FTX Trading Ltd, the legal entity of the collapsed crypto exchange founded by Sam Bankman-Fried, is attempting to drastically reduce its tax debt to the United States Internal Revenue Service (IRS). The troubled exchange is proposing to settle with a $200 million priority tax claim and a $685 million subordinated claim, as detailed in a legal filing on June 3.

This development is the latest in a prolonged dispute between FTX and the IRS, with the exchange seeking to challenge the tax agency's calculations. The FTX Debtors, who are managing the company through its bankruptcy proceedings, argue that the IRS has erroneously included misappropriated funds from Bankman-Fried and other tax liabilities in their assessments.

"The Debtors vigorously dispute the IRS Claims in many crucial respects including, among other things, income tax liability for so-called 'misappropriation income' as a result of Sam Bankman-Fried’s theft of FTX customer funds, employment tax liability for purported compensation paid to Mr. Bankman-Fried and other former principals of the Debtors, and the proposed disallowance of a large amount of deductions and losses for lack of substantiation," the filing states.

The IRS, however, does not agree with the Debtors' arguments and intends to pursue significant tax liabilities if no settlement is reached. The objection deadline for this case is June 17, with a hearing set for June 25, 2024.

Initially, the IRS claimed that FTX owed $44 billion in taxes but later reduced the claim to $24 billion. FTX has contended that the IRS's $24 billion demand would significantly delay the return of funds to its customers. According to The Block, FTX argues that such a large tax liability would hinder the bankruptcy process and the timely restitution to affected customers.

In bankruptcy proceedings, a priority tax claim, such as taxes, must be paid before other debts. Conversely, a subordinated claim is paid only after higher-priority obligations are fulfilled.

FTX's proposal to pay $200 million as a priority tax claim and an additional $685 million as a subordinated claim is a strategic move to minimize its tax obligations and expedite the bankruptcy process. The outcome of this proposal will depend on negotiations with the IRS and the forthcoming legal proceedings.

As the saga unfolds, the resolution of FTX's tax liabilities will be crucial in determining how quickly and efficiently the exchange can settle its debts and return funds to its customers.