immunized against liability for
         prebankruptcy debts. § 522(c). No property can be
         exempted (and therefore immunized), however, unless it
         first falls within the bankruptcy estate. Section
         522(b) provides that the debtor may exempt certain
         property “from property of the estate”; obviously,
         then, an interest that is not possessed by the estate
         cannot be exempted.
    Owen, 500 U.S. at 308 (emphasis in original).     A debtor’s claim
    to a tax refund is property of the estate.     Mueller v.
    496 F.2d 899
    , 903 (5th Cir. 1974).     However, under
    26 U.S.C. § 6402(a) the debtor is generally only entitled to a
    tax refund to the extent that her overpayment exceeds her unpaid
    tax liability.    In re Davis, 889 F.2d at 661.   In the present
    case, the estate had a tax liability totaling $3,800, while the
    1997 overpayment totaled only $1,395.94.    Section 6402(a) grants
    the IRS discretion whether to offset against a debtor’s unpaid
    tax liability or to refund the overpayment to the taxpayer.      The
    IRS elected to exercise that discretion to apply the overpayment
    to Appellant’s past liability.    Because the prior unpaid tax
    liability exceeded the amount of the overpayment, the debtor was
    not entitled to a refund and the tax refund did not become
    property of the estate.    Absent an interest in the estate to the
    refund, it could not properly be exempted by the debtor under §
           We reject the IRS’ contention that the bankruptcy court
    lacked jurisdiction over this proceeding.    Section 505(a)(1)
    vests the bankruptcy court with broad jurisdiction over tax
    matters of the estate and the debtor, including determinations
    with respect to the personal liability of the debtor.     The IRS’
    alternative contention that the bankruptcy court should have
    abstained and permitted this action to be brought in the Tax
    Court or the district court is also rejected.     The bankruptcy
    court did not abuse its discretion in not abstaining from a
    proceeding involving issues governed predominantly by bankruptcy
    law and implicating one of the Code’s paramount objectives of
    providing the honest debtor with a fresh start.     The bankruptcy
    court erred, however, by preventing the IRS from enforcing its
    statutory right to setoff, established in § 6402(a) of the I.R.C.
    and preserved in § 553 of the Bankruptcy Code, against a tax
    overpayment that arose prior to the commencement of the case.
    Upon compliance with the terms of § 553, a creditor’s right to
    setoff is not affected by the post-discharge bar on collection
    efforts in § 524(a)(2).   Additionally, under our controlling
    caselaw, the estate did not have an interest in the tax
    overpayment which could be exempted by Appellant.   The bankruptcy
    court erred in permitting Appellant to exempt property, pursuant
    to § 522, which had not entered the estate.   Because we find
    Appellant could not exempt the overpayment under § 522, we leave
    open the question of whether § 522(c) immunizes exempt property
    from setoff.   We AFFIRM the judgment of the district court.
    EMILIO M. GARZA, Circuit Judge, dissenting:
         In contrast to the majority, I would not reach the merits of
    Constance Luongo’s claim for a refund.   Instead, I would dismiss
    her action on the ground that, under 11 U.S.C. § 505(a)(2)(B),
    the bankruptcy court lacked jurisdiction over her refund claim.
    I find that the bankruptcy court’s jurisdiction extends only to
    claims for refunds that benefit the estate. The majority rejects
    this contention with a cursory analysis of the statute—simply
    reciting the statutory text, but relying on legislative history
    pertaining only to tax liability claims.   In dispensing with the
    assertion that § 505 bars the bankruptcy court’s exercise of
    jurisdiction over this case, the majority overlooks the plain
    meaning of the statute and the legislative history regarding the
    bankruptcy court’s jurisdiction over refund claims.
         It is a cardinal rule of statutory interpretation that we
    begin our analysis by examining the statute’s text.   See INS v.
    464 U.S. 183
    , 189, 
    104 S. Ct. 584
    , 589, 
    78 L. Ed. 2d 401
     (1984) (“This Court has noted on numerous occasions that in
    all cases involving statutory construction, our starting point
    must be the language employed by Congress, . . . and we assume
    that the legislative purpose is expressed by the ordinary meaning
    of the words used.”) (quotations and citations omitted).   Mere
    quotation of the statute does not satisfy this requirement;
    instead, we must give studied consideration to Congress’s words.
    Moreover, § 505 abrogates the government’s sovereign immunity,
    requiring us to strictly construe it in favor of the sovereign.
    See 11 U.S.C. § 106 (expressly abrogating sovereign immunity
    where suits are brought pursuant to § 505); Dept. of the Army v.
    Blue Fox, 
    525 U.S. 255
    , 261, 
    119 S. Ct. 687
    , 691, 
    142 L. Ed. 2d 718
     (1999) (statutes abrogating sovereign immunity are to be
    strictly construed).
           Section 505(a)(1) is a grant of jurisdiction, providing
           Except as provided in paragraph (2) of this subsection,
           the court may determine the amount or legality of any
           tax, any fine or penalty relating to a tax, or any
           addition to tax, whether or not previously assessed,
           whether or not paid, and whether or not contested
           before and adjudicated by a judicial or administrative
           tribunal of competent jurisdiction.
    (Emphasis added).    I agree with the majority that the word “may”
    in § 505(a)(1) arms the bankruptcy court with the discretion to
    exercise the jurisdiction granted to it by § 505.      This grant of
    jurisdiction is, however, limited.      The prefatory phrase
    “[e]xcept as provided in paragraph (2) of this subsection”
    expressly limns this grant of discretionary jurisdiction to those
    cases that are not within the parameters established by paragraph
    (2).    Even if (a)(1) did not contain this explicit exception,
    paragraph (2) begins by stating that the “court may not so
    determine” those cases set out in (2)(A) and (B).      In its rules
    of construction, the Bankruptcy Code provides that “‘may not’ is
    prohibitive, and not permissive,” making clear that the
    bankruptcy court is prohibited from deciding cases in (2)(A) and
    (B).    11 U.S.C. § 102(4).   Furthermore, our circuit has
    previously accepted that paragraph (2) limits the bankruptcy
    court’s jurisdiction, requiring us to determine whether the case
    at hand falls within the circumstances set out by that paragraph.
     See In re Armstrong, 
    206 F.3d 465
    , 474 (5th Cir. 2000) (holding
    that the bankruptcy court lacked jurisdiction to consider a
    refund claim where the trustee failed to comply with §
    505(a)(2)(B)); Tex. Comptroller of Pub. Accounts v. Trans State
    Outdoor Adver. Co. (In re Trans State Outdoor Adver. Co.), 
    140 F.3d 618
    , 620 (5th Cir. 1998) (holding that if the chapter 11
    debtor’s tax liability claim fell within § 505(a)(2)(A), the
    bankruptcy court lacked jurisdiction to consider the claim);
    Internal Rev. Serv. v. Teal (In re Teal), 
    16 F.3d 619
    , 622 (5th
    Cir. 1994) (“Simply stated § 505(a)(2)(A), a jurisdictional
    statute, is mandatory”).      Consequently, the plain meaning of the
    text compels us to examine whether § 505(a)(2) deprives the
    bankruptcy court of jurisdiction.
           Section 505(a)(2)(B) provides that:
         the court may not so determine
              (B) any right of the estate to a refund, before
         the earlier of—
                   (i) 120 days after the trustee properly
                   requests such refund from the governmental
                   unit from which the refund is claimed; or
                   (ii) a determination by such governmental unit of
    such request.
    Luongo claims that the IRS owes her a refund.   Subparagraph (B)
    is the only provision in § 505 that addresses “refund” claims.
    Hence, subparagraph (B) must be the starting place for
    determining whether the bankruptcy court has jurisdiction over
    Luongo’s claim.   See Constable Terminal Corp. v. City of Bayonne,
    N.J. (In re Constable Terminal Corp.), 
    222 B.R. 734
    , 737 (Bankr.
    D.N.J. 1998) aff’d In re Constable Terminal Corp., 
    246 B.R. 181
    (D.N.J. 2000) (“Clearly, when addressing whether a court may
    grant a debtor a tax refund, the court’s decision of the issue
    must begin with the language of § 505(a)(2)(B).”); see also
    Roberts v. Sullivan County (In re Penking Trust), 
    196 B.R. 389
    394 (Bankr. E.D. Tenn. 1996) (noting Congress’s “distinctive
    treatment” of refund claims).
         Subparagraph (B) establishes three conditions precedent to a
    bankruptcy court’s jurisdiction over refund claims.     First,
    refund claims must be properly requested from the relevant
    governmental unit.   See 11 U.S.C. § 505(a)(2)(B)(i).    In order to
    “properly request” a refund, a trustee must comply with the
    refund procedures set forth by the government from which it seeks
    a refund.   See In re Armstrong, 206 F.3d at 472 (“A ‘proper
    request’ [for a refund] under the Internal Revenue Code requires
    compliance with [26 U.S.C.] §§ 7422 and 6511”); Roberts, 196 B.R.
    at 396 (“A ‘proper’ request under § 505(a)(2)(B) connotes
    correctness and dictates conformity with the pertinent taxing
    authority’s mechanism for seeking a refund.”).   Failure to do so
    deprives the bankruptcy court of jurisdiction.   See In re
    Armstrong, 206 F.3d at 472 (finding that where the trustee failed
    to comply with Internal Revenue Code procedures for requesting a
    refund, the bankruptcy court lacked jurisdiction to hear the
    refund claim); City of Perth Amboy v. Custom Distrib. Servs.,
    Inc. (In re Custom Distrib. Servs., Inc.), 
    224 F.3d 235
    , 243-44
    (3d Cir. 2000) (holding that where the chapter 11 debtor failed
    to comply with state procedural requirements, the bankruptcy
    court lacked jurisdiction to hear the refund claim).    Second, the
    subparagraph sets out when in time the bankruptcy court may
    exercise jurisdiction over a refund claim.   The bankruptcy court
    can act once the relevant governmental unit reaches a
    determination on the claim or after the passage of 120 days from
    the date on which the trustee made his request, whichever is
    earlier.   Thus, these two preconditions operate as an exhaustion
    requirement, mandating that the trustee allow the governmental
    unit to receive and act on the refund claim, although it must act
    within 120 days, before the bankruptcy court can exercise
    jurisdiction over the refund claim.
         Third, and most important for this case, the text and
    purpose of subparagraph (B) tell us what kind of refund claim the
    bankruptcy court has jurisdiction to consider when the first two
    conditions have been met:   a refund claim brought for the benefit
    of the estate.   Section 505(a)(2)(B) refers to the “right of the
    estate to a refund.”    The estate encompasses the property
    outlined in 11 U.S.C. § 541, which will be used to pay the
    creditors.    See 5 Collier on Bankruptcy ¶ 541. 01 (15th ed.
    1999).    “Congress is presumed to know the meaning of the words it
    uses, especially in highly complex and intricate statutory
    schemes.” United States v. Sotelo, 
    436 U.S. 268
    , 286-87, 98 S.
    Ct. 1795, 1806, 
    56 L. Ed. 2d 275
     (1978) (Rehnquist, J.
    dissenting); cf. Molzof v. United States, 
    502 U.S. 301
    , 307, 
    112 S. Ct. 711
    , 716, 
    116 L. Ed. 2d 731
     (1992) (“‘[W]here Congress
    borrows terms of art in which are accumulated the legal tradition
    and meaning of centuries of practice, it presumably knows and
    adopts the cluster of ideas that were attached to each borrowed
    word in the body of learning from which it was taken and the
    meaning its use will convey to the judicial mind unless otherwise
    instructed.’”) (quoting Morissette v. United States, 
    342 U.S. 246
    , 263, 
    72 S. Ct. 240
    , 250, 
    96 L. Ed. 288
     (1952)).       The
    Bankruptcy Code is such a statutory scheme, and the word “estate”
    does not include what Luongo seeks through her action—a refund
    solely for her own benefit.14    We must presume that in using the
               In response to this contention, the majority asserts that the
    definition of the estate, as provided in § 541 undermines my
    construction of the words “right of the estate.” The majority notes
    that § 541 defines property of the estate broadly to include property
    that the debtor may later declare exempt. Based on this definition, the
    majority asserts that the estate has a right to the refund claim at
    issue here and that its construction of § 505 does not read “‘the right
    of the estate’ out of the statute,” as I later contend it does. While
    the majority is correct that property that the debtor may later declare
    exempt is property of the estate, the majority’s analysis fails to
    account for the impact of the exemption. The Supreme Court defined an
    exemption as “an interest withdrawn from the estate (and hence from the
    creditors) for the benefit of the debtor.” Owen v. Owen, 500 U.S 305,
    111 S. Ct. 1833
    , 1835, 
    114 L. Ed. 2d 350
     (1991) (emphasis added); see
    Wischan v. Adler, 
    77 F.3d 875
    , 877 (5th Cir. 1997) (“Although the
    proceeds of the pre-petition personal injury causes are initially
    property of the estate, some states and the federal government have
    created exemptions for them”) (emphasis added). The exempt property
    leaves the estate and vests in the debtor. See Bell v. Bell (In re
    225 F.3d 203
    , 216 (2d Cir. 2000) (“It is well-settled law that
    the effect of . . . exemption is to remove property from the estate and
    vest it in the debtor.”); Mayer v. Nguyen (In re Nguyen), 
    211 F.3d 105
    107 & 109 (4th Cir. 2000) (the operation of the exemption is to
    “exclude” the exempt property from the estate); In re Gamble, 
    168 F.3d 442
    , 443 (11th Cir. 1999) (“exempt property is not part of the
    bankruptcy estate”); Seror v. Kahan (In re Kahan), 
    28 F.3d 79
    , 81 (9th
    Cir. 1994) (“The bankruptcy estate includes all of the debtor’s
    interests in property at the commencement of the case, except property
    that the debtor elects to exempt.”); Abramowitz v. Palmer, 
    999 F.2d 1274
    , 1276 (8th Cir. 1993) (holding that where trustee failed to object
    to exemption, the trustee was “precluded from including” the property
    in the debtor’s bankruptcy estate); In re Yonikus, 
    996 F.2d 866
    , 870
    (7th Cir. 1993) (“[a]fter an asset is property of the estate . . ., it
    can still past out of the estate (thus out of the reach of creditors)
    as a” § 522 exemption); Taylor v. Freeland & Kronz, 
    938 F.2d 420
    , 422
    (3d Cir. 1991) (“[T]he property so exempted is no longer considered
    property of the bankruptcy estate.”); Sherk v. Tex. Bankers Life & Loan
    Ins. Co. (In re Sherk), 
    918 F.2d 1170
    , 1174 (5th Cir. 1990) abrograted
    on other grounds by Taylor v. Freeland & Kronz, 
    504 U.S. 638
    112 S. Ct. 1644
    118 L. Ed. 2d 280
     (1992) (exempt property “is no longer property of
    the estate”); Norton Bankruptcy Law and Practice 2d § 51:2 (2000) (“The
    debtor by acting affirmatively, may take the required action to set
    aside his or her exemptions.        The court may determine what is
    appropriately exempted and what property remains in the estate.”)
    (emphasis added); see also Graziadeai v. Graziadei (In re Graziadei),
    32 F.3d 1408
    , 1410 n.2 (9th Cir. 1994) (bankruptcy court lacked
    jurisdiction over homestead property because it was exempt and therefore
    had no conceivable effect on the estate). But see Traina v. Sewell (In
    re Sewell), 
    180 F.3d 707
    , 710 (5th Cir. 1999) (contrasting excluded
    property with exempt property and noting that exempt property is
    “included in the bankruptcy estate but ‘exempted from use in satisfying
    claims of creditors and other authorized charges.”). Even the majority
    phrase “right of the estate,” Congress intended for this to be
    the only type of refund claim encompassed by § 505(a)(2)(B).
              The modification of refund with “the right of the
    estate” also contrasts sharply with § 505(a)(1)’s “any tax, any
    fine . . . , or any addition to a tax” language.       This difference
    illustrates that had Congress intended to refer to refund claims
    generally, it could have done so.        See also Hartford Underwriters
    Ins. v. Union Planters Bank, N.A., 
    530 U.S. 1
    , 7, 
    120 S. Ct. 1942
    , 1947-1948, 
    147 L. Ed. 2d 1
     (2000) (in interpreting 11
    U.S.C. § 506, finding that “had Congress intended the provision
    to be broadly worded, it could simply have said so, as it did . .
    . in other section of the Code.”).       This difference in language
    also accounts for the fact that the debtor can bring a claim for
    a determination of his tax liabilities, but cannot bring a refund
    claim that inures only to his benefit.        Further, if we were to
    adopt the majority’s position we would read the words “right of
    the estate” out of the statute, a result eschewed in statutory
    interpretation.     See 2A Sutherland Statutory Construction § 46.06
    (5th ed. 1992) (“A statute should be construed so that effect is
    given to all its provisions, so that no part will be inoperative
    or superfluous.”)
          Additionally, in setting forth who requests the refund
    acknowledges that “exempted property is removed from the estate.” Thus,
    “the right of the estate” is properly construed as not including exempt
    claim, the statute refers only to the trustee.       See 11 U.S.C. §
    505(a)(2)(B).   Congress’s failure to require that the debtor make
    such a request cannot be seen merely as an omission because, as
    the Supreme Court noted in construing § 506 of the Code, “the
    fact that the sole party named -- the trustee -- has a unique
    role in bankruptcy proceedings makes it entirely plausible that
    Congress would provide a power to him and not others.”        Hartford
    Underwriters Ins., 530 U.S. at 7, 120 S. Ct. at 1947.       So too it
    is entirely plausible here that Congress entrusted this
    responsibility only to the trustee.15     Moreover, giving this
    responsibility to the trustee implies the refund claim will be
    one benefitting the estate because the trustee’s duty is to act
    for the benefit of the estate, i.e., for the benefit of the
    creditors.16    As a result, the text’s delegation solely to the
               Note, however, that the term trustee encompasses a debtor in
    possession. Federal Rule of Bankruptcy Procedure 9001.01(10) provides
    that “[t]rustee includes a debtor in possession in a chapter 11 case.”
    Under 11 U.S.C. § 1107, with certain exceptions “a debtor in possession
    shall have all the rights, . . . and powers, and shall perform all the
    functions and duties, . . . of a trustee in a case under” chapter 11.
     Here, Luongo is a chapter 7 debtor and a trustee has been appointed for
    the estate.
               The majority’s response to my interpretation of §
    505(a)(2)(B) fails to account for the delegation of the duty to properly
    request the refund to the trustee, instead treating the analysis as if
    its only support rested in the words “right of the estate.” It is not
    simply because the words “right of the estate” appear that§ 505 is so
    limited, but also because the duty to request the refund is delegated
    to the trustee. The trustee’s duty is to maximize the estate for the
    purposes of distribution to the creditors. See 6 Collier on Bankruptcy
    ¶ 704.02[3] (15th ed. 2000) (“[I]t is the trustee’s duty to both the
    debtor and the trustee to realize from the estate all that is possible
    trustee the duty to properly request the refund claim considered
    in tandem with the statute’s reference only to “the right of the
    estate to a refund” demonstrates that § 505(a)(2)(B) concerns
    only a refund that benefits the estate.
          The purpose of    § 505(a)(2)(B), as expressed in its text,
    demonstrates that the text’s singular focus on a refund that
    benefits the estate limits the bankruptcy court’s jurisdiction
    over refund claims to those claims benefitting the estate that
    have been properly requested and the tax authority has been
    permitted 120 days to act upon that request.      As described above,
    the first two conditions precedent form an exhaustion
    for distribution among the creditors.”) (emphasis added). In chapter
    7 proceedings, the trustee’s main duty is to liquidate the estate as
    expeditiously as possible. See 11 U.S.C. § 704(1) (trustee is to
    “collect and reduce to money the property of the estate”). Further,
    with respect to exemptions, the Code grants the right of exemption to
    the debtor, not the trustee. See 11 U.S.C. § 522. The trustee, as a
    party in interest, has standing to object to the debtor’s exemptions,
    and should object where the exemption is invalid and would deplete the
    value of the estate available for distribution to the creditors. Once
    the period for objections to the debtor’s proposed exemptions passes and
    the property becomes exempt, the trustee has no interest in exempt
    property except to the extent that the property’s value exceeds any
    applicable caps on the debtor’s exemption, in which case both the estate
    and the debtor have an interest in the property. See 11 U.S.C. § 522(l)
    (property declared exempt on the debtor’s schedules becomes exempt if
    there are no objections); Bankr. R. Proc. 4003 (providing thirty days
    in which to object). The Code recognizes that the trustee’s and the
    debtor’s interests diverge regarding exemptions by allowing the debtor
    to exempt property the trustee recovers, and, more importantly, by
    permitting the debtor to avoid transfers the trustee can avoid in the
    event the trustee fails to act. See 11 U.S.C. § 522(g) and (h). Thus,
    the delegation to the trustee the duty to properly request the refund
    claim is especially significant given the trustee’s and the debtor’s
    roles with respect to exemptions.
    requirement.   This requirement compels the trustee to first avail
    himself of the refund procedures provided by the government from
    which he seeks a refund and allows the government to act first
    with respect to that claim, rather than being subjected
    automatically to the bankruptcy court’s jurisdiction.     See
    Roberts, 196 B.R. at 392 (“The purpose of § 505(a)(2)(B) is to
    afford the taxing authority a reasonable opportunity to review
    any refund claim under its normal procedures.”); St. John’s
    Nursing Home, Inc. v. City of New Bedford (In re St. John’s
    Nursing Home), 
    169 B.R. 795
    , 800 (D. Mass. 1994) (“Section
    505(a)(2)(B) is thus designed to ‘give the taxing authorities
    time to act on a refund request.’”) (quoting Benjamin Weintraub
    and Alan N. Resnick, Bankruptcy Law Manual, ¶ 5.09 (3d ed.
    1992)).   Imposing such a requirement on refunds as opposed to tax
    liabilities is particularly important from the government’s
    perspective.   When a debtor or a trustee seeks a determination of
    tax liabilities, he is asking the bankruptcy court to fix what he
    owes to the government.   Where this occurs, the government may
    receive payment.   More importantly, it will not be making a
    payment to the debtor or the estate.    In contrast, when a trustee
    calls upon the bankruptcy court to resolve the estate’s refund
    claim, the trustee anticipates the receipt of a payment from the
    government.    At the resolution of such a claim, the government,
    be it federal or local, may have to make a payment when the money
    it has received from the debtor may have already left its
    coffers.   See City of Perth Amboy, 224 F.3d at 243 (“[§
    505(a)(2)(B)(i)] is also a recognition of the havoc that would be
    visited on the financial stability of a municipality if it were
    forced to refund taxes paid years before”).       If § 505(a)(2)(B)
    applied solely to the right of the estate to a refund, the debtor
    seeking a refund claim for her own benefit could go directly to
    the bankruptcy court without allowing the government the
    opportunity to examine the claim.        Section 505(a)(2)(B)’s purpose
    offers no basis for allowing one refund claim to escape the
    government’s procedures but not the other.        Cf. In re Dunhill
    Med., Inc., No. 92-37700, 
    1996 WL 354696
     at *5 (Bankr. D.N.J.
    Mar. 27, 1996) (“A debtor should not be permitted to bypass”
    §505(a)(2)(B)’s requirements “simply by classifying a claim as a
    ‘credit’ because the practical result of a credit is identical to
    that of a refund.”).    Such a result frustrates the statute’s
    exhaustion purpose.    Thus, that the text concerns only the
    estate’s right to a refund cannot be construed to mean that
    Luongo’s claim simply falls outside the reach of § 505(a)(2)(B)
    and within the bankruptcy court’s jurisdiction.17       In light of
               In quickly dispensing with the possible jurisdictional bar
    posed by § 505, the majority fails to note in the text of its opinion
    whether Luongo complied with § 505(a)(2)(B)’s requirements that a refund
    be properly requested and that the bankruptcy court wait for the
    government’s determination or 120 days after such a request to act
    (whichever may have occurred earlier). Thus, the majority implies that
    a debtor’s refund claim that benefits only the debtor is not bound by
    this purpose and the text’s focus on the estate’s refund claims,
    the bankruptcy court’s jurisdiction must then be limited to
    refund claims brought for the benefit of the estate.18
         Implicit in the majority’s contention that this reading of §
    505(a)(2)(B) is too constrained is the assumption that Congress
    could not have intended to so limit § 505(a)(1)’s broad grant of
    jurisdiction.   The interaction between § 505(a)(1) and §
    505(a)(2)(A) demonstrates otherwise.      Section 505(a)(2)(B)
    provides that the court may not determine:
         the amount or legality of a tax, fine, penalty, or
         addition to tax if such amount or legality was
         contested before and adjudicated by a judicial or
         administrative tribunal of competent jurisdiction
    these conditions. As described in text, the purpose of subparagraph (B)
    does not permit such a distinction.
         In response to my dissent, the majority states in a footnote that
    Luongo has complied with the requirements of § 505(a)(2)(B). Hence,
    despite the implication of the majority’s initial discussion of § 505,
    the majority seems to interpret § 505(a)(2)(B) as applying to Luongo’s
    claim. This interpretation is incorrect because it cannot overcome the
    text’s focus on “the right of estate” together with the delegation to
    the trustee the responsibility for seeking a refund claim.
               The majority responds that other courts confronted with a
    debtor’s refund claim inuring only to the benefit of the debtor have not
    adopted the interpretation of § 505 I have set forth. In support of
    this contention, the majority points to United States v. Ryan (In re
    64 F.3d 1516
     (11th Cir. 1995) and Gribben v. United States (In
    re Gribben), 
    158 B.R. 920
     (S.D.N.Y. 1993). In In re Gribben, the court
    did not even broach the question of § 505’s applicability to the case,
    let alone offer an interpretation of that section. Although the court
    in In re Ryan at least discussed § 505, it merely recited the statutory
    text and from there concluded, without discussion, that the debtor need
    only meet § 505’s exhaustion requirements in order for the bankruptcy
    court to have jurisdiction. See 64 F.3d at 1520-1521. Given the
    nonexistent or truncated analysis found in these two cases, I find them
         before the commencement of the case under this title
    This exception recites the language of the last clause of
    paragraph (1) adding only the timing provision, i.e., “before the
    commencement of the case under this title.”     Subparagraph (A)
    thus precludes the bankruptcy court from determining any tax
    liabilities contested and adjudicated pre-petition, cutting a
    broad swath from the general grant of jurisdiction and leaving
    only those claims contested subsequent to the beginning of the
    bankruptcy case to fall within the scope of the bankruptcy
    court’s jurisdiction.   Given the substantial limitation
    subparagraph (A) places on the bankruptcy court’s jurisdiction,
    the assumption that Congress did not intend to so limit the
    bankruptcy court’s jurisdiction cannot be made.
         Moreover, the majority contends that the above
    interpretation of § 505(a)(2)(B) contravenes Congress’s intent to
    provided a broad grant of jurisdiction over “tax issues” as
    evinced in the legislative history.    In examining the legislative
    history, the majority focuses solely on the legislative
    statements pertaining to taxes owed by the debtor or the estate.
    Specifically, the majority relies on two statements by
    Representative Edwards and Senator DeConcini.    First, the
    majority relies on Representative Edwards’s statement that § 505
    authorizes “the bankruptcy court to rule on the merits of any tax
    claim involving an unpaid tax, fine, or penalty relating to the
    tax or an addition to a tax, of the debtor or the estate.”    124
    Cong. Rec. 32413; see 124 Cong. Rec. 34013 (1978) (Statement of
    Sen. DeConcini).   Additionally, the majority points to
    Representative Edwards’s and Senator DeConcini’s statement that
    “the bankruptcy judge will have authority to determine which
    court will determine the merits of the tax claim both as to the
    claim against the estate and claims against the debtor concerning
    his personal liability for nondischargeable taxes.”   124 Cong.
    Rec. 32414 (1978) (statement of Sen. DeConcini); 124 Cong. Rec.
    34014 (1978) (statement of Rep. Edwards).   In these statements,
    the majority zeroes in on the phrases “of the debtor or the
    estate” and on “claims against the debtor concerning his
    liability for nondischargeable taxes” in order to show that
    Congress intended for the bankruptcy court to have jurisdiction
    over refund claims not affecting the estate.   But these
    statements concern one kind of claim:   one in which the debtor
    owes money to the government.   The first quotation refers to
    “unpaid tax, fine, or penalty relating to a tax, addition to a
    tax.”   All of these items connote the taxing authority’s right to
    a payment.   Likewise, the second statement’s reference to “claims
    against the debtor” connotes the government’s right to a payment
    from the debtor.   As such, these statements offer little insight
    into Congress’s intent with respect to refund claims.
         Representative Edwards’s and Senator DeConcini’s subsequent
    remarks clarify that § 505(a)(1)’s grant of jurisdiction is
    subject to paragraph (2)’s limitations.    The Legislators note
    that the bankruptcy court “will not have jurisdiction to rule on
    the merits of any tax claim which has been previously
    adjudicated, in a contested proceeding, before a court of
    competent jurisdiction,” recognizing the exception to
    jurisdiction § 505(a)(2)(A) creates.    More importantly, although
    conspicuously absent from the majority’s recitation of the
    legislative history, the Legislators addressed refund claims,
         the bankruptcy court can, under certain conditions,
         determine the amount of tax refund claim by the
         trustee. . . . [I]f the refund results from an offset
         or counterclaim to a claim or request for payment by
         the Internal Revenue Service, or other tax authority,
         the trustee wold not first have to file an
         administrative claim for refund with the tax authority.
              However, if the trustees requests a refund in
         other situations, he would first have to submit an
         administrative claim for the refund. . . . [I]f the
         Internal Revenue Service or other tax authority does
         not rule on the refund claim within 120 days, then the
         bankruptcy court may rule on the merits of the refund
    124 Cong. Rec. 34013 (1978) (Statement of Sen. DeConcini); 124
    Cong. Rec. 32413 (1978) (Statement of Rep. Edwards) (emphasis
    added).    The statement refers only to refund claims brought by
    the trustee and is devoid of any reference to the debtor.    In
    contrast, the legislative history of § 505 is replete with
    references to the debtor where it discusses his debts.    See,
    e.g., 124 Cong. Rec. 34013 (1978) (Statement of Sen. DeConcini)
    (“[A]n individual debtor can also file a complaint to determine
    dischargeability . . . so that the bankruptcy court would then
    determine the validity of the claim against the assets in the
    estate and also the personal liability of the debtor for any
    nondischargeable debt.”) (emphasis added); 124 Cong. Rec. 32414
    (1978) (Statement of Rep. Edwards) (summing up the interplay
    between the automatic stay provision and § 505’s grant of
    jurisdiction stating that “[i]n essence, . . . the bankruptcy
    judge will have authority to determine which court will determine
    the merits of the tax claim both as to claims against the estate
    and claims against the debtor concerning his personal liability
    for nondischargeable taxes.”) (emphasis added).   This
    juxtaposition between the discussion of refunds and the remainder
    of § 505 again implies that these refund claims are claims
    benefitting the estate, not the debtor personally.   Furthermore,
    the legislators noted that the bankruptcy court can exercise
    jurisdiction over refund claims by the trustee only under
    “certain circumstances,” evincing congressional intent to limit
    the bankruptcy court’s jurisdiction over refund claims.   Thus,
    the legislative history shows that Congress granted the
    bankruptcy courts only a limited role in adjudicating refund
         In short, the plain language and the legislative history
    demonstrate that the bankruptcy court has jurisdiction only to
    hear refund claims that benefit the estate and the government’s
    immunity has not been abrogated for the purposes of this suit.
    That § 505 does not provide the bankruptcy court with
    jurisdiction cannot be overcome, as Luongo suggested at oral
    argument, by § 106’s abrogation of immunity for actions brought
    under §§ 522, 542, 543, or 362.     None of these sections concerns
    refunds.   Because § 505 is an abrogation of sovereign immunity
    specifically with respect to refunds, its grant of jurisdiction
    and the limitations on that jurisdiction control.     See In re
    Armstrong, 206 F.3d at 470 (“One basic principle of statutory
    construction is that where two statutes appear to conflict, the
    statute addressing the relevant matter in more specific terms
    governs.”).   Consequently, Luongo’s contention does not defeat
    the conclusion to which the plain language of § 505 and its
    legislative history lead.
         Finally, even if the majority’s view is correct and the
    bankruptcy court can exercise jurisdiction over Luongo’s refund
    claim, the bankruptcy court’s abstention is warranted.    The text
    of § 505(a)(2)(B) plainly focuses on the right of the estate to a
    refund claim.   Should the estate receive such a payment, it will
    benefit the creditors, making them the intended beneficiaries of
    § 505(a)(2)(B). While I agree with the majority that one of the
    broad purposes of the bankruptcy code is to provide debtors with
    a fresh start, I disagree that this broader purpose should trump
    § 505(a)(2)(B)’s more narrow purpose.   Accordingly, even if the
    bankruptcy court had jurisdiction, I would find that abstention
    was warranted.
         For the foregoing reasons, I would dismiss for lack of