Extended Statute of Limitations Where IRS is a Creditor

Under Michigan law, a creditor – and a bankruptcy trustee by extension of the strong arm powers of 11 U.S.C. §544 – has a six year statute of limitations to avoid fraudulent transfers.  MCLA 566.31, et. seq.

A Florida bankruptcy court held that a bankruptcy trustee could step into the shoes of the IRS as a creditor and assert the ten (10) year statute of limitations set forth in the Internal Revenue Code for avoidance of fraudulent transfers.  In re Kipnis, 2016 WL 4543722 (Bankr.S.D.Fl., 2016).

There is a split of authority on the issue of a bankruptcy trustee’s use of the IRS 10 year statute of limitations, but this case should still be considered when dealing with a client who has tax liabilities and asset planning transfers which occurred more than 6 but less than 10 years ago.

In Kipnis, the outstanding obligations to the IRS were substantial and the IRS the only liekly creditor to benefit from the trustee’s recovery.

But what if the tax obligation is small?  Can a bankruptcy trustee use the IRS 10 year lookback period for the benefit of all creditors, or only to the extent of the IRS liability?  The answer is unclear, but represents a concern for many formerly affluent clients with tax obligations who require bankruptcy protection.