[Note: The Bankruptcy Reform Act of 1994 recodified as subsection 106(c), what previously was subsection 106(b). Thus, different references to this subsection may appear in cases depending upon when they were decided.]
The purpose of § 106(c) is to create a partial waiver of the sovereign immunity of a governmental unit -- a waiver limited to the amount of the governmental unit's claim which is triggered only when the governmental unit files a claim. It does not permit an affirmative recovery against the government. See FmHA v. Ketelsen, 104 B.R. 242, 253 (D.S.D. 1988), aff'd, 880 F.2d 990 (8th Cir. 1989); Wallach v. N.Y. Dep't of Taxation & Fin. (In re Bison Heating & Equip., Inc.), 177 B.R. 785 (Bankr. W.D.N.Y. 1995) (New York state agencies subject to trustee's offset of a claim against one agency against a debt to another agency); In re Braniff Airways, 42 B.R. 443, 450 (Bankr. N.D. Tex. 1984); W. Va. Dep't of Fin. & Admin. v. Hassett (In re O.P.M. Leasing Servs.), 21 B.R. 993 (Bankr. S.D.N.Y. 1982); H. Rep. No. 95-595, 95th Cong., 1st Sess. 317 (1977); S. Rep. No. 95-989, 95th Cong., 2d Sess. 29-30 (1978), reprinted at 1978 U.S.C.C.A.N. 5787, 5815-16; cf. In re Mehrhoff, 88 B.R. 922, 924-25 (Bankr. S.D. Iowa 1988) (in dicta, court suggests that filing of a claim by one Federal agency would not permit under § 106(b) offsetting of claims by another Federal agency), rev'd, United States v. Mehrhoff, No. 88-1488-A (S.D. Iowa Mar. 21, 1989) (Note: this view is contrary to government's position on right of offset. See Cherry Cotton Mills v. United States, 327 U.S. 536 (1946); SBA v. Rinehart, 88 B.R. 1014 (D.S.D. 1988), aff'd in part, rev'd in part, 887 F.2d 165 (8th Cir. 1989)).
Section 106(c) only provides a waiver of sovereign immunity; it does not affect other requirements for setoff such as mutuality. In re Braniff Airways, 42 B.R. 443, 450 (Bankr. N.D. Tex. 1984).
Courts have allowed actual damages, punitive damages and attorney fees under § 362(h) to be recovered as an offset under § 106(b) [now 106(c)] against IRS claim for back taxes. United States v. McPeck, 910 F.2d 509 (8th Cir. 1990) (DOJ does not consider decision as precedent for § 106 to impose liability upon U.S. where such liability -- e.g., for punitive damages -- does not exist outside of bankruptcy. Issue was not raised.); see also Rhodes v. IRS (In re Rhodes), 155 B.R. 491 (W.D. Ark. 1993) (stay violation damages, including "stress and anxiety," offset against tax claim).