FTX tentatively settles a $24 billion tax dispute with the IRS, pending court approval of its reorganization plan.
FTX, a cryptocurrency exchange that later declared bankruptcy, and the United States Internal Revenue Service (IRS), its largest creditor, have reached a provisional agreement.
A filing dated June 3 indicates that the exchange and the IRS settled a $24 billion tax dispute. FTX was initially assessed over $44 billion in tax liabilities by the IRS; however, the figure was subsequently diminished. The settlement is contingent on the court approving the reorganization plan of FTX.
The IRS would agree to settle its $24 billion claim in exchange for $200 million in priority tax claims paid within sixty days of the plan’s approval, per the terms of the settlement. In addition, $685 million will be collected by the tax authority as a subordinated claim, which is paid after customers and other creditors.
The deal covers all tax claims until Oct. 31, 2022. According to FTX, the settlement reduces litigation risk and increases certainty regarding creditor and customer recovery. “The outcome of these proceedings would be uncertain given certain novel and complex issues of tax law raised by the IRS Claims.”
The filing shows that FTX doesn’t deny owing taxes but disagrees with the amount and specific reasons for the tax liability. Specifically, the exchange argues that it shouldn’t be taxed on funds misappropriated by its former CEO, Sam Bankman-Fried. It also disagrees with the IRS’ calculations for employment taxes related to salaries paid to Bankman-Fried and other executives.
Furthermore, the exchange argues it has valid deductions and losses the IRS is wrongly disallowing due to lack of proper documentation. However, the tax authority disagreed and was prepared to fight FTX in court for a significant tax payment:
“The IRS does not agree with the Debtors’ arguments and has informed the Debtors that absent a settlement it would pursue these and other theories to impose significant tax liability.”
FTX proposed a new plan to repay creditors on May 8, aiming to fully reimburse all claims plus some additional compensation. Only creditors holding claims in an allowed amount below $50,000 will be eligible for a 118% recovery, which FTX anticipated was “98% of the creditors of FTX by number.” Repayments will be based on the value of assets at the time of FTX’s collapse in November 2022.