The parties have filed competing motions for summary judgment on the Debtor’s objection to the proof of claim filed by the United States of America on behalf of the Internal Revenue Service (the “United States”). The United States asserts that the Debtor’s liability from a Tax Court judgment, for his having received about $4.3 million of fraudulent transfers from the corporate taxpayer, is equivalent to a “tax” and, therefore, the claim is entitled to priority as a tax pursuant to 11 U.S.C. § 507(a)(8)(iii). Debtor argues that the liability arose under state fraudulent transfer law (“FUFTA”) and should have the status of a general unsecured claim, as Debtor had received dividends from a corporate taxpayer while the corporation was deemed insolvent.
From 2003 to 2007, Debtor was an employee and minority shareholder (8.65%) of a now-defunct company, FECP. Debtor managed FECP’s operations but he was not a “responsible person” under 26 U.S.C. § 6672.
During that period, FECP had revenues in excess of $450 million, but paid no income taxes. A later IRS audit determined that FECP owed over $120 million in taxes for those years. FECP’s two controlling shareholders, John Stanton and Ralph Hughes, siphoned substantially all of the cash out of the company. By 2005, FECP was insolvent.
In 2005, 2006, and 2007, Debtor received $3,562,490 in dividends on his FECP stock. He reported the dividends on his individual tax returns and paid income taxes on those dividends.
In 2010, the United States commenced an action in Tax Court against Debtor, pursuant to Section 6901(a) of the Tax Code, to recover the dividends he received in 2005-2007 and bonuses he received in 2003 and 2004. Section 6901(a) provides:
“[t]he amounts of the following liabilities shall . . . be assessed, paid, and collected in the same manner and subject to the same provisions and limitations as in the case of the taxes with respect to which the liabilities were incurred . . . [including] [t]he liability, at law or in equity, of a transferee of property . . . .”
In 2015, the Tax Court ruled that the dividends paid to Debtor in 2005-2007 were fraudulent transfers under Florida law (“FUFTA”), because they were not made in compensation for his services and FECP was either insolvent when the dividends were paid or caused to become insolvent later by reason of the dividends The dividends were found to be constructively fraudulent; actual fraud was not found. Debtor was found liable for $3,562,490, the amount of the dividends he had received and interest under Internal Revenue Code § 6601 from the date of the Notice of Liability, March 3, 2010.The Eleventh Circuit affirmed the Tax Court’s decision.
Debtor filed for protection under Chapter 11 on July 1, 2016. The United States assessed a liability for the judgment on July 28, 2016, and filed a proof of claim in this case (Claim No. 2) on September 9, 2016, in the amount of $4,376,210.94, including $4,365,810.94 as a priority claim under § 507(a)(8) of the Bankruptcy Code. Debtor has objected only to the priority status of the unsecured claim.