Supreme Court Case Pits Bankruptcy Trustee Power Against IRS

The US Supreme Court’s decision to hear a bankruptcy case involving the IRS opens the door for bankruptcy trustees to claw back more potentially fraudulent payments made to government entities.

The dispute sets up a showdown between bankruptcy law and state law. A ruling in favor of trustees would likely result in additional money available to pay back junior, nongovernment creditors—a group that typically sees little recovery on the debts they’re owed in a bankruptcy.

Trustees are often appointed in bankruptcies to undo fraudulent pre-bankruptcy payments—with approval from a bankruptcy judge—and use that money to pay back junior creditors.

“When ...