## Facts

- Energy Resources Co., Inc. and Newport Offshore, Ltd. each filed for Chapter 11 reorganization and owed federal employment taxes.
- Employment taxes included “trust fund” amounts withheld from employees (held in trust for the United States) and other non-trust-fund tax liabilities.
- If trust fund taxes are not paid, the Government may seek payment from responsible corporate officers under 26 U.S.C. § 6672.
- Each debtor’s proposed plan provided that payments to the IRS would be applied first to trust fund tax liabilities, reducing potential § 6672 exposure for corporate officers.
- Bankruptcy courts confirmed plans that required or were construed to require the IRS to apply plan payments first to trust fund taxes.
- On appeal, district courts reached different results; the First Circuit consolidated the cases and held bankruptcy courts may order such allocation when necessary to achieve a successful reorganization.
- The Supreme Court granted review to resolve a circuit conflict over whether bankruptcy courts have authority to direct the IRS’s allocation of Chapter 11 plan tax payments.

## Issues

1. Whether a bankruptcy court, in confirming and enforcing a Chapter 11 plan, has authority to order the IRS to apply plan payments to trust fund tax liabilities when the court finds the designation necessary to the reorganization’s success.
2. Whether such an order impermissibly conflicts with the Internal Revenue Code’s collection scheme, including 26 U.S.C. § 6672 and the IRS’s allocation practices.

## Decision

- The Supreme Court affirmed the First Circuit.
- A bankruptcy court may order the IRS to treat payments under a Chapter 11 plan as payments on trust fund tax liabilities when the court determines the designation is necessary for the plan’s success.
- The authority rests on the Bankruptcy Code’s broad plan and implementation powers, including 11 U.S.C. §§ 1123(b)(5) and 105(a).
- The Court found no disqualifying conflict with § 6672 because the Government retains the ability to pursue responsible persons for any unpaid trust fund taxes if the plan fails or taxes remain unpaid.
- The IRS’s administrative distinction between “voluntary” and “involuntary” payments does not limit the bankruptcy court’s statutory authority.

## Legal Principles

- Under 11 U.S.C. § 1123(b)(5), a Chapter 11 plan may include any appropriate provision not inconsistent with the Bankruptcy Code.
- Under 11 U.S.C. § 105(a), bankruptcy courts may issue orders necessary or appropriate to carry out the Bankruptcy Code.
- A bankruptcy court may direct the IRS’s allocation of tax payments made under a confirmed Chapter 11 plan to trust fund liabilities if the court finds the allocation necessary to the success of the reorganization.
- Such allocation orders are permissible where they do not negate the Government’s tax-collection rights, including the ability to proceed under 26 U.S.C. § 6672 for any remaining trust fund deficiency.

## Conclusion

The Court held that bankruptcy courts may require the IRS to apply Chapter 11 plan payments first to trust fund tax liabilities when the court determines that doing so is necessary to make the reorganization succeed, and that this authority is consistent with the Bankruptcy Code and does not unlawfully impair the Government’s tax-collection remedies.


United States v. Energy Res. Co., 495 U.S. 545 (1990)