Controlling shareholder is liable as a transferee for corporate level tax
TAX BLOG |
The U.S. Court of Appeals for the Eleventh Circuit recently affirmed the Tax Court’s decision to hold a controlling shareholder liable for the unpaid corporate-level taxes of the company he sold. The case involved a tax shelter (Midco) transaction designed to eliminate corporate-level tax on the company’s sale of its assets.
The IRS examined the corporation and ultimately assessed tax, penalties and interest on the sale.
The Midco transaction was structured to allow the buyer to get a fair market value basis for the assets purchased and allow the selling corporation to escape tax on the sale and incur no reduction in the proceeds distributed to the controlling shareholder for any corporate-level tax resulting from the sale.
The facts of the transaction are complex and involved the use of an intermediary to shelter gain on the sale of the assets by transferring distressed debt to the selling company, creating losses that absorbed the built-in gain on the asset sale. The transaction and post-sale distribution of the proceeds rendered the company insolvent.
The Tax Court found, and the Court of Appeals confirmed, that the IRS could collect from the controlling shareholder (transferee) based on the applicable state law that recognized the transfers as fraudulent.
Taxpayers who are contemplating similar transactions should be aware of potential exposure as transferees if the sale of assets, followed by a distribution of the proceeds, renders the company insolvent and unable to pay its tax liability.