DIEBOLD and the Not So Beautiful: Transferee Liability Trumps Tax Shelter
By Jeffrey A. Galant
The Second Circuit, in Diebold v. Commissioner, describes the requirements for finding transferee liability under Section 6901, here specifically under New York law, as state law predominates the determination of whether a person will be liable for federal taxes as a transferee. This case involved a so-called “Midco”transaction, whereby the goal was to avoid the corporate level taxes on the disposition of the assets of a C-corporation.
A sale by the shareholders of their C corporation stock and a sale by the C corporation of its assets were recharacterized as a sale by the C corporation of its assets and then a liquidating distribution of the sale proceeds to the shareholders of the C corporation. This recharacterization allowed the Second Circuit to hold that the C corporation’s shareholders had transferee liability under New York law with respect to the tax liability recognized by the C corporation on the sale of its assets. A remand to the Tax Court concerns whether such recharacterization satisfies federal law.