The Debtor was a North Carolina corporation, wholly owned by DeCoro Limited (“Ltd.”), a Hong Kong limited liability company, which shipped furniture manufactured in China to the United States. The the furniture sales in the United States were procured by the Debtor. In 2008 or 2009, the IRS began an examination to determine whether the Debtor or Ltd. were liable for taxes in the United States. The determination hinged on whether the Debtor was a “dependent agent” of Ltd., in which case Ltd. would be liable for the taxes, or if the Debtor was an “independent distributor”, in which case the Debtor would be liable for the taxes. The IRS issued an audit letter finding that taxes would be assessed against Ltd., but prior to an actual assessment, Ltd. filed an insolvency proceeding in Hong Kong and the Debtor filed this bankruptcy.
The IRS filed (with multiple amendments) a Proof of Claim in the Debtor’s bankruptcy in the amount of $13,011260.56, indicating that this consisted of Corporate Income tax and Foreign taxes for 2004-2008. At issue in determining the tax liability was whether the Debtor was an agent of Ltd. or an independent distributor.
The IRS asserted that the Debtor’s confirmed Chapter 11 plan, as well as the settlements in eleven Adversary Proceedings for recovery of accounts receivable, “effectively recognized” that the Debtor was not the agent of Ltd. The IRS argued that the confirmed plan had a res judicata and collateral estoppel effect. Further, the IRS argued that in the approving of the settlement of the Adversary Proceedings the court actually and necessarily determined that the Debtor was the owner of the accounts receivable. Secondly, the IRS argued that in confirming the plan the bankruptcy court necessarily determined that the Debtor was not an agent of Ltd. Lastly, the IRS objected to the Debtor having standing to object to the tax claim, as the plan provided that the Trustee of the Liquidation Trust had such authority.
The bankruptcy court rejected the res judicata/collateral estoppel argument, finding that while the confirmation order was final and preclusive as to the Debtor’s ownership of the accounts receivable, that issue was not the same as the agency question, which was never actually determined in those proceedings. Further, because Confirmation Orders “frequently dictate and alter the pre-petition rights and relationships of parties”, it does not determine what those rights and relationships were prior to confirmation, which was the pertinent point in time for determining whether the Debtor was an agent for tax liability.
As to the authority of the Debtor to object to the tax claim, the bankruptcy court found that the clear language of the Confirmation Order stated that “the Debtor disputes the IRS priority claim and intends to file an adversary proceeding against the IRS”, preserving the Debtor’s right to object to the IRS claim.
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