Begier v. Internal Revenue Service
Headline: Employer payments of withheld income, FICA, and excise taxes are held in trust for the IRS and cannot be recovered by a bankruptcy trustee, blocking trustees from reclaiming recent tax payments from employers' general funds.
Holding:
- Prevents bankruptcy trustees from reclaiming employers' prebankruptcy trust-fund tax payments.
- Protects IRS priority over withheld and excise tax collections paid before filing.
- Affects trustees, unsecured creditors, and employers who collect taxes.
Summary
Background
American International Airways, a commercial airline, collected excise taxes from customers and withheld income and FICA taxes from employees. By early 1984 it fell behind on those trust-fund taxes. The IRS ordered AIA to use a separate bank account; AIA paid $695,000 from that account and $946,434 from its general funds. AIA filed Chapter 11 on July 19, 1984. A bankruptcy trustee later sued to recover the payments made to the IRS within the 90 days before the filing, arguing those payments were part of the debtor’s property and could be avoided as preferential payments.
Reasoning
The Court focused on 26 U.S.C. §7501, which says collected or withheld taxes are held in trust for the United States. The Justices concluded that collection and withholding occur when wages are paid or customers pay for services, so segregation was not required to create the trust. The Court examined bankruptcy law and legislative history and accepted the House Report’s guidance that a voluntary prebankruptcy payment of trust-fund taxes establishes the necessary connection between the statutory trust and the funds paid. Because the taxes were held in trust, the amounts paid did not count as the debtor’s property and therefore could not be avoided as preferences under the Bankruptcy Code.
Real world impact
This decision means that when employers voluntarily pay withheld or excise taxes before filing bankruptcy, those payments generally cannot be clawed back by the trustee. The ruling affects bankruptcy trustees, unsecured creditors, employers who collect or withhold taxes, and the IRS’s ability to protect tax collections. The holding rests on the Court’s interpretation of federal tax and bankruptcy statutes and the legislative history cited.
Dissents or concurrances
Justice Scalia concurred in the judgment but questioned the Court’s reliance on legislative history and discussed how the taxpayer’s act of designating funds (for example, by writing a check) can identify the trust “res,” agreeing the result follows under that view.
Opinions in this case:
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