FTX debtors push back against $24B IRS claim

“The only source of recovery is by taking recoveries away from victims,” FTX debtors warned

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FTX debtors warned that a $24 billion claim by the Internal Revenue Service could slow down the return of customer funds. 

The filing, made on Sunday, further argues that the FTX debtors “never earned anything anywhere near amounts that could support the IRS Claims for $24 billion in taxes.”

Instead, lawyers wrote, debtors for the bankrupt exchange incurred billions in losses.

“These cases present a zero-sum game. The only source of recovery for the IRS is by taking recoveries away from victims. As there is no basis to assert any tax claim against the Debtors, the IRS’s reliance on its own processes only serves to delay distributions to those truly injured,” FTX wrote.

Initially, according to the filing, the IRS alleged claims of $43 billion, but brought that number down by roughly half to get to $24 billion.

FTX’s debtors asserted that the IRS has not provided a basis for its claims, and the US previously said that the IRS’s claims “are not subject to estimation.” 

Read more: Bankman-Fried’s crypto portfolio would be up billions this year — thanks to Solana 

Under that scenario, the burden of responsibility to disprove the claims amount would fall to the FTX debtors, which FTX said would take “many months” to resolve. 

“These cases should not be delayed by an IRS process that is akin to determining whether a shipwreck sits at 1,000 feet or 3,000 feet below sea level. The import is the same — the ship is underwater,” the lawyers wrote. EY recorded the FTX loss at $11 billion, which is apparently reflected on the tax returns.

The FTX debtors have been working with the IRS on the claims, allegedly supplying document requests. The estate argues that “there is no reason to have an additional lengthy fact discovery period to address tax issues the IRS has already been evaluating for many months.”

If the IRS’s claims can be resolved, then the bankruptcy proceedings will be able to move forward. The proposed schedule would set an evidentiary hearing ahead of confirmation in February of next year, where “the parties can brief the issues and present their positions.”

However, if the back and forth continues then the bankruptcy plan will be delayed. The US, the filing said, gave an “eight month estimation schedule” for further IRS investigation.

The bankrupt exchange declared bankruptcy in November of last year. Former CEO Sam Bankman-Fried, who was found guilty of fraud in November of this year, has a sentencing hearing also set for February 2024.


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