Southeast Waffles, LLC v. U.S. Dept. of Treasury (In re Southeast Waffles, LLC)

2011 Fed App 014P (6th Cir.)
This case presented an issue of first impression in the Sixth Circuit about how reasonably equivalent value is calculated when the transfer is a payment of a tax obligation owed to the IRS. Whether Debtor receives less than reasonably equivalent value when the IRS applied prepeition payments made by Debtor to the penalty portion of the tax liability was the queston presented to the Panel. The Panel ruled that under Section 6671 of the Internal Revenue Code, tax liabilities and penalties are one in the same and are not distinguished from one another by the IRS when assessing a taxpayer's tax liability. Accordingly, payment of the penalty portion reduces dollar for dollar the taxpayer's liabilty. The Panel concluded that a taxpayer receives equivalent value when a payment is applied to the penalty portion of the liability rather than being first applied to the tax debt. Affirmed.
Procedural context:
On appeal from Bankruptcy Court for the Middle District of Tennessee's dismissal of the Debtor's adversary proceeding pursuant to Fed. R. Civ. P. 12(b)(6) and Fed. Bankr. Rule 7012.
From 2005 to 2008, the Debtor, Southeast Waffles, LLC, periodically failed to make all federal income tax withholding, social security, and unemployment payments due to the IRS and to timely file returns related to such taxes. As a result, the IRS assessed penalties in excess of $1.5 million against the Debtor. During the time period of 2005 to 2008, the Debtor made several payments to the IRS that were applied by the IRS to the penalties. The payments applied to penalties totaled $637,000. On August 25, 2008, the Debtor filed its Chapter 11 petition. The Debtor operated is business and managed its properties as a debtor-in-possession until substantially all of its assets were sold in accordance with its confirmed plan. On August 24, 2010, the Debtor filed an adverary complaint against the IRS asserting that penalty payments of $637,000, made in the four years preceding the petition date, constitute constructive fraudulent conveyances under 11 U.S.C. 548(a)(1)(B) and Tenn. Code Ann. 66-3-301 et seq. Specifically, the Debtor alleged that the IRS' application of prepetition payments to the tax penalties were a fraudulent transfer.
Boswell, Harris and McIvor

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