United States v. Miller: Supreme Court Shields IRS from Trustee Clawbacks
In corporate bankruptcies, trustees are empowered to "claw back" payments made by a debtor before filing — especially those deemed preferential or fraudulent. Under Section 544(b) of the Bankruptcy Code, a trustee can step into the shoes of a creditor and use state law to recover transfers that fall outside the federal two-year lookback period, if a creditor under applicable state law could do so.
Case: United States v. Miller
Decided: March 26, 2025 (U.S. Supreme Court)
Key Issue: Whether bankruptcy trustees can use state law to recover federal tax payments made more than two years before the bankruptcy filing
Background
In corporate bankruptcies, trustees are empowered to "claw back" payments made by a debtor before filing — especially those deemed preferential or fraudulent. Under Section 544(b) of the Bankruptcy Code, a trustee can step into the shoes of a creditor and use state law to recover transfers that fall outside the federal two-year lookback period, if a creditor under applicable state law could do so.
In bankruptcy, a trustee can try to get the money back that the company paid out before it went bankrupt — especially if it was unfair to other creditors. Normally, they can only go back two years under federal law; however, after the Miller case, the Supreme Court said trustees couldn’t use this rule to go after payments made to the federal government, like the IRS, because the government is protected by something called sovereign immunity.
In United States v. Miller, a bankruptcy trustee attempted to use this provision to reclaim tax payments made to the IRS more than two years before the bankruptcy — citing a longer statute of limitations under state fraudulent transfer law.
The IRS objected, arguing that the United States government is immune from lawsuits unless it has clearly waived that immunity, and that Section 544(b) does not amount to such a waiver.
Supreme Court Decision
In an 8–1 decision, the Supreme Court sided with the government.
Writing for the majority, the Court held that:
Section 544(b) does not waive the federal government's sovereign immunity for recovery actions based on state fraudulent transfer law.
Trustees cannot rely on state law with longer statutes of limitation to claw back tax payments to the IRS.
The Court emphasized that waivers of sovereign immunity must be explicit, and no such clear waiver exists under the Bankruptcy Code for this kind of action.
The Court is saying that you can’t sue the U.S. government or try to take its money unless the law clearly says you can. This rule is called sovereign immunity, and it protects the government from lawsuits unless it explicitly gives permission.
Legal and Practical Implications
1. Limits on Trustee Powers
Bankruptcy trustees can no longer use state law “workarounds” to target older tax payments made to the federal government. Their recovery window is effectively limited to the two-year federal statute.
2. IRS and Federal Agencies Gain Protection
The ruling strengthens the IRS’s position in bankruptcy proceedings, shielding long-settled payments from clawback claims. It may also apply to other federal agencies, not just the IRS. Trustees can't go after older tax payments made to the IRS using state laws with longer time windows.
3. Impact on Estate Recoveries
In large or complex bankruptcies, this could reduce the pool of recoverable funds available for creditors — particularly in cases where large tax payments were made well before bankruptcy. Creditors might recover less money in some cases, because big payments to the IRS may be off-limits.
Key Figures
2 years – Maximum lookback period to recover IRS payments under this ruling
8–1 – Supreme Court vote in favor of the IRS
Section 544(b) – Bankruptcy Code provision at the heart of the dispute
Sovereign Immunity – Legal doctrine reaffirmed by the Court to protect federal interests
Strategic Insight from White Knight Restructuring
This decision is a wake-up call for trustees and creditors who rely on aggressive recovery strategies to increase estate value. It underscores the need for early diligence on tax payments and a refined understanding of the limits of trustee powers under both federal and state law.
White Knight helps:
Audit historical payments to assess real recovery potential
Strategize around clawback limitations for both public and private creditors
Mitigate tax exposure in distressed M&A and pre-bankruptcy planning
In a Post-Miller World: Trustees Must Tighten the Net
The Miller decision closes a door long considered ajar. Trustees can no longer stretch timelines using state law to pull in older IRS payments. For federal agencies, it’s a powerful affirmation of sovereign immunity. For everyone else, it's a reminder: in bankruptcy, timing is everything.
