Picture a Fontana trucking company three months into Chapter 7. A letter from the trustee’s lawyer lists two April 2023 company wires, to the IRS and the Franchise Tax Board, that paid the owner’s personal taxes. It wants the money back.
Until March 2025, a California trustee could also have sued the IRS for the federal share. United States v. Miller ended that. It did nothing for the owner.
What did the Supreme Court decide in United States v. Miller?
In Miller, 604 U.S. 518 (2025), decided March 26, 2025, an 8-1 Court (Justice Jackson writing, Justice Gorsuch dissenting) held that the waiver of sovereign immunity in 11 U.S.C. § 106(a) “applies only to the §544(b) claim itself,” not to the state-law claim nested inside it. Section 106(a) is jurisdictional. It does not change what section 544(b)(1) requires: a transfer “voidable under applicable law by a creditor holding an unsecured claim.” No creditor of the Utah debtor, which paid about $145,000 of two shareholders’ taxes, could have sued the IRS on a Utah-law claim outside bankruptcy, so neither could the trustee.
That ended the rule California courts had followed since In re DBSI, Inc., 869 F.3d 1004 (9th Cir. 2017), which let a trustee recover about $13.4 million of shareholder taxes from the IRS. The Seventh Circuit had sided with the government in In re Equipment Acquisition Resources, Inc., 742 F.3d 743 (7th Cir. 2014).
The Court declined to decide the trustee’s fallback argument, that a creditor could have voided the payments by suing the shareholders, and the Tenth Circuit remanded on May 1, 2025. As of October 2026, I have found no published ruling on that theory.
How far back can a California bankruptcy trustee reach?
Under 11 U.S.C. § 548(a)(1), the trustee can undo transfers made “on or within 2 years before the date of the filing of the petition,” either with actual intent to hinder, delay or defraud, or for “less than a reasonably equivalent value” while insolvent or thinly capitalized. Section 548 borrows no state law, so Miller leaves it alone.
For older transfers the trustee uses section 544(b) and California’s Uniform Voidable Transactions Act: Cal. Civ. Code § 3439.04 for actual intent (a transfer “to an insider” heads its badges of fraud), and section 3439.05 for a transfer without reasonably equivalent value by an insolvent debtor, with section 3439.02 presuming insolvency when debts generally go unpaid as they come due. Remedies are in section 3439.07. Under section 3439.09, constructive fraud claims run four years, actual intent four years or one year after discovery, and nothing survives seven. Section 546(a) generally gives the trustee two years after the order for relief to sue; section 551 preserves what is avoided for the estate.
Can the trustee sue the owner whose personal taxes the company paid?
Yes. Collection runs through 11 U.S.C. § 550(a)(1), which reaches “the initial transferee of such transfer or the entity for whose benefit such transfer was made.” The owner whose tax bill was paid is that entity.
Under the Ninth Circuit’s dominion test, a transferee needs “dominion over the money or other asset, the right to put the money to one’s own purposes” (In re Bullion Reserve of North America, 922 F.2d 544 (9th Cir. 1991)), and In re Incomnet, Inc., 463 F.3d 1064 (9th Cir. 2006), noted that agencies including the IRS have been held initial transferees. A wire straight to the IRS or FTB makes the agency the initial transferee and the owner the beneficiary; money routed through the owner’s own account makes him the initial transferee. Either way he is in the first tier, and section 550(b)’s good-faith protection covers only later transferees.
California law supplies the actual creditor Miller demands. Civ. Code § 3439.08(b)(1) allows a judgment against “the first transferee of the asset or the person for whose benefit the transfer was made,” and no immunity protects the owner. The trustee usually pleads constructive fraud: the company was insolvent, and paying the owner’s personal tax gave it nothing, because value under section 3439.03 means property or satisfying the debtor’s own debt.
Did a Chapter 7 trustee’s demand letter just arrive about taxes your company paid for you? Those letters often set a response date only weeks out, and California’s four-year window reaches 2023 payments in a 2026 case.
What defenses does a California owner have to a tax payment clawback?
Solvency is the best one: the trustee must prove insolvency, though a company behind on its bills faces the section 3439.02 presumption.
Calling the payment an authorized tax distribution usually backfires. A distribution is paid on the owner’s equity, so the company gets nothing for it. Corp. Code § 17704.05(a) also bars an LLC distribution that leaves the company unable to pay debts as they come due or with liabilities above assets, and section 17704.06 makes a consenting member, or one who knowingly received it, personally liable to the LLC for four years.
Two defenses need paper. Repaying a documented loan from the owner satisfies the company’s own debt, which is value, and the insider preference window in section 547(b)(4)(B) is one year. Reasonable pay for work is value too, if payroll records and a W-2 from that year back it up. Section 3439.08(a)’s good-faith defense covers only actual-intent claims, and only for reasonably equivalent value.
Does Miller also protect the Franchise Tax Board, CDTFA and EDD?
This is unsettled; I found no post-Miller decision involving a state tax agency. Within section 548’s two years, the better answer is that the agency can be sued. Central Virginia Community College v. Katz, 546 U.S. 356 (2006), held that the states “agreed in the plan of the Convention not to assert any sovereign immunity defense they might have had” in bankruptcy, so a 2025 payment to the FTB is recoverable in a 2026 case.
Past two years, the agency reading follows Miller’s method. Section 544(b) asks what a creditor could have done outside bankruptcy, where Katz does not apply. That creditor would face claim presentation under Gov. Code §§ 905.2 and 945.4, the bar on “legal or equitable process” against tax collection in Rev. & Tax. Code § 19381, and a refund suit that belongs to “any taxpayer” under section 19382. Miller’s examples of consenting states (Illinois, New York, Ohio) did not include California, which joined the 23-state brief backing the United States.
The trustee reading answers that Miller construed a federal waiver, while the states surrendered bankruptcy immunity at the founding. And Gov. Code § 945 says “A public entity may sue and be sued,” so a creditor who presented a claim could have sued.
My view, and it is only that: a Central District bankruptcy judge is more likely to protect the FTB under section 544(b), because I found no California consent to UVTA suits over tax paid on someone else’s account. CDTFA and EDD disputes are rarer, since a company’s sales and payroll taxes are usually its own debts.
How would this play out for a Fontana trucking LLC?
An illustrative case: a single-member Fontana trucking LLC, behind on fuel and repair vendors, wires $85,000 to the IRS and $22,000 to the FTB in April 2023 for its member’s 2022 personal income tax. It files Chapter 7 in the Riverside Division in September 2026.
At 41 months, the wires are outside section 548. The IRS claim fails under Miller, and the FTB claim is the open question many trustees will skip. The member faces all $107,000. Section 3439.09’s four years had not run at filing, and section 546(a) generally gives the trustee until September 2028. With no loan to repay and no payroll in a disregarded LLC, his defenses are thin. Repaying does not reopen his tax accounts; he just pays his own 2022 tax with his own money, years late.
The planning point: in the year or two before a possible filing, pay personal taxes from personal funds. Make any tax distribution only after a written finding, backed by current financial statements as section 17704.05(b) allows, that the LLC passes both tests. I see this most where the company always paid the owner’s estimates and nobody stopped when business turned.
| Trustee target | § 548 (2 years) | § 544(b) plus UVTA (4 years) | Sovereign immunity issue | Likely result |
|---|---|---|---|---|
| IRS | Avoidable; § 106(a) lists § 548 | Barred by Miller | Waiver skips the nested state claim | Recent payments only |
| FTB, CDTFA, EDD | Avoidable under Katz | Unsettled | Could a creditor sue it outside bankruptcy? | Recent yes; older open |
| Insider who benefited | Yes, § 550(a)(1) | Yes, § 3439.08(b)(1) | None | Main target |
| Vendor paid for the company’s own debt | Usually not; value given | Usually not | None | Safe, apart from preference rules |
Frequently Asked Questions
Can a bankruptcy trustee make the IRS return taxes my company paid for me?
Only for payments made within two years before the filing, under section 548. For older payments, United States v. Miller bars the claim against the IRS, but the trustee can still pursue you.
How far back can a California trustee go to recover a payment made for an owner?
Usually four years, under California’s Uniform Voidable Transactions Act as applied through section 544(b). Actual-intent claims can sometimes run one year from discovery, never past seven years.
Is a tax distribution under my LLC operating agreement safe from a trustee?
Not if the LLC was insolvent. A distribution gives the company nothing back, and Corporations Code section 17704.05 bars distributions that leave an LLC unable to pay its debts.
Can the trustee collect the same payment from both the IRS and me?
No. Section 550(d) allows only one satisfaction. After Miller, the IRS is out of reach for payments older than two years, so the claim usually lands on the owner.
Does Miller protect the Franchise Tax Board from a trustee’s lawsuit?
Not for payments within two years, because Katz held the states gave up sovereign immunity in bankruptcy. For older payments the question is open, and I have found no decision on it.
How North Star Law Firm Can Help
North Star Law Firm defends California owners against trustee demands over pre-filing payments through its preference and clawback defense practice and advises companies weighing a Chapter 7 filing. Its tax defense work covers the IRS and FTB side. Phillip Zagotti is a California attorney and a CPA admitted to the U.S. Bankruptcy Court for the Central District of California and the U.S. Tax Court.
If a trustee has written about payments your company made for you, contact North Star Law Firm or schedule a consultation before the response date passes.