TLDR

  • FTX has reached a tentative settlement with the IRS to resolve a $24 billion tax claim for a significantly lower amount.
  • Under the settlement, the IRS will receive a $200 million priority claim to be paid within 60 days of FTX’s restructuring plan going into effect.
  • The IRS will also receive a $685 million subordinated claim, which will be paid after customers and other creditors, depending on available funds.
  • The settlement clears a major hurdle in FTX’s bankruptcy proceedings and provides more certainty regarding creditor and customer recovery.
  • FTX disputes the specific reasons for the tax liability, arguing it shouldn’t be taxed on misappropriated funds and disagreeing with the IRS’ calculations for employment taxes.

In a new development in the ongoing FTX bankruptcy saga, the fallen cryptocurrency exchange has reached a tentative settlement with its largest creditor, the United States Internal Revenue Service (IRS).

The agreement, which is subject to court approval, aims to resolve a staggering $24 billion tax claim that had threatened to derail FTX’s efforts to repay its customers and creditors.

The IRS had initially filed claims against FTX exceeding $44 billion, which were later adjusted to $24 billion. The proposed settlement significantly reduces these claims, with the tax authority set to receive a $200 million priority claim to be paid within 60 days of FTX’s restructuring plan becoming effective.

The IRS will collect a $685 million subordinated claim, which will be paid after customers and other creditors, depending on the availability of funds.

This settlement marks a crucial milestone in FTX’s bankruptcy proceedings, as it removes a major obstacle that could have led to prolonged and unpredictable litigation between the exchange and its largest creditor.

If the court had upheld the IRS’ original claim, it could have severely impacted FTX’s ability to repay its customers, a concern the company had previously raised.

John J. Ray III, the CEO overseeing FTX’s restructuring, emphasized the importance of the settlement in a recent court filing. He stated,

“Together, starting in the most challenging financial disaster I have seen, the debtors and their creditors have created enormous value from a situation that easily could have been a near-total loss for customers.”

The settlement not only reduces the risk of extensive litigation costs but also provides a clearer path forward for FTX’s numerous creditors and customers.

While FTX acknowledges that it may owe taxes to the IRS, it disputes the specific reasons for the tax liability and the calculations made by the tax authority.

The exchange argues that it should not be taxed on funds misappropriated by its former CEO, Sam Bankman-Fried, who was found guilty of fraud, conspiracy, and money laundering charges in connection with the company’s collapse.

FTX also disagrees with the IRS’ calculations for employment taxes related to salaries paid to Bankman-Fried and other executives.

FTX contends that it has valid deductions and losses that the IRS has wrongly disallowed due to a lack of proper documentation. Despite these disagreements, the IRS was prepared to fight FTX in court for a significant tax payment, stating that it would pursue various theories to impose substantial tax liability on the exchange.

The settlement, which covers all tax claims until October 31, 2022, represents a pragmatic approach to resolving the tax dispute and allows FTX to focus on its broader reorganization plan.

The exchange has proposed a new plan to repay creditors, aiming to fully reimburse all claims and provide additional compensation to certain creditors.

Under this plan, creditors holding claims below $50,000 will be eligible for a 118% recovery, which FTX estimates to be 98% of its creditors by number.

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