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Profits from Tax Evasion Under the Midco Transaction

10 Pages Posted: 23 Apr 2013  

Calvin H. Johnson

University of Texas at Austin - School of Law


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.

The proposal is made as a part of the Shelf Project, a collaboration among tax professionals to develop proposals to help Congress raise revenue in ways that improve the fairness and efficiency of the tax system. Shelf projects follow the format of a committee report, describing current law and the reasons for change and providing an explanation of the proposal.

Suggested Citation

Johnson, Calvin H., Profits from Tax Evasion Under the Midco Transaction. Tax Notes, p. 45, March 2013; U of Texas Law, Public Law Research Paper No. 444; The Shelf Project. Available at SSRN:

Calvin Harsha Johnson (Contact Author)

University of Texas at Austin - School of Law ( email )

727 East Dean Keeton Street
Austin, TX 78705
United States
512-232-1306 (Phone)
512-232-2399 (Fax)

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