It is undisputed that the Debtor failed to file its tax returns for the years 2006 to 2008; and that for such failure, the Debtor incurred penalties totaling $3,662,000."
COMMENT: You may wonder how a tax case wound up in bankruptcy court. Bankruptcy law keeps its own beat, and a bankruptcy court can have near-extraordinary powers. For example, the court can determine the amount or legality of any tax, any fine, or any penalty relating to a tax. That is what happened here. The IRS assessed a penalty, the taxpayer protested, the IRS decided it was right (surprise) and submitted the penalty as a claim to the bankruptcy court.
OBSERVATION: Right off the bat, we have two Refco's going - "Pool" and "LLC." Set this aside, as it is not relevant to our story.
- In 2005 Refco LLC filed for bankruptcy. This caused a run, meaning that ...
- Sphinx yanked out $312 million. However, ...
- Sphinx had to return $260 million as was deemed a "preference" action.
- In 2006 Sphinx went into liquidation. As part of the process, the Court appointed two liquidators.
- The liquidators soon found very serious accounting issues. They in fact advised that they could not assure the accuracy of tax and accounting information provided investors.
- Refco Pool wanted its money from Sphinx, but all they received was something called "special situation shares." They were special because no one knew what they were worth until the liquidation was complete, a process which stretched into 2013.
COMMENT: Here we have a conundrum. Refco Pool has one main asset - special situation shares (whatever that means) in a bankrupt entity with accounting problems severe enough that its liquidators advise against using any numbers. A tax return requires numbers. What to do?
As an accrual method taxpayer, the Debtor cannot recognize income until 'all the events have occurred which fix the right to receive such income and the amount thereof can be determined with reasonable accuracy.'"
ANALYSIS: The judicial standard however is not whether Refco Pool exhausted all possible alternatives. The standard is whether Refco Pool exercised the level of care that a reasonably prudent person would under the same circumstances.
By knowingly filing inaccurate returns, the Debtor had a reasonable cause for concern given the specter of accuracy-related penalties it might incur ...."
Based on this knowledge, a reasonable person would likely be concerned with signing the jurat clause at the bottom of Form 1065..."
COMMENT: The jurat clause is the one at the bottom of the tax form that reads "... to the best of my knowledge and belief, it is true, correct, and complete."
Based on the evidence presented, the Debtor proved that it carefully considered its filing obligations and undertook appropriate steps in an effort to avoid the failure. Accordingly, the Court holds that the debtor acted in a responsible manner both before and after the failure to file occurred."