The Breakdown - The IRS Says FTX Owes HOW Much!?

Episode Date: May 13, 2023

Today on The Breakdown its FTX's Insane tax bill and why 2022 won't leave us alone. Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribeto the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW  

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Saturday, May 12th, and that means it's time for the weekly recap. A quick note before we dive in, The Breakdown. If you somehow have missed this, is now the Breakdown Network. It's a set of shows all about these big picture power shifts remaking our world that I am so clearly interested in, if not even, obsessed with. The other shows on the breakdown network include Bitcoin Builders, which is all about this incredible entrepreneurial energy heading to Bitcoin. And then, of course, there is the AI breakdown, which is basically trying to do for the AI space exactly what the breakdown tries to do for

crypto, Bitcoin, and Macro. I cover the key news each day and try to give an analysis about why it matters. You can find those shows anywhere you listen to podcasts. If you're on Apple, it's extra easy as you can just press the little breakdown network button right below the title. I appreciate all of you who have tried the new shows, and I'm looking forward to having even more of you join this sort of cross-cutting conversation. Speaking of which, if you want that conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly.L.Y slash breakdown. Now, for this weekly recap, we are catching up on gnarly hangover crap from last year, and specifically, we're going to focus in on FTX's seemingly insane tax bill.

The IRS has filed claims for $44 billion, with a B, in taxes owed against the FTX bankruptcy estate. According to court filings dated April 27th and 28th, the IRS has placed 45 claims against FTX group companies, including West Realm Shires, which operated FTX U.S., ledger holdings, blockfolio, and others. Now, that said, the bulk of the claims were four claims totaling 37.8 billion

against Alameda Research and Alameda Research Holdings. The claims were filed as administrative priority claims under the bankruptcy code, meaning that the IRS is seeking payment ahead of customers and other unsecured creditors. One of the claims against Alameda Research includes $20 billion in partnership taxes, which are leveled against the profits of partnerships in lieu of income taxes. Much of the remainder of the claims relates to income tax and payroll tax withholdings. So far, the FTCS estate claims to have recovered around $7.3 billion in cash and liquid crypto assets,

leaving them well short of affording this gigantic tax bill. So what the hell actually happened here? Effectively, every crypto lawyer and non-lawyer has been trying to figure that out. Meet TC writes, The insane Alameda Research LLC tax bill circulating is real. The major balances don't have detail, but in part it appears the IRS went back and reclassified all employees from contractors to employees and hit them for unpaid employer-side employment taxes.

Since Alameda Research LLC is likely a partnership for tax purposes, the back taxes are assessed at the partnership level, but, depending on what's in the partnership agreement, it may push out the assessed taxes to partners. Also given these numbers, I have to assume that they were assessed on the basis that all employees were U.S.-based, I cannot imagine they collected W-9s, and none of them paid employment taxes on their income. The bankruptcy estate can reduce the bill related to those amounts. I wonder how much of that relates to executive compensation paid as consulting fees rather than salary. Closing Biden's $18 billion tax loophole for crypto investors in one trade. Now, if this seems really confusing to you, you are not alone. Zero X Fubar writes,

there's no way Alameda paid $40 billion. They never even had that much in AUM. Meade again says, only thing I can think of is massively inflated by fraud-related penalties and interest, but even then really hard to imagine a bill this high. Cryptotrater Mr. Purple writes, the details are light, but here is the filing for one of the claims. Many weird things going on here. Taxes for 2023, $8 billion partnership for 2022, $122 million in payroll. taxes per quarter, implying 3.2 billion salaries, many things don't add up. Now, another crypto trader Spreeks says, my guesses would be some combination of marking shit coins like serum, FTT, maps that were minted as income at market price, taking all unaccounted for transfers and counting them as ordinary

income. Now, Mr. Purple went a little bit more in depth and tweeted, the claims circulating crypto Twitter is real and a few things to note. One, taxman does get paid first in a bankruptcy, which is why it's filed under an admin priority status. Two, FTA- ex-estate will defend against this claim. Three, calculation of their claim was not publicly filed, but a few things jump out. A, includes a $12 billion claim partnership income for the tax period 2023. Clearly, that makes no sense. B, claims $8 billion in same tax for 2022, which would exceed all revenue. C claims $122 million per quarter for FICA payroll taxes. Payroll taxes are 15%, so this would imply $3.2 billion of annual salaries. D does not claim any interest in penalties, which

where you usually see large dollar amounts. For, claims are often inflated in a bankruptcy for many reasons. A, sue high and settle less. B, sometimes claims get filed for same claim against each individual debtor entity. In this case, there are 130 of them. But claims can't be settled two to 130 times for the same underlying claim. It's done procedurally to make sure claim isn't disallowed for filing against incorrect entity.

Five other bankruptcies have had very large claims to settlement amounts for the IRS. For example, A, Lehman Brothers 1.2 billion claimed, 370 million settled. WorldCom 626 million claimed versus 47 settled. Chrysler, 500 million claimed versus 60 million settled. PG&E, 2.5 billion claimed versus 90 million settled. Still, when you're talking about 44 billion, you're way above any of these numbers. They certainly don't make any sense to me except as a procedural or as a strategic kind of thing.

But for most folks who are paying attention, the big question is whether the U.S. government is going to skip ahead of the bankruptcy line. asked about the question of priority, MeetC writes, depends whether depositors are deemed creditors or whether there was no debtor-creditor relationship. If the latter, then deposits are priority. If creditors, Uncle Sam does.

The massive tax bill is for Alameda, not FTCS. Not likely to have bearing on FTX depositors, I don't think. But the FTCS entity claims will work that way. Wasey lawyer also went in-depth about this exact question. They write, tweeted about this briefly, but thought I'd do a more in-depth post to explain how it affects the insolvent

side of things for FTX claimants. TLDR, not great. This is an Alameda tax bill, so it needs to be paid by the Alameda silo. As most people following No by now, the hole in FTX International came about because Alameda borrowed a couple billion dollars from FTX International. So now in order to recover monies as creditors of FTCS International, we need FTCS International to recover monies as creditors of Alameda. So Alameda sells its assets, repays its creditors, including FTX International, and FDX International now has some money to repay its own creditors, us. Problem with this annoying tax bill isn't just the fact that there is now another massive creditor of Alameda, which would reduce FTC's pro rata share of the Alameda estate. The problem is that this

tax claim would have priority over FTX's claim. Yes, under the U.S. Bankruptcy Code, Uncle Sam has priority over unsecured creditors, which means this massive $20 billion tax bill needs to be paid off before any money can even flow from Alameda to FTX International. In other words, we are pretty boned. One potential saving grace is if somehow the trust argument that all the assets customers deposited into FTX were actually held on trust manages to stand up in court. That way, the loan to Alameda was just a transfer of trust assets to Alameda and customers can trace their proprietary interest into Alameda's assets. We'll have to sit down and think a bit around the law of tracing and do some research to see how well that holds up. As always, hentai penguin in a suit,

entertainment purposes only, not legal or financial advice. Now, there is, as you, as you, you might well imagine lots of preemptive anger. Mehbissette says this is exactly why U.S. is the most hated country in the world. Millions of international customers are going to be robbed by the U.S. government and the U.S. legal system. Jamison Lop, the CTO of CASA says, imagine getting rugged by SBF. Then, just when you think you're going to get half your money back, the IRS steps in to rug the rest.

Chainlink God writes, FTX depositors getting double-rugged, first via the fraud itself, and then by those who fail to prevent the fraud. Claims by the government take priority over payment over on security. creditors. Feel protected yet, Anon? Ledger completely sums up my feeling when he wrote, I'd say unbelievable, but it wouldn't be true. Finally, Eric Voorhe says, it's fair for the IRS to take all the money instead of the victim since the government prevented the fraud from happening. Now, unfortunately, this wasn't the only time FTX was in the news this week. Late on Monday, lawyers for Sam Bangman-Fried filed a motion to dismiss most of his criminal charges. Across seven pretrial

motion, Sam and his team argued that fraud, money laundering, and campaign finance charges should be dismissed, 10 of the 13 charges, leaving only conspiracy to commit commodities and securities fraud, and conspiracy to commit money laundering charges to proceed to trial unquestioned. The filing spans hundreds of pages, including masses of attached evidentiary documents. In the most straightforward motion, Sam argued that he had been charged twice regarding the same conduct in several cases, and that allowing the pile of duplicative charges to remain could lead to, quote, undue prejudice in the trial. He asked that one of the charges from each pair, be withdrawn. In a separate motion, Sam argued that some of the charges, particularly the charge of

campaign finance, did not comply with his extradition agreement. Under the extradition treaty, the Bahamas needed to consent to the charges being brought. Sam is arguing that without the additional information and charges put forward since his extradition, the Bahamas could not consent. As Teddy Schlafer puts it, one argument made by SBF's team is that the U.S. government did a bait and switch effectively, trying to convict him on other charges such as campaign finance. Now, what really caught people's attention is the broader narrative that Sam is trying to put forward in these motions, that his conduct with FTCX and Alameda research was essentially industry standard, and that the downfall of the firm was not the fault of management, i.e. himself, but rather the logical

conclusion of the broader crypto downturn. The filing reads, quote, like many other cryptocurrency market participants and many other startups that experience exponential growth in a short period, FTX did not fully develop controls and risk management protocols. FtX, like other market participants, was susceptible to a broader market collapse. The filings go on to call Sam's prosecution, quote, a classic rush to judgment and argued that many of the charges, Repres represented, quote, seeking to turn these civil and regulatory issues into federal crimes. Regarding campaign finance violations, the filing said that the charges feature a, quote, resoundingly lack supporting factual allegations and are premised on incoherent or contradictory allegations

regarding the aims and means of the purported conspiracy. Sam argues that the funds lent to FTX executives for the purposes of making large campaign contributions were genuinely their own and not under Sam's control. The John J. Ray led FtX bankruptcy team also featured heavily, with Sam accusing them of, quote, working hand in glove with the government to investigate and prosecute. He also argued that they have, quote, acted as a public mouthpiece for the government by continuing to make disparaging remarks. Essentially, he argues the bankruptcy team has improperly become a part of the prosecution. He requested additional discovery of documents against the FTX bankruptcy team due to the assistance that they have provided. So there is, as you might imagine, a lot to unpack here. I think what people

are most responding to is the don't blame me, blame crypto winter. Now, aside from the obvious take, that Crypto Winter wasn't the cause that gave Alameda an unlimited credit line backed by customer assets, it's also noteworthy that the biggest factor in causing this Crypto Winter was in fact Sam's fraud and its revelation. Now beyond that, it's also interesting to note that Sam is going so extensively in a motion to dismiss. Historically speaking, these are kind of direct and to the point, mostly about deficiencies in the prosecution's argument, rather than a first run at a defense brief. We'll have to see how the judge takes a view of this. But I think that the clearest thing that this demonstrates, especially due to its insane length, is that Sam is going to be a total,

total pain in the ass throughout this entire process. I've heard a few people suggest that it would surprise them if a lawyer actually put forward most of this stuff a sound trial strategy, which could mean that Sam has totally commandeered his defense. Now, that is, of course, his right, and it would also be completely on brand of him thinking that he is smarter than everyone else in the world. One last one from the stupid files for you to enjoy on this Saturday afternoon. The co-founder of Failed Crypto Hedge Fund Three Arrows Capital, Suu, has obtained a restraining order against Arthur Hayes, the co-founder and former CEO of Bitmex. The restraining order was granted by a Singapore court last Friday and prevents Arthur from using, quote, threatening, abusive,

or insulting words, and making, quote, any threatening, abusive or insulting communication that would cause the applicant harassment, alarm or distress. Now, the cause, the cause buzzer genesis of this is that Arthur has been tweeting at Sue and Kyle recently, asking for repayment of $6 million that he claims to be owed. As one example on April 26, Arthur tweeted, A Little Birdie told me Sue Zoo is in Singapore trying to keep a low profile. I know you ain't broke, bra. Come see Daddy and make amends. It won't hurt, I promise. The Singapore protection from harassment court judge ordered that Arthur is prohibited from communicating with Zoo, quote, by any means, and also prevented from publishing, quote, any identity information. In the richest irony,

the court allowed Zhu to serve the restraining order via Twitter message, although it's probably safe to say that Arthur is well aware of the order by now. Now for context, in case you weren't paying attention, 3-R-O's capital currently sits on more than 1 billion in liabilities owed to individual creditors, as well as 2.3 billion owed to Genesis trading. Liquidators for the firm have chastised Sue and Kyle for failing to cooperate constantly and not helping provide information early on in the process. They as well had to request to serve as a pena, for example, via Twitter. Now, of course, it's unclear if their cooperation has improved in recent months, but, you know, they've been busy. In fact, they just launched a new crypto and bankruptcy claims exchange.

Shockingly, that exchange has seen vanishingly small volume, and the market for bankruptcy claims has so far failed to materialize. Arthur Hayes was extremely critical of the move, as so many on crypto-twinter were, suggesting that the pair should instead focus on repaying creditors. Arthur tweeted around the time of the launch, A little birdie told me Sue and Kyle raised big money from Bahrain sovereign wealth fund, They are trading via Tai Ping Shan.

Be warned, I want my money. Another week in crypto, guys, 2022 will not leave us alone, but hopefully we can keep plowing through and not have to have shows like this in the future. For now, I hope you are having a wonderful non-bankrupt afternoon.

So until next time, be safe and take care of each other. Peace.