"Property of the debtor" subject to the preferential transfer provision of 11 U.S.C.S. § 547(b) is best understood as that property that would have been part of the estate had it not been transferred before the commencement of bankruptcy proceedings.
A commercial airline was required to withhold or collect certain federal "trust-fund taxes": (1) income taxes withheld from employee wages, under 26 USCS 3402(a); (2) Federal Insurance Contributions Act (FICA) taxes collected from employee wages, under 26 USCS 3102(a); and (3) excise taxes collected from airline customers, under 26 USCS 4291. The amount of such taxes was held, under 26 USCS 7501, to be a special fund in trust for the United States. On July 19, 1984, the airline filed a federal bankruptcy petition, and, several months later, the United States Bankruptcy Court for the Eastern District of Pennsylvania appointed a trustee and converted the case to a liquidation under Chapter 7 of the Bankruptcy Code (11 USCS 701 et seq.). The trustee, seeking to exercise his power, under 11 USCS 547(b) (later amended), to "avoid" (that is, recover) certain preferential transfers of "property of the debtor," filed an adversary action against the Federal Government to recover the entire amount that the airline had paid the Internal Revenue Service (IRS) for trust-fund taxes during the 90 days before the bankruptcy filing.
The Bankruptcy Court (1) found for each party in part; (2) allowed the trustee to avoid most of the payments that the airline had made out of its general accounts; and (3) expressed the view that only where a tax trust fund is actually established by the debtor and the taxing authority is able to trace funds segregated by the debtor in a trust account established for the purpose of paying the taxes in question would such a fund not be property of the debtor's estate (83 BR 324). On appeal, the United States District Court affirmed. On appeal by the government, the United States Court of Appeals for the Third Circuit, reversing, expressed the view that (1) any prepetition payment of trust-fund taxes is a payment of funds that are not the debtor's property; and (2) such a payment is therefore not an avoidable preference (878 F2d 762).
Were debtor's payments of taxes to respondent, pursuant to 26 U.S.C.S. § 7501, made with funds that were debtor's property?
On certiorari, the United States Supreme Court affirmed. It was held that the airline's prepetition payments of the trust-fund taxes to the IRS from the airline's general accounts could not be avoided by the trustee, under 547(b), as preferential transfers, because the payments were not transfers of "property of the debtor" within the meaning of 547(b), but were instead transfers of property held in trust for the IRS, since (1) the airline created a trust within the meaning of 7501 at the moment the relevant payments--from customers to the airline for excise taxes and from the airline to its employees for FICA and income taxes--were made; and (2) the particular dollars that the airline paid to the IRS were "property of the debtor," where, pursuant to 547(b)'s legislative history, the airline's act of paying its trust-fund obligation was alone sufficient to establish the required nexus between the amount held in trust and the funds paid.