Dec 19, 2023

The U.S. government's claim for $24 billion in unpaid taxes from FTX has only one source – taking cash away from its victims, according to the bankrupt crypto exchange.

Video transcript

The state of crypto is presented by Tron connecting the world to the power of Cryptocurrency, bankrupt crypto Exchange. FTX says that the US government's claim for $24 billion in unpaid taxes has only one source and that's taking cash away from victims. In a filing on Sunday, the exchange said quote, the Alice in Wonderland argument has no support in the law end quote. Joining us now to discuss this tax head of government solutions miles fuller miles. Welcome back. Hey, thank you for having me. It's good to be back. Happy to talk about this stuff. It's very interesting, of course. So why don't you just start out by telling us what's going on here? Is this usual for the IRS to come um in a bankruptcy case such as this and demand tens of billions of dollars uh that element? So the process that we're going through here for the IRS is usual, the tens of billions of dollars is probably very unusual. And what makes it even more unusual is the impact of what the proof of claim that the IRS has filed is it's really here going to end up taking away and that's what we're hearing from Debtors Council. It's going to take away from a payout to injured victims of the failed exchange, which is also something that doesn't typically arise in a bankruptcy proceeding. And that's because a little bit of high level is in, in the bankruptcy, under bankruptcy law. The IRS and tax claims generally get a priority over other creditors, uh particularly unsecured creditors. And that's why I think in trying to put forth a plan to get a payout made to various individuals and move this all forward. They're realizing that a $24 billion payout to the IRS is going to eliminate funds to other people and that's why it's being challenged. Well, it's my understanding that this number started uh much higher and it's come down a few times to end up this $24 billion number. What do you think is gonna happen here? What do you think the likely outcome is? I think the likely outcome? And we saw that listening into the hearing that occurred, the court did grant the motion and really what the motion was, a procedural motion on behalf of the debtors to come up with a process to estimate this claim and reach a conclusion about what the right value of the claim is going to be. The judge. There seemed a fairly skeptical about the $24 billion number as my prior time as a lawyer for the IRS and actually had an appointment at the attorney's office. I would handle these types of claims. Never this magnitude. The IRS when it's conducting an audit is left in a position sometimes where it needs to guess what it thinks the outcome is going to be. So it estimates claims and that's what we're here. What's happening in this case. Uh The question that's coming up is everyone's trying to figure out, well, how are you estimating a claim at this high value? Even during the hearing? It was pointed out that the tax returns, if we just take the income tax portion, the tax returns that were filed at least for one year only showed $34 million of income at a 20% tax rate, even if there was no expenses involved, that would only result in taxes of about $6 million. So how are you getting to $24 million? And we didn't really get to hear during the hearing from the IRS or the, or the US attorney or the Department of Justice attorney who's representing the IRS. Really? What the reason was my best guess is because we know that this involves some element of fraud where money was taken, probably revenue coming into FTX was taken and misused by individuals who were employees or had relationships of FTX. The IRS is taking the approach that the $34 million income number is probably under reported and there must be much higher amount of income that needs to come in and that's maybe where you start to get that, the number can actually get bigger. And then you have, that's on the income tax side. You also have the employment tax side. So if the number that came in was taken by employees and the IRS Visa is compensation, then you would have payroll or employment taxes on that. So then all of a sudden you're getting a second set of taxes on that number. I still don't know how it would get to 24 billion. I'd be very curious to hear the IRS math clearly, they should have some math that helped them get there. But that's, I think really what everyone's looking for in this. Do you think there's a sort of pr element here for the IRS? This is a huge case. Of course, we know Senator Beman Fried uh was found guilty on multiple charges to do with fraud. There are uh many people out there who were affected by this. We are waiting to see if they can get any of their funds back that they put into this platform. Do you think that will be taken into consideration as the IRS uh deals with the exchange on how much should potentially be paid back when it comes to these outstanding taxes? I definitely think it will here. This is such a high profile matter. I said this is probably a little bit unexpected ever for the IRS having to be dealing with this because not necessarily even because of the size of the claim or what's going on, there's been other massive bankruptcies like this, but the creditors here are individuals who are victims of a massive fraud. And so, you know, digging their heels in on their claim is going to make the IRS look a little bad. I'm almost sure sure that the optics uh that ftxs management today in bankruptcy and their council see is that yes, we, we can apply some pressure to the IRS in the public sphere that, hey, look, you're going to take away from all these injured people. Is that really what you need to do? Um Although they clearly indicated that if the IRS is owed some money, you know, they're happy to put that in the plan, but it needs to be really the appropriate or close to the appropriate amount of money and they just want to know what's going on. I know you previously said that this number is, is one that we don't often see. Um but are there any other bankruptcies that you can draw on that are similar to this where we can look at that outcome and say, ok, that outcome is probable in this case. It's hard, not off the top of my head. There's been other massive bankruptcies we had, you know, many, many years ago, we had Enron bankruptcy, MC I worldcom, these other massive sort of fraud related bankruptcies and there, I think as they passed through bankruptcy and restructuring, there may very well have been claims that it was high that were this high by, made by the IRS and no one probably noticed them because all the other creditors in those bankruptcies were probably other business entities operating that were really, we would view uh equally with the IRS is just, and in terms of being a creditor here, I I can't think of any bankruptcies where we're dealing with. Really the creditor pool is largely made up of individuals who are victims of a fraud. So that's what sets us apart from other stuff and really will apply some pressure to get this resolved quickly and miles. I'm just in like a real prediction mood lately. And so you don't have to give me an answer if you don't have one but drawing on your experience at the IRS and looking at the facts in front of us. Do you have an inkling or prediction on where this might land? I don't have, I don't know if I have a good one. I, I imagine this will land, you know, the the court granted the motion which is to set up a procedure to go through really an abbreviated type of trial or evidentiary hearing to get to an end result. Um And the court it's gonna happen in, in February March as it looks like the timeline. I have a feeling as we approach that time and we get the parties talking and now that the court is applying pressure to the government a little bit with a speedy timeline, we're probably very well likely to maybe see some sort of settlement. And even if we don't see a settlement, we're at least gonna get a very clear picture of what the IRS is saying. And to the extent that a good component of this massive dollar amount involves some income that the IRS is saying really belonged to one of the FTX related entities that then was taken, you know, came into that it should be reported for taxes and then comes out maybe on the back end as compensation. We're going to get an understanding of that and the court is likely to apply a lot of pressure about with the IRS as to how that number came about and what they did to get there. All right. Miles, we are going to have to leave it there. Thank you so much for joining me. It's always a pleasure having you on and digging in to some of the tax challenges in this industry. So thanks again and we hope you're having a happy holidays. Thank you. You too. And thanks for having me. That was tax fit head of government solutions Miles Fuller.

Learn more about Consensus 2024, CoinDesk’s longest-running and most influential event that brings together all sides of crypto, blockchain and Web3. Head to to register and buy your pass now.