BANKRUPTCY COURT HOLDS DEBTOR COMPANY HAD PROPERTY INTEREST IN QSUB STATUS.

Because it was a QSub, MSC II was not required to pay federal and state income taxes on its net taxable income under chapter 1 of the IRC and chapter 2 of the Indiana Code. Id. at ¶¶ 2, 17-20. See 26 U.S.C. §§ 1361(b)(3)(A), 1362(a), 1366(a)-(b); Ind. Code § 6-32-2-8(2); 26 C.F.R. § 1.1361-(4)(a). Additionally, MSC II was not required to file income tax returns separate from BDI. Compl. at ¶ 2 n.2. Instead, since a QSub is treated as a flow-through entity, BDI's income tax return included all items of income or loss generated by MSC II. Id. Although this income and loss must be reported on its tax return, an "S" corporation like BDI generally is not required to pay tax on such income; rather, the items of income and loss are reported on the personal tax return of the "S" corporation's shareholders (in this case, BDI's sole shareholder, Barden), who may be required to pay tax on the income. Id. at ¶ 2 n.2. See 26 C.F.R. § 1.1366-1(a).

On the Petition Date, both BDI and MSC II retained their status as an "S" corporation and QSub, respectively. Compl. at ¶¶ 2, 17, 30. After the Petition Date, but before March 16, 2010, BDI filed a notice with the IRS revoking its status as an "S" corporation as of January 1, 2010 (the "Revocation"). Id. at ¶ 21. As a result, U.S. Treasury regulations dictated that, MSC II's QSub status was automatically terminated as of the end of the prior tax year,⁵ December 31, 2009, and both BDI and MSC II became "C" corporations as of January 1, 2010. Id. at ¶ 21. 26 U.S.C. §§ 1361(b)(3)(B)-(C), 1362(d); 26 C.F.R. §§ 1.1361-4(a), 1.1361-5(a)-(b), 1.1362-2(a).

As a consequence of becoming a "C" corporation, MSC II became responsible for filing its own tax returns and paying income taxes on its holdings and operations (26 C.F.R. §§ 1.11-1(a); 1.6016-1-1.6016-4), which include the Majestic Star II riverboat casino and the Majestic Star Hotel at Buffington Harbor in Gary, Indiana. Compl. at ¶¶ 22, 25.

Neither BDI nor Barden sought or obtained authorization from the Court for the Revocation. Id. at ¶ 23. The Complaint alleges that BDI and Barden did not consult with the Debtors or the Debtors' advisors before the Revocation. Id. The Debtors did not learn of the termination of MSC II's QSub status until July 19, 2010, which is believed to be at least four months after BDI and Barden filed the Revocation with the IRS. Id. at ¶ 24.

The Debtors allege that because MSC II was not informed about the Revocation, it was unaware that it had a new obligation to report and pay income taxes. Id. at ¶ 27. The Debtors allege that due to the change of MSC II's tax status, MSC II has had to pay approximately $2.26 million in estimated income tax to the Indiana Department of Revenue for 2010 that it otherwise would not have had to pay. Id. However, as of April 2011, the Debtors had paid no federal income taxes to the IRS as a result of the Revocation. If the Debtors owe any federal taxes, they had to make their estimated tax payments for MSC II to the IRS on April 15, 2011. Additionally, the Debtors had to make their estimated tax payments and penalties for the year ended December 31, 2010, to the Indiana Department of Revenue, on April 20, 2011. Id.

The Court disagrees with the IRS's argument that it does not have jurisdiction over the Debtors' claims. The IRS's position is based on a fundamental flaw that the Debtors' claims against the IRS, regard the amount or legality of any tax claim under section 505(a)(1). The Debtors are not seeking a declaratory judgment of the amount of any tax under section 505(a)(1), rather, the Debtors are seeking to avoid the revocation of MSC II's QSub status as an unauthorized transfer of estate property under § 549. This Court has jurisdiction under 28 U.S.C. § 157(b)(2) to determine an avoidable transfer under § 549, and the IRS's lack of jurisdiction argument.

As discussed above, the Court must accept as true all allegations in the Amended Complaint and draw reasonable inferences in a light most favorable to the plaintiff. Phillips v. County of Allegheny, 515 F.3d 224, 231 (3d Cir. 2008); Morse v. Lower Merion School District, 132 F.3d 902, 905 (3d Cir. 1997). However, "a court need not credit a plaintiff's 'bald assertions' or 'legal conclusions' when deciding a motion to dismiss." Sands v. McCormick, 502 F.3d 263, 267-68 (3d Cir. 2007) (quoting Morse, 132 F.3d at 906).

As discussed in further detail infra, the Debtors have alleged sufficient facts which, if accepted as true, establish a plausible ground for a claim that there was a postpetition unlawful transfer of property of the estate that was not authorized under title 11 or by the Court. Therefore, the Defendants' Motion to Dismiss for failure to state a claim is denied.

For purposes of the Motion for Judgment on the Pleadings, the Debtors have alleged sufficient facts which if accepted as true, establish a plausible ground for a claim that there was a postpetition unlawful transfer of property of the estate that was not authorized under title 11 or by the Court. Therefore, Defendants Barden and BDI's Motion for Judgment on the Pleadings is denied. The Defendants' substantive arguments are discussed infra, in the Court's Summary Judgment discussion.

Summary judgment serves to "isolate and dispose of factually unsupported claims or defenses" and avoid unnecessary trial where the facts are settled. Delta Mills, 404 B.R. at 104 (quoting Celotex Corp. v. Catrett, 477 U.S. 317 (1986)). Thus, at the summary judgment stage, the court's function is not to weigh the evidence and determine the truth of the matter, but to determine whether there is a genuine issue for trial. Pearson v. Component Tech. Corp., 247 F.3d 471 (3d Cir. 2001) (citing Celotex, 477 U.S. at 317); see also Fed.R.Civ.P. 56(c). In making this determination, the court must view all facts in the light most favorable to the non-movant and must draw all reasonable inferences from the underlying facts in favor of the non-movant. McAnaney, 665 F.Supp.2d at 141; Pastore v. Bell Tel. Co. of Pa., 24 F.3d 508, 512 (3d Cir.1994). Any doubt must also be construed in the non-moving party's favor. Delta Mills, 404 B.R. at 105.

Once the moving party provides sufficient evidence, the burden shifts to the non-moving party to rebut the evidence. Delta Mills, 404 B.R. at 105. The non-moving party "must do more than simply show that there is some metaphysical doubt as to the material facts." McAnaney, 665 F.Supp.2d at 141 (quoting Caldarola v. Calabrese, 298 F.3d 156, 160 (2d Cir. 2002)). "[T]he mere existence of some alleged factual dispute between the parties" cannot defeat a properly supported summary judgment motion. Anderson, 477 U.S. at 247-48. The dispute must relate to a genuine issue of material fact. Delta Mills, 404 B.R. at 105. Thus, a non-moving party cannot defeat a summary judgment motion based on conclusory allegations and denials, but instead must provide supportive arguments or facts that show the necessity of a trial. McAnaney, 665 F.Supp.2d at 141.

Summary judgment should be granted if, after drawing all reasonable inferences from the underlying facts in the light most favorable to the non-moving party, the court concludes that there is no genuine issue of material fact to be resolved at trial and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(a).

The parties' submissions demonstrate that there are no genuine issues of material fact. The issue in this case solely involves issue of law. More specifically, the issue is whether a Debtors' QSub status as a QSub is property of the estate? Under section 549 of the Bankruptcy Code, "the trustee may avoid a transfer of property of the estate that occurs after the commencement of the case; and . . . that is not authorized under [title 11] or by the court." 11 U.S.C. § 549(a); In re NJ Mobile Dental Practice, P.A., 2008 WL 1373706, at *4 (Bankr. D.N.J. Apr. 7, 2008) (section 549 also empowers debtor in possession to avoid post-petition transfers).

A. Was there an Avoidable Transfer of the Property of the Bankruptcy Estate?

Nonetheless, section 541 of the Bankruptcy Code does not specifically define what constitutes an interest in property. "The legislative history of § 541(a) indicates that it is expansive and includes 'all kinds of property, including tangible or intangible property, causes of action . . . and all other forms of property specified in section 70(a) of the Bankruptcy Act.'" In re Forman Enters., Inc., 281 B.R. at 611 (citing U.S. v. Whiting Pools, 462 U.S. 198, 205 n. 9, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983). "'Generally, property belongs to the debtor . . . if its transfer will deprive the bankruptcy estate of something which could otherwise be used to satisfy the claims of creditors.'" In re Feiler, 230 B.R. 164, 167 (B.A.P. 9th Cir. 1999) (quoting In re Bullion Reserve of N. Am.), 836 F.2d 1214, 1217 (9th Cir. 1988)).

Non-debtor parent BDI's subchapter "S" election under IRC § 1362 resulted in the Debtors' treatment as a QSub under IRC § 1361(b)(3)(B)). As a result of BDI's subchapter "S" election under title 26 § 1362 of the United States Code, federal law will determine whether the Debtors hold a property interest in its QSub status. Numerous federal courts have previously held that a debtor's prepetition status as an "S" corporation is property of the estate. See Parker v. Saunders (In re Bakersfield Westar), 226 B.R. 227, 233-34 (B.A.P. 9th Cir. 1998) (finding that debtor's right to make or revoke its subchapter S status is property of th estate); In re Frank Funaro Inc. v. Funaro (In re Frank Funaro Inc.), 263 B.R. 892, 898 (B.A.P. 8th Cir. 2001) (adopting Bakersfield for proposition that debtor has property interest in "S" corporation status); Walterman Implement Inc. v. Walterman (In re Walterman Implement Inc.), 2006 WL 1562401, *3 (Bankr. N.D. Iowa May 22, 2006) (same); Guinn v. Lines (In re Trans-Lines W., Inc.), 203 B.R. 653, 661-62 (Bankr. E.D. Tenn. 1996) (finding that an "S" corporation's tax status constitutes property interest under the Bankruptcy Code); In re Cumberland Farms, Inc., 162 B.R. 62, 66-67 (Bankr. D. Mass. 1993) (finding that the debtor has a property interest in the tax savings that result from its "S" corporation status).

Additionally, some of those courts have held that the "S" corporation's status is property of the estate because of the tax benefits that status confers on the debtor. See In re Feiler, 230 B.R. at 168 (holding that a debtor's right to carry forward or carry back a net operating loss is property of the estate. The court noted that in addition to the ability to control the right to make or revoke a net operating loss election, the tax benefits resulting from the revocation of the election shifted "an obligation of the debtor-corporation's principals, and payment of those tax liabilities would have diminished estate funds that would otherwise have been available to satisfy the claims of the debtor-corporation's creditors."); In re Bakersfield Westar, 226 B.R. at 233-34 ("The ability to not pay taxes has a value to the debtor-corporation in this case . . . [as a result of the revocation of the debtor's "S" corporation status] [t]he debtor's estate will be required to pay the capital gains taxes on an administrative expense priority basis, and its payment of the taxes will diminish the amount of monies that would otherwise be available to satisfy claims of the debtor's remaining creditors."); In re Cumberland Farms, Inc., 162 B.R. at 66-67 (finding that the debtor has a property interest in the tax savings that result from its "S" corporation status).

This Court agrees with other courts that have held that a debtor "S" corporation, or in this case its wholly-owned QSub, has a property interest in the benefits that status affords the debtor, most importantly the ability to pass-through tax liability and the net operating losses to its ultimate shareholders. Bakersfield, 226 B.R. at 233-34 (finding that the debtor had a property interest in its subchapter S status where revocation required estate to pay $400,000 in taxes otherwise owed by shareholders). In In re Cumberland Farms, Inc., the court had to decide whether the debtor "S" corporation had a property interest in the tax savings that resulted from its "S" corporation status. Id. at 64-65. The court held that the Debtors' "S" corporation had a property interest in the benefit of minimizing future tax payments. Id. at 66-67.

Similarly, the Court in Bakersfield in part premised its holding that a debtor's "S" status is estate property on the ground that the revocation of that "S" status would require the debtor's estate to pay taxes that it would otherwise not be required to pay and "diminish the amount of monies available to satisfy claims of the debtor's remaining creditors." 226 B.R. at 234. See also In re Feiler, 230 B.R. at 168 ("As a result of the revocation, the estate's substantial capital gains tax liabilities became an obligation of the estate and its creditors, rather than remaining an obligation of the debtor-corporation's principals, and payment of those tax liabilities would have diminished estate funds that would otherwise have been available to satisfy the claims of the debtor-corporation's creditors. Id. at 168 (quoting In re Bakersfield Westar, 226 B.R. at 230, 233-34). Consequently, because the debtor-corporation's subchapter "S" status provided the debtor-corporation the ability to pass-through capital gains tax liabilities to its principals, the right to make or revoke its subchapter "S" status had value to the debtor and constituted property or an interest of the debtor in property. Id.

As established by the case law, a wholly-owned QSub, like an "S" corporation, has a property interest in the benefits that status affords the debtor, most notably the right of the estate to be free of a heavy tax burden that will "diminish estate funds that would otherwise have been available to satisfy the claims of the debtor-corporation's creditors." In re Feiler, 230 B.R. at 168; See also In re Bakersfield Westar, 226 B.R. at 230.

As a Qsub, the Debtors enjoyed a special tax status that allowed them to pass-their its taxable income and net operating losses to its shareholders. The significance of this benefit is not lost on the Court. Prior to the Revocation, all of the Debtors' net operating losses flowed up from MSC II to BDI, and then ultimately to Defendant Barden. As the controlling shareholder of multiple pass-through "S" corporate entities (BDI and the Debtors), Barden received an enormous tax benefit. Barden, as the sole shareholder of BDI and CEO of BDI and each of the Debtors, elected to treat BDI as an "S" corporation in 2005. After this initial election, Barden, who controlled BDI, then had BDI elect to treat its wholly-owned subsidiary, MSC II, as a QSub under IRC § 1361(b)(3)(A). The net tax effect of these elections is that all of the income and losses of the underlying "S" corporations flowed up to Barden and allowed Barden to enjoy the benefits of the Debtors' prepetition net operating losses to offset his personal income tax.

Conversely, once the Debtors filed for bankruptcy protection, BDI's "S" corporation status and the QSub status no longer benefitted Barden. Postpetition, as a result of the "S" corporation election and QSub election, Barden was faced with the very real possibility of having to pay ordinary income taxes and capital gains taxes on the pass-through treatment of the Debtors' income and potential sale of assets of his companies. The Revocation of BDI's "S" status and, by operation of the IRC, the Debtors' QSub's status, helped Barden to avoid potentially negative tax consequences. By operation of the IRC and Treasury Regulations, the Revocation of BDI's "S" status automatically terminated MSC II's QSub status and converted both entities into "C" corporations. The result was the reversal of the beneficial prepetition flow-through treatment of net operating losses to the controlling shareholder, Barden. 26 U.S.C. §§ 1361(b)(3)(B)-(C), 1362(d); 26 C.F.R. §§ 1.1361-4(a), 1.1361-5(a)-(b), 1.1362-2(a).

The Court disagrees with the Defendants that the Revocation merely caused collateral change to MSC II. The Revocation was not a change without significance. The affect of the Revocation is that a potentially significant tax burden was shifted from Barden, as controlling shareholder of pass-through "S" corporation entities, back to the Debtors. As a result of the Revocation, potential tax liabilities became an obligation of the estate and its creditors, and the payment of those tax liabilities will diminish estate funds that would have been available to satisfy creditors' claims.

The Bakersfield Court aptly addressed this type of attempted bankruptcy tax planning; "[t]hus, the decision to revoke the debtor's sub-chapter S status appears to reflect careful tax planning, and the Revocation appears to represent an effort by the Saunders to manipulate the bankruptcy system to their personal advantage under the guise of professional tax planning." Bakersfield, 226 B.R. at 236. Here, the Debtors as a wholly-owned QSub have a property interest in that status under § 541 of the Bankruptcy Code because of the significant tax benefits it provided them, namely, to pass-through income and loss to its sole shareholder, Barden. Defendant Barden enjoyed the benefits of the "S" corporation election and QSub election through his ability to utilize the Debtors' net operating losses to offset his own personal income. Now he must also bear the burden of any post-petition tax liabilities attributable to the Debtors. After the Revocation of the Debtors' QSub status, a potentially significant tax liability has been transferred back to the estate and will reduce the creditors' recovery. The Debtors' status as a QSub has very real and significant value and is property of the estate. Debtors were damaged by the Revocation under the guise of tax planning.

Defendants Barden, BDI, and the IRS argue that the QSub has no property interest in its tax status because the QSub has no separate for tax purposes from the "S" corporation. QSub status is dependent on an election of the "S" corporation parent. The Court disagrees that a QSub cannot have a property interest in its tax status because the decision to elect or revoke that tax status is held by a non-debtor. The Second Circuit has held that property interests include rights that may be intangible and/or contingent on a non-debtor's actions. See e.g. Official Committee of Unsecured Creditors v. PSS Steamship Co. (In re Prudential Lines Inc.), 928 F.2d 565, 570 (2d Cir. 1991) (rejecting the non-debtor parent's argument that because the debtor was a subsidiary member of a consolidated group, the common parent of that group, and not the debtor, controlled the group's use of the net operating losses. The Second Circuit affirmed the bankruptcy court's order enjoining a non-debtor parent corporation from taking a stock deduction that would have prevented its debtor subsidiary from claiming its net operating losses.). The Third Circuit has also held that "[p]roperty of the estate 'includes all interests, such as . . . contingent interests and future interests, whether or not transferable by the debtor.'" Pension Transfer Corp. v. Beneficiaries Under Third Amendment to Fruehauf Trailer Corp. Ret. Plan (In re Fruehauf Trailer Corp.), 444 F.3d 203, 211 (3d Cir. 2006) (quoting Prudential, 928 F.2d at 572). Despite the fact that MSC II's QSub status is dependent on an election of the non-debtor "S" corporation, BDI, MSC II has a property interest in its QSub status.

The IRS argues that the cases the Debtors cite for the proposition that an "S" corporation's subchapter S status is property of the estate do not support the Debtors' arguments because the holdings in each of those cases were based on the rationale that an "S" corporation has the right to make or revoke its subchapter S status. IRS Reply Brief at 8-9 (D.I. 50). The IRS argues that unlike "S" corporations, QSubs do not have the right to make or revoke their QSub tax status, "[r]ather, the QSub's status depends entirely on the actions of their parent corporation." Id. at 9. The IRS asserts that the cases Debtors cite are inapposite.

The Court disagrees with the Defendant's contention that because the Qsub does not have the right to make or revoke its QSub status, that the QSub does not have a property interest in its tax status. IRC § 1362(a) provides that a small business corporation can elect to be treated as an "S" corporation and that the election is only valid if all of the shareholders consent to the "S" corporation election. See 26 U.S.C. § 1362(a)(1)-(2). In conjunction with IRC § 1362(a) governing "S" corporation election, IRC § 1361(b)(3)(B) defines what qualifies as a wholly-owned qualified subchapter "S" subsidiary. IRC § 1361(b)(3)(B) provides that the subsidiary will be treated as a QSub if (1) it is wholly-owned by an "S" corporation, and (2) the "S" corporation elects to treat the subsidiary as a qualified subchapter S subsidiary. IRC § 1361(b)(3)(B). Although MSC II's QSub status was dependent on BDI's election, Prudential established that a property interest may exist even if contingent on a non-debtor's actions. MSC II's interest in the QSub status was property of the estate.

Furthermore, regardless that the IRC provides that the "S" corporation or QSub elections are controlled by the "S" corporation, the reality is that both elections are controlled by the principal shareholders of the "S" corporation. In a corporate group such as the Debtors, with wholly-owned subsidiaries owned by a single principal shareholder, this reality becomes even more clear. Defendant Barden is the sole shareholder and principal of BDI, the "S" corporation. BDI in turn owns one hundred percent of MSC II, the QSub. Although BDI elected to treat MSC II as a QSub, in reality that decision was made by BDI's sole shareholder, Defendant Barden. The same applies to the Revocation.

Finally, the Defendants' argument that the Debtors' "S" corporation cases are inapposite is not persuasive. The Defendants' argument presumes that the holdings that an "S" corporation has a property interest in its "S" corporation status were based exclusively on the rationale that an "S" corporation has the right to make or revoke its subchapter "S" status, and those rights are what constituted an interest of the debtor in property. The Defendants argue that because a QSub does not have the right to make or revoke its QSub status, the holdings on the "S" corporation decisions are inapplicable.

The Court disagrees. The fact that the "S" corporation has the right to make or revoke its subchapter S status was not the only rationale and basis for the rulings that an "S" corporation has a property interest in its "S" corporation status. As expressed in the decisions, those courts also gave consideration to other factors such as the benefit that the status conferred on the estate. This includes minimizing tax liability and avoiding the shifting of a tax burden from the principal shareholder back onto the estate and the estate's creditors. See In re Bakersfield Westar, 226 B.R. at 234; In re Cumberland Farms, Inc., 162 B.R. at 66-67; In re Feiler, 230 B.R. at 168 (holding that a debtor's right to carry forward or carry back a net operating loss is property of the estate while also noting that in addition to the ability to control the right to make or revoke a net operating loss election, the tax benefits resulting from the revocation of the election shifted "an obligation of the debtor-corporation's principals, and payment of those tax liabilities would have diminished estate funds that would otherwise have been available to satisfy the claims of the debtor-corporation's creditors.").

The cited cases which premise holdings on the tax benefits that the "S" corporation status conferred on the debtors, apply equally to both "S" corporations and QSubs. Like an "S" corporation, a QSub benefits from its status as a pass through entity. The primary benefit is that all income earned by the QSub is passed through and up to the "S" corporation and then further passed on to the "S" corporation shareholders. The ability to minimize or eliminate tax liability is a significant benefit to the estate and will help preserve a larger portion of estate funds to satisfy creditors' claims. See In re Feiler, 230 B.R. at 168; See also In re Bakersfield Westar, 226 B.R. at 230. The fact that the QSub does not itself have the ability to make or revoke its QSub status is a statutory anomaly. As explained infra, the right to make or revoke the election to be treated as an "S" corporation is in reality controlled by the corporation's shareholders and they equally control the right of the QSub to be treated as a QSub by having the "S" corporation make the § 1361(b)(3)(B) election for Qsub treatment. Therefore, the case law that takes into consideration the benefits that the "S" corporation's status conferred on the Debtors in determining that the status is property of the estate is equally applicable to Qsubs. As a result, the Court holds that a wholly-owned QSub has a property interest in the tax benefits that status affords the debtor, most notably the right to be free from a heavy tax burden, and the right to prevent a shifting of tax liability from the shareholders to the QSub through a revocation of the "S" corporation's status, that by operation of the IRC revokes the QSub's status.

B. Was The Revocation a Violation of the Automatic Stay?

The Court will grant the Debtors' Motion for Summary Judgment as to Count II of the Complaint because the Revocation violated the automatic stay imposed by Section 362 of the Bankruptcy Code. Section 362 of the Bankruptcy Code prohibits any act "to exercise control over property of the estate," including the post-petition transfer of the debtor's property. 11 U.S.C. § 362(a)(3). Any act in violation of the stay is void and has no effect. See e.g., In re Hull, 2003 WL 22000599, at *1 (Bankr. D. Del. 2003).

The automatic stay is violated "where a non-debtor's action with respect to an interest that is intertwined with that of a bankrupt debtor would have the legal effect of diminishing or eliminating property of the bankrupt estate." Prudential, 928 F.2d at 574. A wholly-owned QSub has a property interest in the tax benefits that status affords the debtor, most notably the right of the estate to be free of a heavy tax burden that will diminish creditors' recovery, and any postpetition act that causes the debtor to lose this status is an act to exercise control over property of the estate. See Walterman Implement Inc. v. Walterman (In re Walterman Implement Inc.), 2006 WL 1562401, at *3; In re Feiler, 230 B.R. at 168; Cumberland, 162 B.R. at 68.

The Defendants' revocation of BDI's "S" corporation status which automatically terminated the Debtors' QSub status was an exercise of control over the Debtors' property in violation of § 362.

In addition, Defendant IRS's Motion to Dismiss is DENIED; and Defendants Barden and BDI's Motion for Judgment on the Pleadings is DENIED.

DATED: January 24, 2012.

² For purposes of the Motion to Dismiss and motion for judgment on the pleadings, "The court is not required to state findings or conclusions when ruling on a motion under Rule 12. . . ." Fed. R. Bankr. P. 7052(a)(3). Accordingly, the Court herein makes no findings of fact and conclusions of law pursuant to Rule 7052 of the Federal Rules of Bankruptcy Procedure. With respect to the Motion for Summary Judgment, this Opinion constitutes the findings of fact and conclusions of law required by Federal Rule of Bankruptcy Procedure 7052. To the extent any of the following findings of fact are determined to be conclusions of law, they are adopted, and shall be construed and deemed, conclusions of law. To the extent any of the following conclusions of law are determined to be findings of fact, they are adopted, and shall be construed and deemed, as findings of fact.

³ The operations of an "S" corporation are subject to only one level of taxation. Its income and losses are passed through to its shareholders and the corporation itself is generally exempt from the taxes imposed under chapter 1 of the IRC. The same is true of a QSub. A "C" corporation, by contrast, is subject to two levels of taxation. Its net income is subject to tax at the corporate level and any distributions made by the corporation to its shareholders are subject to a second level of tax.

⁴ To qualify as a QSub, the entity must be a domestic corporation that is wholly-owned by an "S" corporation and one which the "S" corporation elects to treat as a QSub. See 26 U.S.C. § 1361(b)(3)(A). Although BDI owns the stock of MSC II through two intermediate entities -- Majestic Holdco and The Majestic Casino, LLC (Bennett Affidavit at ¶¶ 5-7) -- these two entities are disregarded for federal income tax purposes, and BDI is treated as the direct owner of MSC II. 26 C.F.R. § 301.7701-3(b). Therefore, MSC II met the requirements for Qsub status.(Bennett Affidavit at ¶¶ 3-8).

⁵ The QSub's status was automatically terminated pursuant to 26 U.S.C. § 1361(b)(3)(B) because it no longer met the statutory requirement of being wholly-owned by an "S" corporation.