According to a report by Accounting Today, in an 8-1 decision, the U.S. Supreme Court ruled that a bankruptcy trustee cannot recover funds fraudulently transferred from a failed business to the IRS to pay shareholders’ personal tax debts.

The case, United States v. Miller, centered on $145,000 diverted from a Utah company to the IRS in 2014—three years before the company filed for Chapter 7 bankruptcy in 2017.

The trustee attempted to reclaim the funds under Section 544(b) of the Bankruptcy Code, which allows trustees to void transfers that an unsecured creditor could challenge under applicable law. However, the government argued that sovereign immunity blocked such a claim because no creditor could sue the federal government under Utah law.

While lower courts sided with the trustee, the Supreme Court reversed those rulings, holding that the Bankruptcy Code’s waiver of sovereign immunity under Section 106(a) does not extend to the state laws underpinning Section 544(b) claims.

The decision significantly limits bankruptcy trustees’ ability to claw back funds from the IRS using state fraudulent transfer statues with longer lookback periods. 

Legal experts say this ruling effectively protects the government from liability for certain pre-bankruptcy transactions—even if the transfers were fraudulent—unless Congress amends the law.