FTX is embroiled in a $24 billion tax dispute with the Internal Revenue Service (IRS) in its bankruptcy case. The IRS claims FTX owes this amount in unpaid taxes, but FTX says the claim has “no relation to reality” (Law360, 2023). An estimation hearing has been ordered by the bankruptcy judge to determine the validity and amount of the IRS claim. This is intended to resolve the dispute quickly rather than through lengthy litigation. However, the timing of the estimation hearing (scheduled for March) coincides with when FTX hopes to get its bankruptcy plan approved. If the IRS claim is upheld, it would likely wipe out any funds meant to repay FTX customers who lost money.

The IRS says it based its $24 billion claim on tax returns, pleadings and a report about fraudulent activity at FTX. FTX disputes this and says based on its tax professionals’ review, it only owes $34.7 million in taxes. The outcome of the estimation hearing carries high stakes. If the IRS claim is substantially upheld, there may be no money left to distribute to creditors and customers under FTX’s bankruptcy plan. Both sides seem confident in their positions on the amount owed.

Law360 covered the topic in an article on December 15, 2023 where Gray Reed Partner Joshua Smeltzer was one of the experts interviewed. Board Certified in Tax Law by the Texas Board of Legal Specialization, Joshua uses his experience as a former litigator for the U.S. Department of Justice to defend clients in tax audits, tax appeals, and litigation in Federal District Court, U.S. Tax Court, the U.S. Court of Federal Claims, and tax issues in U.S. Bankruptcy Court.


“If the numbers are not clear because of fraudulent activity, the court may decide that’s a problem of their own making,” Joshua Smeltzer, a tax attorney who co-leads Gray Reed & McGraw LLP’s blockchain and digital assets practice, said of FTX. The IRS says it settled on the $24 billion sum using pleadings in the case and a report by FTX CEO John J. Ray III in conjunction with tax returns submitted by the debtor. According to the agency, FTX has underreported income it generated through the fraudulent activity that the exchange’s former leader, Sam Bankman-Fried, was found guilty of in November. In estimation, the IRS could also focus on bank deposit analyses showing money flowing in and out of FTX accounts, provided that authentic documents exist, Smeltzer said. But much of the agency’s strategy will depend on whether the court decides to abandon the typical presumption of correctness applied to the IRS and force it to prove its claim. “The court is indicating that it hasn’t decided that the IRS should get that presumption,” Smeltzer said. “It may stick them with the burden of proof.” But if estimation is something of a gamble, it’s one FTX is eager to take.

Read the full article here.