Bankruptcy Taxation

S Corporation May Not Pay Shareholders Post-Petition Tax Obligations

By: Erin Rieu-Sicart

St. John’s Law Student

American Bankruptcy Institute Law Review Staff
Finding that it would violate the absolute priority rule, the United States Bankruptcy Court for the Western District of North Carolina, in In re Carolina Internet, Ltd., held that an insolvent S corporation may not pay post-petition taxes on behalf of its shareholders because a corporation’s creditors have priority over its shareholders.[1] That approach highlights the problems bankruptcy creates for pass-through entities such as S corporations, because the benefits of successful post-petition operations flow to the creditors while the tax consequences of those operations are borne by the shareholders.