Emory Bankruptcy Developments Journal


The 2017 Tax Cuts and Jobs Act changed the landscape for the approximately 4 million S corporations in the United States. This Comment addresses how the TCJA has highlighted an existing tension between the Bankruptcy and Tax Codes concerning whether S corporation shareholder termination rights granted under § 1362 of the Tax Code should constitute avoidable fraudulent transfers under § 548 of the Bankruptcy Code. Traditionally, courts have permitted bankruptcy trustees to unilaterally shift capital gains liabilities incurred from asset liquidation sales of insolvent S corporations to the businesses’ shareholders and characterize such terminations as fraudulent transfers. However, recent decisions in the Third and Fourth Circuits have restricted the trustee’s “Strong Arm” power to avoid S election terminations. The author considers this tension between the two codes as well as the TCJA’s implications on S corporation shareholders. It then finally makes a suggestion for creating an exception to the fraudulent transfer conveyance doctrine for S corporations.