In Re:Majestic Star Casino LLC

BDI elected under I.R.C. 1362(a) to be treated as an S-corporation, not subject to federal taxation because its profits and losses passed through to Barden, its sole shareholder. MSC owns the Majestic Star Casino and Hotel. BDI acquired MSC in 2005. BDI elected to treat MSC as a QSub (I.R.C. 1361(b)(3)(B), not as a separate tax entity. MSC, therefore, paid no federal taxes. In 2009, MSC and its affiliates filed voluntary bankruptcy petitions. Barden and BDI were not debtors. After the petition, Barden caused revocation of BDI’s status as an S-corporation; MSC’s QSub status automatically terminated because it was no longer wholly owned by an S-corp. Neither BDI nor Barden sought authorization from the debtors or from the Bankruptcy Court. MSC allegedly was unaware that it had a new obligation to pay income taxes. As of first date federal taxes would have been due, the debtors had paid no federal income taxes. The Bankruptcy Court permitted conversion of MSC to a limited liability company, so that MSC would no longer qualify for QSub status, even if the Revocation had not occurred. The debtors sought to avoid the Revocation, which, they alleged, caused an unlawful post-petition transfer of property. The Bankruptcy Court granted summary judgment to the debtors. The Third Circuit vacated and directed that the petition be dismissed for lack of jurisdiction. View "In Re:Majestic Star Casino LLC" on Justia Law