In tax debt bankruptcy case, parties dispute company ownership

In a previous post we discussed Grammy Award-winning singer Dionne Warwick’s financial troubles and the fact that she recently filed for bankruptcy because of a mounting tax debt. As we noted earlier, it can be difficult or impossible to discharge tax debt during bankruptcy except in very special circumstances.

This case may end up being one of those circumstances if Ms. Warwick’s attorney are successful in arguing that the IRS cannot seek payment on the debts from two companies that Ms. Warwick has worked with in the past.

The singer’s attorneys say that the IRS cannot go after assets in the two companies because Ms. Warwick, the debtor, has no financial interest in the companies.

Typically when creditors believe that someone who owes them money has financial interests in a company to the point where the company could be held liable the creditor must name those companies in the original filing with the court. Otherwise the entities would not have enough notice to respond to the inquiries and other parties with interests in the company would not be aware that there was a pending action against its assets.

While these may seem like small details to the average Atlanta reader, these types of issues can make a big difference in a Chapter 7 bankruptcy case, particularly when someone is trying to discharge debts that are generally not eligible for discharge such as tax debt. Here, if the companies are considered Ms. Warwick’s “alter egos” with close financial ties to her, then she may be considered financially capable of paying off a larger portion of the $7 million she owes in federal taxes. If those companies are not hers and the funds held by them are not accessible to her, then she may succeed in getting a vast majority of the debt discharged. 

Source: The Wall Street Journal’s Bankruptcy Beat blog, “Dionne Warwick Takes on the IRS,” Jacqueline Palank, June 10, 2013