Bottom Line Result:

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The Court disagreed with the Trustee and found in favor of the IRS. If the Trustee had prevailed, it would have sent shock waves to S Corporation shareholders who would have to be concerned that tax payments to the IRS made from distributions in troubled companies could be recalled. Had the IRS been required to refund the tax payments in this case, they would have certainly sought payment from the Kenrob IT shareholders.

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As Jay Adkisson stated in his Forbes article about this case "The lesson here is that what constitutes consideration for a transfer -- usually known in the fraudulent transfer context as "reasonably equivalent value" -- is not always obvious. But it should also be comforting to planners that tax reimbursement arrangements such as these have a chance of surviving scrutiny under a fraudulent transfer analysis. This is not to say that all such arrangements will survive, but if properly structured and documented they have a chance, as here." See Adkisson article here: https://www.forbes.com/sites/jayadkisson/2012/11/01/kenrob-information-the-irs-fights-off-fraudulent-transfer-claim-for-debtor-s-corporations-tax-reimbursements-to-shareholders/#346453913353

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Mr. Adkisson was prescient in stating that "This is not to say that all such arrangements will survive..." In the 2016 Zazalli v. Swenson (In re DBSI, Inc.), case (referenced below), the bankruptcy trustee prevailed against the IRS and obtained a $17 million fraudulent transfer judgment for S Corporation tax payments made on behalf of the principals. DBSI, short for Diversified Business Services and Investments managed office buildings, shopping centers and warehouses for investors nationwide. DBSI sold investors fractional interests in the properties, and they leased the properties back to DBSI to manage.The company collapsed into bankruptcy in 2008. Prosecutors said the company had become a Ponzi scheme, with money from new investors used to pay earlier investors.