Tax Court Rejects IRS Challenge to "Midco" Transaction

The U.S. Tax Court has again rejected the IRS's challenge to a so called "midco" transaction on the basis of imposing transferee liability upon the shareholder, a trust, which sold its stock in a C corporation.  The Tax Court in Frank Sawyer Trust of May 1972, T.C. Memo 2011-298 (No. 5526-07) held that state fraudulent conveyance law did not apply to the stock sale transaction, and that the tax doctrine of substance over form was not applicable. The Service has been challenging these so called "midco" transactions over the past few years, in which an intermediary buyer purchases the stock of the C corporation's shareholders at a one level of capital gains tax to the stock seller, then the buyer consolidates the new target and liquidates the assets against midco losses and sells the assets to another market buyer.