Begier v. Internal Revenue Service

• Decision Date: 04 June 1990
• Docket Number: No. 89-393,89-393
• Parties: Harry P. BEGIER, Jr., etc., Petitioner v. INTERNAL REVENUE SERVICE
• Court: U.S. Supreme Court

496 U.S. 53

110 S.Ct. 2258

110 L.Ed.2d 46

Harry P. BEGIER, Jr., etc., Petitioner

v INTERNAL REVENUE SERVICE.

No. 89-393.

Argued March 27, 1990.

Decided June 4, 1990.

Syllabus

The Internal Revenue Code directs "every person receiving any payment for facilities or services" subject to excise taxes to "collect the amount of the tax from the person making such payment." 26 U.S.C. § 4291. It also requires an employer to "collect" Federal Insurance Contributions Act (FICA) taxes from its employees "by deducting the amount of the tax from the wages as and when paid," § 3102(a) (emphasis added), and to "deduct and withhold upon such wages [the employee's federal income tax]," § 3402(a)(1) (emphasis added). The amount of taxes "collected or withheld" is "held to be in a special fund in trust for the United States." § 7501. Thus, these taxes are often called "trust-fund taxes." After American International Airlines, Inc. (AIA), fell behind in its trust-fund tax payments, the Internal Revenue Service (IRS), pursuant to § 7512, ordered it to deposit all future taxes collected into a separate bank account. AIA established the account, but did not deposit funds sufficient to cover the entire amount of its obligations. Nonetheless, it remained current on the obligations, paying part of them from the separate bank account and part from its general operating funds. In a subsequent liquidation proceeding under the Bankruptcy Code, petitioner Begier was appointed AIA's trustee. Seeking to exercise his power under § 547(b) of the Bankruptcy Code—which permits a trustee to avoid certain preferential payments made before the debtor files for bankruptcy—Begier filed an adversary action against the Government to recover the entire amount that AIA had paid the IRS for trust-fund taxes during the 90 days before the bankruptcy filing. The Bankruptcy Court refused to permit Begier to recover any of the money AIA had paid out of the separate account on the ground that AIA had held that money in trust for the IRS. However, it allowed him to avoid most of the payments made out of AIA's general accounts, holding that such funds were property of the debtor. The District Court affirmed, but the Court of Appeals reversed, holding that any prepetition payment of trust-fund taxes is a payment of funds that are not the debtor's property, and that such a payment is therefore not an avoidable preference.

Held: AIA's trust-fund tax payments from its general accounts were transfers of property held in trust and therefore cannot be avoided as preferences. Pp. 58-67.

(a) Equality of distribution among creditors is a central policy of the Bankruptcy Code that is furthered by § 547(b) to the extent that it permits a trustee to avoid prepetition preferential transfers of "property of the debtor." Although not defined by the Code, "property of the debtor" is best understood to mean property that would have been part of the estate had it not been transferred. Its meaning is coextensive with its postpetition analog "property of the estate," which includes all of the debtor's legal or equitable interests in property as of the commencement of the case. § 541(a)(1). Since a debtor does not own an equitable interest in property he holds in trust for another, that interest is not "property of the estate" and, likewise, not "property of the debtor." Pp. 58-59.

(b) AIA created a trust within the meaning of 26 U.S.C. § 7501 at the moment the money was withheld or collected. The statutory trust extends to the amount of tax "collected or withheld," and the language of §§ 4291, 3102(a), and 3402(a)(1) makes clear that the acts of collecting and withholding occur at the time of payment—the recipient's payment for the service in the case of excise taxes and the employer's payment of wages in the case of FICA and income taxes. The fact that AIA neither put the taxes in a segregated fund nor paid them to the IRS does not somehow mean that AIA never collected or withheld them in the first place. Mandating segregation as a prerequisite to the creation of a trust under § 7501 would make § 7512's requirement that funds may be segregated in special and limited circumstances superfluous and would mean that an employer could avoid the creation of a trust simply by refusing to segregate. Pp. 60-62.

(c) The funds transferred from AIA's general accounts were trust assets. Neither § 7501 nor common-law rules for tracing trust res offer guidance on how to determine whether the assets were trust property. And the strict rule of United States v. Randall, 401 U.S. 513, 91 S.Ct. 991, 28 L.Ed.2d 273—which prohibited the IRS from recovering withheld taxes ahead of the bankruptcy proceeding's administrative expenses—did not survive the 1978 restructuring of the Bankruptcy Code. The 1978 Code's legislative history shows that Congress intended that the courts permit the use of "reasonable assumptions" under which the IRS could demonstrate that amounts of withheld taxes were still in the debtor's possession at the time the petition was filed. Thus, Congress expected that the IRS would have to show some connection between the trust and the assets sought to be applied to a debtor's trust-fund obligations. While the Bankruptcy Code does not demonstrate how extensive this nexus must be, the legislative history identifies one reasonable assumption: that any voluntary prepetition payment of trust-fund taxes out of the debtor's assets is not a transfer of the debtor's property. Other rules might be reasonable, but the only evidence presented suggests that Congress preferred this one. Pp. 62-67.

878 F.2d 762 (CA3 1989), affirmed.

MARSHALL, J., delivered the opinion of the Court, in which REHNQUIST, C.J., and BRENNAN, WHITE, BLACKMUN, STEVENS, O'CONNOR, and KENNEDY, JJ., joined. SCALIA, J., filed an opinion concurring in the judgment, post, p. 67.

Paul J. Winterhalter for petitioner.

Brian J. Martin for respondent.

Justice MARSHALL delivered the opinion of the Court.

This case presents the question whether a trustee in bankruptcy may "avoid" (i.e., recover) from the Internal Revenue Service (IRS) payments of certain withholding and excise taxes that the debtor made before it filed for bankruptcy. We hold that the funds paid here were not the property of the debtor prior to payment; instead, they were held in trust by the debtor for the IRS. We accordingly conclude that the trustee may not recover the funds.

I

American International Airways, Inc. (AIA), was a commercial airline. As an employer, AIA was required to withhold federal income taxes and to collect Federal Insurance Contributions Act (FICA) taxes from its employees' wages. 26 U.S.C. § 3402(a) (income taxes); § 3102(a) (FICA taxes). As an airline, it was required to collect excise taxes from its customers for payment to the IRS. § 4291. Because the amount of these taxes is "held to be a special fund in trust for the United States," § 7501, they are often called "trust-fund taxes." See, e.g., Slodov v. United States, 436 U.S. 238, 241, 98 S.Ct. 1778, 1782, 56 L.Ed.2d 251 (1978). By early 1984, AIA had fallen behind in its payments of its trust-fund taxes to the Government. In February of that year, the IRS ordered AIA to deposit all trust-fund taxes it collected thereafter into a separate bank account. AIA established the account, but did not deposit funds sufficient to cover the entire amount of its trust-fund tax obligations. It nonetheless remained current on these obligations through June 1984, paying the IRS $695,000 from the separate bank account and $946,434 from its general operating funds. AIA and the IRS agreed that all of these payments would be allocated to specific trust-fund tax obligations.

On July 19, 1984, AIA petitioned for relief from its creditors under Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 1101 et seq. (1982 ed.). AIA unsuccessfully operated as a debtor in possession for three months. Accordingly, on September 19, the Bankruptcy Court appointed petitioner Harry P. Begier, Jr., trustee, and a plan of liquidation in Chapter 11 was confirmed. Among the powers of a trustee is the power under § 547(b) ¹ to avoid certain payments made by the debtor that would "enabl[e] a creditor to receive payment of a greater percentage of his claim against the debtor than he would have received if the transfer had not been made and he had participated in the distribution of the assets of the bankrupt estate." H.R.Rep. No. 95-595, p. 177 (1977), U.S.Code Cong. & Admin. News 1978, pp. 5787, 6138. Seeking to exercise his avoidance power, Begier filed an adversary action against the Government to recover the entire amount that AIA had paid the IRS for trust-fund taxes during the 90 days before the bankruptcy filing.

The Bankruptcy Court found for the Government in part and for the trustee in part. In re American International Airways, Inc., 83 B.R. 324 (ED Pa.1988). It refused to permit the trustee to recover any of the money AIA had paid out of the separate account on the theory that AIA had held that money in trust for the IRS. Id., at 327. It allowed the trustee to avoid most of the payments that AIA had made out of its general accounts, however, holding that "only where a tax trust fund is actually established by the debtor and the taxing authority is able to trace funds segregated by the debtor in a trust account established for the purpose of paying the taxes in question would we conclude that such funds are not property of the debtor's estate." Id., at 329. The District Court affirmed. App. to Pet. for Cert. A-22-A-26. On appeal by the Government, the Third Circuit reversed, holding that any prepetition payment of trust-fund taxes is a payment of funds that are not the debtor's property and that such a payment is therefore not an avoidable preference. 878 F.2d 762 (1989).² We granted certiorari, 493 U.S. 1017, 110 S.Ct. 714, 107 L.Ed.2d 734 (1990), and we now affirm.

II

A.

Equality of distribution among...