States Support Federal Government in IRS Tax Payment Case
A coalition of 22 states and the District of Columbia has aligned with the federal government in appealing to the U.S. Supreme Court to overturn a ruling that mandated the IRS return a tax payment. This arose when a bankruptcy trustee deemed the payment a fraudulent transfer under state law.
Background of the Case
The case involves All Resort Group, a bankrupt Utah company that paid $145,000 to the IRS to cover the personal tax debts of its shareholders. The company was insolvent at the time, leading the bankruptcy trustee, David Miller, to argue that the payment was fraudulent under Utah law.
Arguments Presented by the States
In their amici brief, the states argued that the Tenth Circuit incorrectly treated the federal government as an ordinary creditor. They emphasized that if this interpretation is upheld, states could be compelled to return tax payments collected years earlier, without knowledge of the taxpayer’s actions.
The Role of Bankruptcy Code Section 544(b)
The case questions whether U.S. Bankruptcy Code Section 544(b) allows a bankruptcy trustee to retroactively nullify tax payments made to the federal government under state fraudulent-transfer laws.
Legal Proceedings and Court Decisions
The Tenth Circuit supported the trustee’s claim, ruling that the federal government wasn’t immune from such actions. The federal government then petitioned the Supreme Court, highlighting that similar cases have caused significant debate among bankruptcy courts.
Implications for State Sovereign Immunity
The states argue that Section 544(b)(1) only empowers an actual creditor with a viable state law claim to seek recovery, meaning that sovereign immunity should bar Miller’s claim. The broad interpretation of Section 106(a) could challenge the limits of Congress’ power to abrogate state sovereign immunity under the Constitution.
States Involved in the Brief
The states supporting Oregon include Alabama, Arkansas, California, Colorado, Connecticut, Hawaii, Idaho, Illinois, Indiana, Maine, Massachusetts, Minnesota, New Jersey, New York, North Dakota, Ohio, Pennsylvania, Rhode Island, South Dakota, Tennessee, Virginia, Washington, and the District of Columbia.
Representation of the Parties
Oregon is represented by Attorney General Ellen F. Rosenblum, Solicitor General Benjamin Gutman, and Peenesh Shah. Miller is represented by Lisa Blatt of Williams & Connolly LLP, and the federal government by Solicitor General Elizabeth Prelogar and other attorneys from the U.S. Department of Justice.
Conclusion: The Case’s Importance in the U.S. Supreme Court
The case, U.S. v. Miller, holds significant implications for bankruptcy law and state sovereign immunity. The Supreme Court’s decision could set a crucial precedent for how tax payments made under fraudulent circumstances are handled in bankruptcy cases.
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