Begier v. Internal Revenue Service

American International Airways (AIA) was required to withhold taxes from employee wages and was to collect excise taxes from customers. AIA was obligated to turn over these taxes (collectively, trust-fund taxes) to the Internal Revenue Service (IRS) (defendant). Due to AIA’s delinquency in doing so, in February 1984, the IRS required AIA to establish a segregated account for trust-fund taxes. By June, AIA paid to the IRS $695,000 in trust-fund taxes from the segregated account and $946,434 in trust-fund taxes from its general funds. In July, AIA filed for Chapter 11 bankruptcy. In September, the bankruptcy court appointed Harry Begier, Jr. (the trustee) (plaintiff) as AIA’s trustee. Relying on Bankruptcy Code § 547(b), the trustee filed an adversary action against the IRS seeking the return of AIA’s trust-fund-tax payments. Per the trustee, such payments were avoidable preferences because they permitted the IRS to receive more than it otherwise would have received from AIA’s bankruptcy estate. The bankruptcy court ruled that the trustee was entitled to avoid most of AIA’s trust-fund payments from AIA’s general funds but that AIA’s payments from the segregated account were not avoidable because AIA held that money in trust for the IRS. The district court affirmed, but the court of appeals reversed, holding that none of AIA’s prebankruptcy trust-fund-tax payments were avoidable because they did not involve AIA’s property. The trustee appealed.