The United States Supreme Court’s decision to hear arguments in United States v. Miller pits the Internal Revenue Service's (IRS) sovereign immunity against the authority of a bankruptcy trustee. The government may find it’s facing an uphill battle.

The government wants the justices to reverse two lower-court rulings allowing a Chapter 7 liquidating trustee to recover a $145,000 payment made 10 years ago to the IRS. The trustee, representing a Utah transportation firm in bankruptcy, brought a fraudulent transfer action to void the 2014 payment that was made to cover the personal tax debts of two company officers.

Miller asks whether a trustee may claw back a debtor’s federal tax payment under Section 544(b) of the Bankruptcy Code when no actual creditor could have obtained relief under a state law governing fraudulent transfers. Section 544(b) permits trustees to avoid a fraudulent transfer if it would be invalid “under applicable law” outside bankruptcy by one of the debtor’s actual creditors.

Section 544 won’t be the only part of the Bankruptcy Code considered in Miller. The Supreme Court will address Section 106(a) again, which says “sovereign immunity is abrogated as to a governmental unit to the extent set forth” in several sections of the code, including Section 544.

Just last year, the high court held in Lac du Flambeau Band of Lake Superior Chippewa Indians v. Coughlin that Section 106(a) waives sovereign immunity as to Native American tribes. The court based its holding on principles of strict statutory construction as well as underlying policy concerns that undergird the Bankruptcy Code.

Each of these could present significant hurdles for the government in Miller.

Full Bloomberg Tax article discussing these issues can be found here.