Understand the complexities and nuances of the Bankruptcy Code to better advise clients and prepare for court.
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
Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to email@example.com.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to firstname.lastname@example.org.
Put me on standing order
Notify me when new releases are available (no standing order will be created)