The hemp industry is facing a rapidly shifting regulatory landscape that could significantly alter the financial and legal viability of many businesses. In the recent episode of TaxTalk x Cannabis Quick Hits, we break down the looming regulatory overhaul, its tax and bankruptcy implications, and the restructuring options available to hemp and cannabis companies navigating financial distress.

A Major Regulatory Shift for Hemp

Bankruptcy and IRS tax debts are deeply misunderstood topics, often surrounded by confusion and anxiety.

For individuals and businesses who know very little about these issues, it’s important to start with the basics – not all tax debts are wiped out by bankruptcy, and the rules for clearing IRS debts are complex. However, bankruptcy can provide relief, or at least breathing room, for those facing insurmountable tax bills.

Here’s what you need to know, presented in practical terms for the average taxpayer.

What Is Bankruptcy?

Earlier this year, the Internal Revenue Service (“IRS”) recognized a victory in United States v. Miller. In this bankruptcy case, the trustee attempted to avoid certain transfers that shareholders of the bankrupt company had made, including a $145,000 transfer to the IRS.

Paul, Weiss Named Chapter 11 Firm of the Year in Global Restructuring Review Awards

Global Restructuring Review (GRR) recognized Paul, Weiss as the “Chapter 11 Firm of the Year” in its 2024 GRR Awards, which honor the most impressive restructuring practices and individuals of the past year. The firm was recognized for its role advising in several major chapter 11 matters, including the restructurings of Hornblower, Lumileds, Revlon and Rite Aid, among others

Brian Hermann Discusses Chapter 11 Trends at Bankruptcy Conference

Section 548 of the bankruptcy code authorizes a trustee, debtor, or other appropriate party to avoid actual and constructive fraudulent transfers that occurred prepetition. In order to prove that a transfer was an actual fraudulent transfer, the trustee (or another appropriate plaintiff) must prove that the debtor made the transfer “with actual intent to hinder, delay or defraud any entity to which to debtor was or became…indebted.” 11 U.S.C. §548(a)(1)(A).

Chart Comparing Exemptions

The specific bankruptcy and nonbankruptcy (Minnesota law and nonbankruptcy federal law) exemptions vary in scope and dollar amount. The following table summarizes and compares the two sets of exemptions. The statutory language of the exemption has been paraphrased in this chart. The actual statutory language as well as case law must be reviewed when analyzing a debtor’s claim for a particular exemption.

Revised August 2024

. . . In such circumstances, sealing the indictment “would undermine the purpose of having a statute of limitations at all.”

Introduction

A powerful tool afforded to a bankruptcy trustee or a chapter 11 debtor-in-possession ("DIP") is the power to recover pre-bankruptcy transfers that are avoidable under federal bankruptcy law (or sometimes state law) because they were either made with the intent to defraud creditors or are constructively fraudulent because the debtor-transferor received less than reasonably equivalent value in exchange and was insolvent at the time, or was rendered insolvent as a consequence of the transfer.

You can’t make this stuff up. The legal issues are pedestrian. But the facts behind those issues are incredible!

Litigation History

Here’s the boring stuff first.

On January 8, 2024, the U.S. Supreme Court denies certiorari in Mann v. LSQ Funding Group, L.C. (Case No. 23-425). Here’s the procedural background:

A debtor's non-exempt assets (and even the debtor's entire business) are commonly sold during the course of a bankruptcy case by the trustee or a chapter 11 debtor-in-possession ("DIP") as a means of augmenting the bankruptcy estate for the benefit of stakeholders or to fund distributions under, or implement, a chapter 9, 11, 12, or 13 plan.