Tim’s Tax News on the Tenth – November 2020

Earlier this month a North Carolina bankruptcy judge permitted a bankruptcy trustee to combine the rights of the Internal Revenue Service with Bankruptcy Section 544(b)(1) to sue for the recovery of fraudulent transfers going back 10 years, well beyond the four year look back that chapter 7 bankruptcy trustees use in Illinois.

In the North Carolina case, the debtor filed a chapter 7 petition in 2018. In 2010 and 2011, the debtor had allegedly transferred real property to his parents for no consideration when he was insolvent. The Internal Revenue Service filed a Proof of Claim in the Debtor’s case claiming an unsecured claim for about $4,200, based upon a claim of tax evasion by the Debtor.

The bankruptcy trustee sued the parents of the Debtor for receipt of constructively fraudulent transfers under Bankruptcy Code Section 548(a)(1)(B). The parents filed a motion to dismiss, arguing that the transfer was beyond the statutes of limitations under both the Bankruptcy Code and the North Carolina Voidable Transactions Act.

The bankruptcy judge denied the parents’ motion to dismiss, holding that the trustee was entitled to utilize the statute of limitations available to the IRS. The judge found Section 544(b)(1) enables a trustee to avoid a transfer that “is voidable under applicable law by a creditor holding an unsecured claim that is allowable under Section 502.” The trustee contended that the IRS represented the required unsecured creditor and that the IRS was entitled to avoid transactions going back 10 years under 26 U.S.C. § 6502. Thus, the bankruptcy trustee is permitted to step into the shoes of the IRS and invoke the applicable law that the IRS could use outside of bankruptcy to avoid the targeted transfers to the defendants.

If you would like more details, please do not hesitate to call our office. Our office has been successful in helping taxpayers with IRS and IDOR collection problems for over 28 years. If you have a tax or debt problem, please contact me at 847-705-9698 or thughes@lavellelaw.com and find out how we can help you.

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