FTX: IRS's $24 billion claim will rob lenders of their money

FTX: IRS's $24 billion claim will rob lenders of their money
Photo by Rolando Yera / Unsplash

IRS Tax Bill Would Take Cash From Victims of FTX Bankruptcy

In a dramatic turn of events in the ongoing saga of FTX Trading Ltd., the United States Internal Revenue Service (IRS) has placed a staggering $24 billion claim against the bankrupt crypto firm. This development, as reported in a recent court filing by FTX, sets the stage for a contentious legal battle that could significantly impact the victims of the firm's well-publicized collapse.

FTX and IRS Head to Court

The heart of the matter lies in the differing views of FTX and the IRS on the company's tax liabilities. The two entities are scheduled to meet in court this Wednesday, with the primary agenda being to establish a procedure to ascertain the legitimacy of the IRS's claim. While FTX is pushing for a swift resolution to determine the estimated tax debt, the IRS maintains that its audit is ongoing, rendering any premature estimation of tax dues inappropriate. FTX, in its filing, has criticized this stance, likening it to an “Alice in Wonderland argument” with no legal basis.

FTX's Position and Loss Claims

FTX argues that its operations, which spanned three years, were not profitable, thereby negating the possibility of owing a substantial amount to the IRS. The company fears that any enforced payment would directly harm the victims of FTX, who are already reeling from the company's fraudulent collapse. In court documents filed on Sunday, FTX highlighted its proposed payout plan, which aims to distribute billions to creditors and customers who suffered financial losses.

The Role of the Bankruptcy Judge

A pivotal figure in this dispute is US Bankruptcy Judge John Dorsey, who FTX has requested to oversee a hearing in February to settle the tax dispute. The resolution of this conflict is crucial for FTX's payout proposal to advance.

The Government's Stance

On the other side of the argument, federal officials have indicated a willingness to amend the $24 billion claim, potentially reclassifying a portion as unsecured debt, which typically holds a lower priority in bankruptcy proceedings. They assert that their intention is not to gain a windfall but to ascertain the correct tax liabilities owed by FTX.

Backdrop of Fraud and Bankruptcy

This legal tussle follows the conviction of FTX founder Sam Bankman-Fried for orchestrating a fraud that precipitated the exchange's downfall. FTX declared bankruptcy last year following Bankman-Fried's agreement to relinquish control to restructuring experts. These professionals have been diligently working to recover assets and disentangle the complex debt web, which includes obligations to customers who invested in the platform.

Asset Recovery and the Road Ahead

To date, FTX's administrators have successfully recovered approximately $7 billion in assets, including $3.4 billion in cryptocurrencies, as per court filings. The case, officially known as FTX Trading Ltd., 22-11068, is currently in the U.S. Bankruptcy Court for the District of Delaware.