In
In re Majestic Star Casino, LLC, the Court of Appeals for the Third Circuit held as a matter of first impression that a Chapter 11 debtor’s status as a pass-through entity for taxation purposes did not constitute “property” of the bankruptcy estate.
[1] The debtors, Majestic Star Casino II (“MSC II”) and other subsidiaries and affiliates, were wholly owned by a non-debtor corporation called Barden Development, Inc. (“BDI”).
[2] Don H. Barden (“Barden”) was the sole shareholder, CEO, and president of BDI.
[3] In November of 2009, the debtors filed for bankruptcy under chapter 11 of the Bankruptcy Code.
[4] Later that year, Barden chose to revoke BDI’s status as an “S” corporation (“S-Corp”) for tax purposes, thus forfeiting the company’s pass-through tax status.
[5] As a result of that election, MSC II’s status as a qualified subchapter S subsidiary (“QSub”) was also automatically revoked.
[6] Thus, MSC II was now subject to federal and state taxes that it used to pass on to Barden.
[7] MSC II asserted that the revocation of BDI’s S-Corp status constituted an unlawful postpetition transfer of property of MSC II’s bankruptcy estate.
[8] The Third Circuit reversed the decision of the bankruptcy court, holding that MSC II’s status as a QSub for tax purposes was not property, and even if it was, it would belong to the shareholders of its non-debtor parent corporation and not to MSC II.
[9]