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Trustee Can Use IRS’s 10 Year Collection Statue to Avoid a Fraudulent Transfer

On Behalf of | Dec 12, 2016 | Bankruptcy |

Usually, a trustee seeks to avoid fraudulent conveyances that occur within the state’s statute of limitations, which in Maryland is three years. However, in the recent case of In re Kipnis, 555 B.R. 877 (Bankr. S.D. Fla. 2016), the bankruptcy court allowed a trustee to pursue a fraudulent conveyance action using the IRS’s 10-year collection statue of 26 U.S.C. §6502. In this case, the trustee sought to avoid transfers the debtor made in 2005 after the IRS determined that the debtor owed it in excess of $1 million dollars. The debtor, who filed for bankruptcy in January of 2014, moved to dismiss the complaint on the basis that the alleged fraudulent transfer occurred more than four years prepetition, which is beyond Florida’s statute of limitations. The court ruled that the trustee was not limited by the state’s statute of limitations. Section 544(b) of the Bankruptcy Code allows a trustee to avoid any transfer of an interest of the debtor in property that is voidable under applicable law under section 502 of the Code. Section 6901 of the Internal Revenue Code allows the IRS to pursue avoidance actions against transferees of the taxpayer’s property. Although the IRS must prove the elements of a fraudulent transfer under state law, the statute of limitations to file the action is governed by federal law. Under §6502, the IRS has ten years to collect a tax debt. Because §544(b) allows a trustee to step into the shoes of the IRS, he can avoid the transfer for the benefit of the tax debt, which is an allowable unsecured claim in the debtor’s bankruptcy case.

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