United States v. Energy Resources Co.

Under the Internal Revenue Code, employers must withhold employees’ personal income taxes and Social Security taxes from employees’ paychecks. These taxes are held in trust for the United States (the government) (creditor) by the employers and are known as “trust-fund” taxes. If an employer fails to pay trust-fund taxes, 26 U.S.C. § 6672 allows the government to collect an equivalent amount from the employer’s officers or employees who are responsible for collecting the tax. Newport Offshore, Ltd. (Newport) and Energy Resources Company (debtors) owed significant federal tax debts to the government. Newport and Energy Resources filed separate Chapter 11 petitions and proposed reorganization plans that provided for paying their tax debts over time, with payments allocated first to satisfy their trust-fund tax obligations. In Newport’s case, the bankruptcy court confirmed the proposed plan, but the district court reversed, and Newport appealed to the First Circuit. In Energy Resources’ case, the bankruptcy court confirmed the proposed plan, but the Internal Revenue Service (IRS) refused to apply Energy Resources’ payments to the trust-fund tax debt. The bankruptcy court ordered the IRS to apply the payments as required by the plan, and the district court affirmed. The government appealed to the First Circuit. The First Circuit consolidated the two matters, reversed the Newport decision, and affirmed the Energy Resources decision. The court recognized that the IRS considered tax payments made under a Chapter 11 reorganization plan to be involuntary, and thus that the payments fell outside the IRS’s typical practice of allowing taxpayers who voluntarily submit payments to the IRS to specify how those payments should be allocated. Nevertheless, the court concluded that bankruptcy courts had the authority to order the IRS to apply a Chapter 11 debtor’s payments to the debtor’s trust-fund tax liabilities if the court found that doing so was necessary to achieve a successful reorganization. Because the First Circuit’s decision conflicted with other circuits’ holdings, the United States Supreme Court granted certiorari.