## Facts

- American International Airlines, Inc. (AIA) was required to collect or withhold certain federal taxes (employee income taxes, FICA, and certain excise taxes).
- Under 26 U.S.C. § 7501, amounts “collected or withheld” are deemed held “in trust for the United States.”
- AIA became delinquent on these trust-fund tax obligations.
- The IRS directed AIA under 26 U.S.C. § 7512 to deposit future trust-fund taxes into a separate bank account.
- AIA opened a separate account but did not deposit enough to cover all trust-fund tax obligations; it paid some taxes from the separate account and some from general operating accounts.
- Within 90 days before AIA filed for bankruptcy, AIA made payments to the IRS for trust-fund taxes.
- After bankruptcy, the trustee sued under 11 U.S.C. § 547(b) to avoid the prepetition IRS payments as preferential transfers of “an interest of the debtor in property.”
- The bankruptcy court treated segregated-account payments as trust property (not avoidable) but allowed avoidance of most general-account payments; the district court affirmed.
- The Third Circuit reversed, concluding that prepetition payments of trust-fund taxes are not transfers of the debtor’s property; the Supreme Court affirmed.

## Issues

1. Whether a debtor’s prepetition payments to the IRS for trust-fund taxes, including payments from general operating accounts, are transfers of “property of the debtor” avoidable as preferences under 11 U.S.C. § 547(b).
2. Whether § 7501 requires physical segregation of withheld/collected taxes to treat payments as transfers of trust property rather than estate property.

## Decision

- The Supreme Court affirmed the judgment for the IRS.
- “Property of the debtor” in § 547(b) means property that would have been part of the bankruptcy estate if it had not been transferred prepetition.
- Section 7501 creates a statutory trust in the amount of trust-fund taxes at the time the taxes are collected or withheld, not only when funds are segregated.
- Payments of trust-fund taxes to the IRS, including payments drawn from general accounts, are treated as transfers of § 7501 trust property rather than property of the debtor.
- Because the payments were not transfers of the debtor’s property, they could not be avoided as preferences.

## Legal Principles

- For preference avoidance under 11 U.S.C. § 547(b), “property of the debtor” refers to property that would otherwise have entered the bankruptcy estate.
- Amounts collected or withheld for specified federal taxes are held in trust for the United States under 26 U.S.C. § 7501.
- Physical segregation is not a prerequisite to the existence of the § 7501 trust; the trust attaches to an abstract amount upon collection/withholding.
- Courts may use “reasonable assumptions” to identify and trace trust-fund tax payments, rather than requiring strict dollar-for-dollar tracing through commingled accounts.
- Transfers of trust property are not avoidable preferences because trust property does not belong beneficially to the debtor and is not available for distribution to general creditors.

## Conclusion

Prepetition payments of trust-fund taxes to the IRS are not preferential transfers under § 547(b) because § 7501 impresses collected/withheld taxes with a statutory trust upon collection, and segregation is not required to treat such payments as transfers of non-estate property.


Begier v. Internal Revenue Serv., 496 U.S. 53 (1990)