IRS Supreme Court Win in Bankruptcy Suit Opens Door to Misconduct

The US Supreme Court’s decision in United States v. Miller narrows bankruptcy trustees’ powers to claw back certain pre-bankruptcy transfers. While the court emphasized the limited nature of its holding, the implications for policing insider abuse and protecting creditors could grow over time.

The 8-1 ruling, a resounding victory for the IRS, limits a crucial tool that trustees use to recover estate assets and could open the door to strategic insider behavior designed to shield assets from creditors. It reflects a broader trend toward narrower readings of the Bankruptcy Code and trustee powers.

In Miller, the court held that trustees can’t use state fraudulent transfer laws via Bankruptcy Code Section 544(b) to recover payments made to the IRS if no individual creditor could have brought the same claim outside bankruptcy. Sovereign immunity, the court concluded, bars such actions—even if the transfer would otherwise be voidable under state law.

The case involved a trustee’s attempt to recover about $145,000 that a company paid to the IRS for its directors’ personal tax liabilities. The transfer occurred three years before the bankruptcy—outside the Bankruptcy Code’s two-year lookback period in Section 548 but within the four-year window under Utah’s fraudulent transfer law.

The IRS didn’t dispute that the transfer was fraudulent. It argued only that sovereign immunity shielded it from liability—and the court agreed.

Justice Ketanji Brown Jackson, writing for the majority, explained that the sovereign immunity waiver in Section 106(a) doesn’t override Section 544(b)’s requirement that an actual creditor must have a valid claim outside bankruptcy. Because sovereign immunity would have barred the creditor’s claim, the trustee’s claim fails, too.

The decision matters because it removes a longer lookback option trustees often rely on to recover estate assets. This shift raises broader questions about fairness and whether certain creditors—namely, the government—are being allowed to play by a different set of rules.

If a payment to a government entity occurred more than two years before the bankruptcy, it may now be off-limits—even if clearly improper under state law. That means lower recoveries for unsecured creditors and tighter timelines for trustee action.

The decision also opens the door to strategic abuse. Insiders in financial distress might use company funds to pay personal tax debts, knowing the IRS is more protected than other creditors. The Supreme Court’s ruling creates a kind of “safe harbor” for certain transfers when the recipient is the government.

The ruling has practical implications across the bankruptcy landscape. Trustees should move quickly to identify and challenge transfers to government entities within the two-year window. Beyond that period, recovery options are now constrained.

Tax professionals should watch for businesses using company funds to pay insiders’ personal tax obligations. Even if these are harder to unwind, they may still raise fiduciary and ethical red flags.

In a similar way, corporate boards and counsel may rethink how they prioritize payments. Transfers to the IRS and other agencies may now enjoy more protection in bankruptcy.

Finally, creditors must act fast if they suspect funds are being diverted to satisfy insider debts. Once outside Section 548’s reach, those payments may be effectively untouchable.

In his dissent, Justice Neil Gorsuch warned that the majority’s approach could undermine the trustee’s role as fiduciary for all creditors. He argued that Congress had already waived sovereign immunity in bankruptcy and that the trustee’s action was squarely within that waiver.

No matter whether courts apply Miller narrowly in future cases, tax and bankruptcy professionals should prepare now. Trustees must act faster. Creditors must be more vigilant. And insiders should know that scrutiny hasn’t disappeared—it’s just moved to a shorter timeline.

The case is United States v. Miller, U.S., No. 23-824, 3/26/25.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Diane Lourdes Dick is a professor at the University of Iowa College of Law. Her research focuses on business bankruptcy, tax, and restructuring practices.

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