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IRS Seeks to Block Gallery Reorganization

24 Mar, 2008 By: Erik Gruenwedel

Movie Gallery Inc.'s path to exit bankruptcy by the second quarter may have hit a snag March 24 when the Internal Revenue Service filed an objection seeking more than $7.5 million in administrative expenses and other fees.

The motion filed with U.S. Bankruptcy Court in Richmond, Va., claims Gallery owes the IRS $3.3 million and Hollywood Video owes $4.2 million in tax-related expenses through Jan. 15, 2008.

In addition the IRS said it objected to language in Gallery's reorganization plan that it claimed is in violation of the Tax Anti-Injunction Act. Enacted in 1867 the Act requires that a person or entity in dispute over a tax liability with the IRS must first pay the full amount to the government before filing an administrative claim for a refund.

Separately, the Virginia Department of Taxation filed a motion against Gallery seeking sales, litter and income taxes in the amount of more than $42,000.

Gallery posted a net loss of $469,000 on consolidated revenue of nearly $200 million for the period from Jan. 7 to Feb. 10.

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