IRS’s $4.3M Claim Against Debtor Doesn’t Have Priority Status

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By Diane Davis

A $4.3 million IRS claim against a Chapter 11 debtor for fraudulent transfers doesn’t have priority status in bankruptcy, the U.S. Bankruptcy Court for the Middle District of Florida held ( In re Kardash , 2017 BL 334832, Bankr. M.D. Fla., No. 8:16-bk-05715-KRM, 9/21/17 ).

William J. Kardash’s liability from a Tax Court judgment isn’t a “tax” that can be claimed as a priority over other creditors under Bankruptcy Code Section 507(a)(8), Judge K. Rodney May wrote Sept. 21.

A claim is entitled to priority under Section 507(a)(8) if it is for “a tax on or measured by income or gross receipts.”

Kardash’s liability isn’t a tax but rather an “independent financial obligation arising under state law to repay dividends he received in 2005-07 from his defunct employer, Cast-Crete, the court said. Thus, it is a general unsecured claim, the court said.

Kardash was an employee and minority shareholder of Cast-Crete from 2003-07. Cast-Crete made more than $450 million in revenue but paid no income taxes.

During that time, two controlling shareholders siphoned all of the cash out of the company and it became insolvent.

In 2005, 2006, and 2007, Kardash received more than $3.5 million in dividends on his stock.

The Tax Court ruled that the dividends paid to Kardash were fraudulent transfers under Florida law because they weren’t compensation for services and were made when the company was insolvent or became insolvent.

Kardash later filed Chapter 11.

The IRS argued that Kardash’s transferee liability under §6901(a) of the Tax Code is the “functional equivalent” to a tax for purposes of the Bankruptcy Code’s priorities.

The court rejected this argument. Transferee liability is separate and independent of the underlying tax obligation owed by the transferor, the court said. The Eleventh Circuit has ruled in Baptiste v. Commissioner of Internal Revenue, that §6901(a) transferee liability isn’t a tax; therefore, Kardash’s transferee liability isn’t entitled to priority, the court said.

Alberto F. Gomez, Jr., Johnson Pope Bokor Ruppel & Burns, LLP, Tampa, Fla.; Erica G. Pless, The Pless Law Firm, P.A., St. Petersburg, Fla., represented Kardash; Nicole Peair, Timberlake Annex, Tampa, Fla., represented U.S. Trustee for Tampa.

To contact the reporter on this story: Diane Davis in Washington at DDavis@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

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