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In re Majestic Star Casino, Limited Liability Corporation

United States Court of Appeals for the Third Circuit
716 F.3d 736 (2013)


Facts

Barden was the sole shareholder of Barden Development, Inc. (BDI). Majestic Star Casino II, Inc. (Majestic) (plaintiff) was a wholly owned subsidiary of BDI. BDI was an S corporation under the Internal Revenue Code (IRC) for tax purposes, and Majestic was therefore a qualified subchapter S subsidiary (QSub) corporation. Under the IRC, S corporations and QSub corporations avoid paying federal tax at the corporate level, because the taxes are paid by the shareholders. Majestic filed for chapter 11 bankruptcy in November 2009. After Majestic filed its petition, Barden successfully petitioned the Internal Revenue Service (IRS) for revocation of BDI’s S corporation status. As a result of the revocation, Majestic lost its QSub status and was therefore subject to paying federal taxes.  Majestic filed a complaint with the bankruptcy court, alleging that the revocation of BDI’s S corporation status and the subsequent loss of Majestic’s QSub status was an unlawful post-petition property transfer from Majestic’s estate. The bankruptcy court ruled in favor of Majestic and ordered Barden and the IRS to reinstate BDI’s S corporation status and Majestic’s status as a QSub. This case was certified for a direct appeal.

Rule of Law

Issue

Holding and Reasoning (Jordan, J.)

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