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- Title
VOLATILE WINDFALLS: EFFECTS OF TAX CUTS AND JOBS ACT FOR S-CORP SHAREHOLDERS WARRANT STRONG ARM POWER LIMITATION IN BANKRUPTCY.
- Authors
DOUGHERTY, JACK M.
- Abstract
For years, a nuanced judicial inconsistency at the intersection of the U.S. Internal Revenue and Bankruptcy Codes has percolated in bankruptcy and appellate courts, generating a judicial split and erratic outcomes for a small few of the approximately 4 million S corporations in the United States. The split concerns whether S corporation shareholder termination rights granted under § 1362 of the Tax Code constitute avoidable fraudulent transfers under § 548 of the Bankruptcy Code. Some courts, including those in In re Trans-Lines West, Inc. and In re Bakersfield Westar, Inc., have historically permitted bankruptcy trustees to unilaterally shift the capital gains liabilities stemming from asset liquidation sales of insolvent S corporations to third parties--the business's shareholders--who are not parties to the bankruptcy proceeding, characterizing the terminations as fraudulent conveyances.' Recently, however, two courts, including the Third Circuit in In re Majestic Star Casino, LLC and a Fourth Circuit Bankruptcy Court in In re Health Diagnostic Lab. Inc. have restricted the liquidating trustee's nearly unlimited strong arm power to avoid S election terminations, creating inconsistent treatment in federal bankruptcy courts. This Comment begins with a background discussion of the relevant sections of the two federal codes involved in the judicial uncertainty at issue. Second, this Comment considers potential implications of the Tax Cuts and Jobs Act on S corporation shareholders, which is likely to increase the frequency of litigation over Subchapter S elections and termination rights in the context of the Strong- Arm power. Ultimately, this Comment suggests that, at the intersection of the Tax and Bankruptcy Codes, there lies a strong argument for creating an exception to the fraudulent conveyance doctrine for S corporations.
- Subjects
BANKRUPTCY; SUBCHAPTER S corporations; UNITED States. Internal Revenue Service; FRAUDULENT conveyances; TAX cuts
- Publication
Emory Bankruptcy Developments Journal, 2020, Vol 36, Issue 1, p299
- ISSN
0890-7862
- Publication type
Article