The Supreme Court recently ruled in the case of United States v. Miller that the Internal Revenue Service (IRS) has the right to retain certain tax payments made under fraudulent circumstances prior to a company’s bankruptcy filing. This ruling has significant implications for creditors and the application of the Bankruptcy Code.
The case involved a financially distressed business where shareholders redirected company funds to pay off personal tax obligations to the federal government. When the business filed for bankruptcy, its creditors challenged the appropriateness of using corporate resources for settling personal debts.
In delivering the opinion, Justice Ketanji Brown Jackson reasoned that the applicable state law—specifically, Utah’s fraudulent conveyance statute—did not allow creditors to recoup funds from the IRS. The reasoning was that the IRS enjoyed protection via sovereign immunity, making these pre-bankruptcy transfers non-voidable under Section 544 of the Bankruptcy Code.
Justice Jackson clarified that while Section 106 of the Bankruptcy Code waives sovereign immunity for numerous provisions, it does not alter substantively the requirements or liabilities against the government. Rather, it permits courts to hear claims made under Section 544 without imposing liability. Jackson’s interpretation underscores the legislative need for precision when drafting statutory waivers of sovereign immunity.
This decision reinforces a strict interpretation of statutory waivers, echoing the court’s historical tendency to read such waivers narrowly. The inference made through this ruling suggests that any substantial shift in liability concerning federal sovereign immunity would require clearer legislative action. The court hinted that Congress must refine its efforts if it aims to impose liabilities on the federal government in such contexts.
The wider implications of this decision stress the necessity for legislative clarity when intersecting bankruptcy proceedings with sovereign immunity factors. In doing so, the court has reiterated the criticality of textual precision within the law, as further discussed on SCOTUSblog.