4.2.a Setoff Of Refund Is No Longer Prohibited By The Automatic Stay

• Jurisdiction: United States

a. In general

The filing of the bankruptcy petition, whether in Chapter 7, 11 or 13, results in an immediate automatic stay that enjoins virtually all tax collection efforts against property of the estate.²⁴¹

The automatic stay prohibits the IRS from attempting to collect for prepetition tax liability "to recover a claim against the debtor that arose before the commencement of the case under this title." 11 U.S.C. § 362(a)(1). However, what is, and is not, a pre versus a postpetition tax claim is not always clear. See discussion at ¶ 3.11(c)(2) Straddling tax claims.

Bankruptcy code section 362 provides, in pertinent part, that the filing of the petition operates as a "stay applicable, to all entities, of ...." The phrase all entities includes governmental units, including taxing entities. 11 U.S.C. §101(14). In re Parr Meadows Racing Ass'n, Inc., 880 F.2d 1540 (2nd Cir. 1989).

The IRS acknowledges the effect of the automatic stay. The filing of a bankruptcy petition acts as an...