Begier v. Internal Revenue Service

RESPONDENT: Internal Revenue Service
LOCATION: Cumberland County Central Booking

DOCKET NO.: 89-393
DECIDED BY: Rehnquist Court (1988-1990)
LOWER COURT: United States Court of Appeals for the Third Circuit

CITATION: 496 US 53 (1990)
ARGUED: Mar 27, 1990
DECIDED: Jun 04, 1990

Brian J. Martin - on behalf of the Respondent
Paul J. Winterhalter - on behalf of the Petitioner

Facts of the case


Media for Begier v. Internal Revenue Service

Audio Transcription for Oral Argument - March 27, 1990 in Begier v. Internal Revenue Service

William H. Rehnquist:

We'll hear argument now on No. 89-393, Harry P. Begier v. Internal Revenue Service.

Mr. Winterhalter.

Paul J. Winterhalter:

Thank you, Your Honor.

Mr. Chief Justice, and may it please the Court:

Good afternoon.

The third case before the Court today involves whether a debtor's pre-bankruptcy payment alone from its general operating account for trust fund tax obligations excludes that property from a bankruptcy estate subject to avoidance as preferential transfers under Section 547.

For the reasons which I shall present to this Court, I would respectfully present that such transfers are, in fact, avoidable.

The Petitioner in this case is the court-appointed Chapter 11 bankruptcy trustee in the matter of American International Airways.

The debtor was a commercial airline carrier that provided scheduled passenger and air cargo service throughout the eastern and central United States.

As a carrier, the debtor had many employees and was required to pay wages to those employees and was further required to withhold taxes from those employees' wages, was required to withhold individual income taxes, the employer's... the employee's share of Federal Insurance Corporation taxes, and was further required to retain certain excise taxes which it collected from the passengers' tickets.

By the first quarter of 1984, the debtor had become... had experienced financial difficulties in the payments of its... of its debt... of its debts.

Similar to many companies in this type of situation, the debtor failed to file and pay its tax returns on a timely basis.

The debtor funded only net payroll.

The IRS imposed extraordinary remedies for the enforcement of the collect... for the enforcement of these taxes.

It issued a notice changing the debtor's tax filing requirements from a quarterly basis to a monthly basis.

It also required the debtor to make deposits into a certain designated depository.

The debtor followed these guidelines and on April 30th transferred two checks to the government, one out of the specially designated account and the second check in the amount of $734,797 from the debtor's general operating account.

The debtor and the IRS agreed to specific application of these funds.

Two further payments were made out of the general operating account just prior to the bankruptcy.

One for $200,000, which was applied to 941 withholding taxes and the second in the amount of $11,636 which was applied to Federal unemployment taxes and also to Form 11 taxes for the year 1982.

William H. Rehnquist:

All the payments you've described, Mr. Winterhalter, were within the preferential period?

Paul J. Winterhalter:

That is correct, Your Honor.

The debtor's financial difficulties continued, whereby on July 19th, 1984, the debtor filed its petition under Chapter 11.

Problems persisted and a trustee was appointed two months later.

During the administration of the bankruptcy proceeding, the trustee instituted this instant action, seeking to avoid the three transfers made out of the debtor's general operating account.

Following a trial, the bankruptcy court ruled that the trustee was entitled to avoid $700,410.

The District Court affirmed.

On subsequent appeal to the Third Circuit, the United States Court of Appeals for the Third Circuit reversed the bankruptcy court and district court findings.

The Third Circuit, relying principally on the dissenting opinion of the D.C. Circuit in Drabkin v. The District of Columbia, found the ability of the debtor to make the pre-petition payment of withholding taxes regardless of the source of those funds impressed those funds with trust characteristics, removing the property from the debtor's estate.

William H. Rehnquist:

What particular funds was the court of appeals talking about?