Explore the complexities of M&A transactions and the IRS’s pursuit of tax recovery in a stock deal. Learn from the case of Shockley v. CIR.
M&A Stories
December 11, 2018
In 2000, a couple who founded a media company in 1985 decided to retire while still holding a controlling interest in the company. They wanted to sell their company but faced a dilemma: a stock sale had tax advantages, but selling the assets separately might fetch a better price.
To address this, they employed a “midco transaction,” where they sold the company’s stock to a specialist buyer. Subsequently, the buyer sold the assets, which included radio and TV stations.
The tv station part of this complex deal concluded within hours on May 31, 2001 with the radio station closing five months later, either without generating immediate tax liability. The couple received approximately $26 million from this sale. However, the IRS later reclassified it as an asset sale and assessed the company nearly $79 million in taxes, penalties, and interest.
Since the company had been liquidated and no longer existed, the IRS pursued the couple under Section 6901 of the Internal Revenue Code, making them liable for the company’s tax debt. The couple challenged this in court but lost at both the Tax Court and the federal appellate court levels.
The court ruled that the stock sale was, in essence, an asset sale aimed at tax avoidance. The couple was found liable under Wisconsin’s fraudulent transfer law because they received the sales proceeds that had, in substance, been earned by the company from selling its highly appreciated radio and TV assets, rendering the company insolvent.
This case underscores the importance of understanding the complexities and potential consequences of M&A transactions, especially when they involve aggressive tax planning.
Case Reference:
Shockley v. CIR, No. 16-13473, United States Court of Appeals, Eleventh Circuit, (October 3, 2017).
By John McCauley: By John McCauley: I help people manage their tax risk when buying or selling a business.
Email: jmccauley@mk-law.com
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Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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