Duluth web developer files for Chapter 11 bankruptcy

One of Duluth's largest technology employers has filed for Chapter 11 bankruptcy after years of financial battles with the Internal Revenue Service and the Minnesota Department of Revenue over failing to pay taxes.

One of Duluth's largest technology employers has filed for Chapter 11 bankruptcy after years of financial battles with the Internal Revenue Service and the Minnesota Department of Revenue over failing to pay taxes.

50 Below Sales & Marketing made the filing on Wednesday in U.S. Bankruptcy Court, claiming it had $10 million to $50 million in liabilities.

Among the creditors with the largest claims against the company are the IRS, which the company stated it owes $8.8 million in unpaid payroll taxes; the Minnesota Department of Revenue, which the company claims it owes about $1 million in taxes; and the Minnesota Unemployment Insurance Program, which is seeking nearly $500,000 in unemployment insurance, according to the company's filings.

50 Below designs and develops large-scale web applications and marketing campaigns for corporate clients, hosting more than 100,000 retailer and agent/adviser websites and e-commerce stores, according to the company's website.

The company's bankruptcy attorney, Mike McGrath, said the bankruptcy puts a plan in place to allow the company to pay back the state and federal government.


"The taxing authorities haven't agreed to let us pay the tax debt over a five-year period. The bankruptcy code specifically gives a Chapter 11 debtor the right to pay taxes over five years from the date of filing," McGrath said. "We don't need government consent to a five-year plan. We've never had the government agree to a five-year plan, and now we have the statutory right to pay our taxes over five years."

McGrath called the bankruptcy filing "the last step in what has been a very successful restructuring of the company."

He said the company would not be forced to lay off any of its 250 employees, adding that 50 Below has been profitable, making $800,000 through the first part of 2012.

"If anything, we'll continue to grow. This will remain a good employer in Duluth. The company is way better off operating under Chapter 11 bankruptcy protection than we were the day before we filed," he said. "We're in a position to pay the taxes. We'll be paying substantial tax debt out of profits. It's all good news for the people of Duluth and our employees."

David Hogge, the company's CEO, praised his employees in a statement saying they have helped to stabilize the company and "put us on the road to prosperity" despite being "in a down economy and in adverse local conditions."

"The leadership and staff have performed an incredible job," he said. "With this behind us we can focus on our customers, partners and employees."

The company has had tax trouble with the IRS and state Department of Revenue for over a decade. In 2006, for example, the U.S. Department of Justice filed suit against 50 Below claiming the company failed to pay $3.7 million in unemployment taxes.

While that claim was settled by a court order in 2007, in January 2010 the Justice Department filed a claim that 50 Below failed to file timely tax returns and pay its employment tax obligations per the court order. The company fought those claims, filing statements that the taxes were paid in compliance with the order.


On Aug. 15, the company claimed in a court filing that the IRS "has told Fifty Below that it intends to put it out of business by seizing its assets."

"The IRS has begun levying on the Company's accounts, which means that Fifty Below does not have the funds to pay its taxes" as required by a court order.

On Aug. 23, an attorney representing the Department of Justice filed an emergency motion claiming the company was in contempt of an April 6 court order by failing to make biweekly employment tax deposits and by not complying with discovery requests made by the government. Before a judge could decide the issue, the company filed for bankruptcy.

The company has also had problems paying its employees on time. In early December, the News Tribune reported that 50 Below failed to pay some of its employees before Thanksgiving.

McGrath said that was because of tax liens applied on the company by state and federal taxing authorities.

"That won't happen again," McGrath said. "There's an automatic stay in a Chapter 11 case, so all of the collection efforts, any proceedings against the company are stayed, and we can just focus on running our business."

Jon Napoli, who has worked for 50 Below for the last 11 years and is now a program manager for the company, said he believes the struggles with the IRS and state Department of Revenue are behind the company.

"I believe this will help us continue to grow for many, many years to come," he said.

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