United States v. Energy Resources Co.

Background

Several companies that filed for reorganization under Chapter 11 asked bankruptcy courts to direct the Internal Revenue Service (IRS) to apply payments to so-called trust fund taxes—amounts withheld from employees’ paychecks for income and Social Security taxes—before other tax debts. Two examples are Newport Offshore and Energy Resources, which had plans to pay federal tax debts over several years and asked the IRS to apply trust fund payments first. The IRS refused, lower courts split, and the First Circuit produced mixed results before the Supreme Court took the case because different appeals courts disagreed.

Reasoning

The main question was whether a bankruptcy court can order the IRS to treat a reorganizing company’s tax payments as trust fund payments when doing so is needed to make the reorganization work. The Court relied on the bankruptcy law’s broad power to approve plan terms and to issue orders necessary to carry out plans. The opinion rejected the Government’s argument that such orders clash with tax rules that allow the IRS to collect from responsible individuals. The Court said those collection rights remain available and the bankruptcy orders do not stop the IRS from pursuing responsible persons, so the bankruptcy courts did not exceed their authority.

Real world impact

The decision lets bankruptcy judges require that employee withholding taxes be paid first when that priority is essential to a Chapter 11 plan’s success. That will affect how companies draft plans and negotiate with the IRS during reorganizations. The ruling resolves a split among appeals courts and gives bankruptcy courts a clear tool to protect reorganization outcomes.

Dissents or concurrances

Justice Blackmun dissented, indicating the decision was not unanimous.