SPECIAL REPORT: ‘Starnes' Highlights Midco Shelter Litigation Issues

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Although the Fourth Circuit recently declined to impose transferee liability on former shareholders of a company sold through a purported intermediary tax shelter, practitioners tell BNA the issues created by IRS's efforts to use federal substance-over-form principles to recast so-called Midco transactions as generating state law transferee liability could open the door to other creditors attempting to do the same. “The IRS is fabricating a transfer for federal tax purposes that never actually occurred,” says Anthony Daddino of Meadows, Collier, Reed, Cousins, Crouch & Ungerman. “And it is asking the Tax Court to hold that such federal tax fiction can give rise to a state law transferee liability claim.” He warns such a ruling could open the floodgates for other creditor claims.