Tuesday, April 30, 2013
Calvin H. Johnson (Texas), Profits From Tax Evasion Under the Midco Transaction, 138 Tax Notes 1485 (Mar. 25, 2013):
In a transaction the IRS has called the midco shelter, a scoundrel evades tax on the sale of a corporation’s business assets and shares the benefit of the evasion with the sellers of the corporation’s stock and the buyers of its assets. Shareholders of a corporation with appreciated assets sell stock to the scoundrel, and the corporation sells its assets. Tax on the gain is due but the scoundrel evades tax. Asset buyers get a step-up in basis to cost without having to cover the tax on the asset sale. Stock sellers get a price greater than the net worth of assets, when tax due is considered.
The proposal would make the selling shareholders secondarily liable for the corporate tax, limited by the premium they receive in excess of the corporation’s net worth. That premium would be measured from the actual sales of corporate assets. The proposal would also make asset buyers secondarily liable for corporate tax, limited by the deemed value of the step-up in basis. The proposal would have no effect on current transferee liability law.
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