FTX and IRS Reach $885M Settlement

The FTX estate and the Internal Revenue Service (IRS) have agreed on a settlement where the bankrupt exchange will pay nearly $1 billion, specifically $885 million, far less than the $24 billion initially sought by the IRS.

Under the agreement, FTX debtors will pay $200 million to the IRS within 60 days of approval. The remaining $685 million will be paid based on available funds, with lower priority compared to other claims. A hearing on this motion is scheduled for June 25 before Judge John Dorsey, who oversees the bankruptcy proceedings.

Last December, FTX debtors contested the $24 billion claim, arguing that FTX never earned enough to justify such a claim. Initially, the IRS had claimed it was owed nearly $44 billion, a figure later reduced by half.

This settlement marks a significant step in resolving FTX’s bankruptcy. A hearing will be held later this month to discuss the estate’s proposed reorganization plan. In early May, the estate announced it had gathered $14.5 billion to $16 billion to repay creditors, although the plan has received mixed reviews. Some creditors are dissatisfied that their claims will be based on November 2022 prices, an issue previously challenged but supported by Judge Dorsey, who noted that the code is “very clear.”

The proposed settlement clears a major hurdle for FTX. The IRS claim, initially one of the largest, has been significantly reduced, enabling FTX to move forward with its reorganization. $200 million to be paid to the IRS within 60 days. $685 million to be paid as funds become available, with lower priority status. A hearing on the motion is scheduled for June 25.

The settlement affects how creditors will be paid. While the IRS receives $200 million upfront, the remaining $685 million will be addressed after higher priority claims, potentially benefiting other creditors initially, though the total pool remains affected by the IRS claim.

The reduction of the IRS claim from $24 billion to $885 million is significant. If upheld, the original claim could have severely limited funds for other creditors. This settlement allows for a more manageable payout structure and quicker resolution of remaining obligations.

As the June 25 hearing nears, stakeholders will watch closely. The hearing will address both the IRS settlement and the broader reorganization plan proposed by the FTX estate, outlining how the assembled $14.5 billion to $16 billion will be distributed, a point of contention among creditors.

While the reorganization plan shows progress, it faces criticism, especially regarding the valuation date for creditor claims. Paying out claims based on November 2022 prices has been controversial, but the legal framework appears solid, as indicated by Judge Dorsey's comments.

The IRS settlement is crucial for FTX’s bankruptcy process, significantly reducing one of the largest claims and allowing for a more orderly resolution of debts. As FTX moves forward, focus will shift to the reorganization plan details and stakeholders' reactions. Upcoming hearings will be critical in determining the final structure and timeline for creditor repayments and winding down FTX’s operations.