The step transaction doctrine is a judicial doctrine in the United States that combines a series of formally separate steps, resulting in tax treatment as a single integrated event. The doctrine is often used in combination with other doctrines, such as substance over form. The doctrine is applied to prevent tax abuse, such as tax shelters or bailing assets out of a corporation. The step transaction doctrine originated from a common law principle in Gregory v. Helvering, 293 U.S. 465 (1935), which allowed the court to recharacterize a tax-motivated transaction.[1]
interrelated yet formally distinct steps in an integrated transaction may not be considered independently of the overall transaction. By thus linking together all interdependent steps with legal or business significance, rather than taking them in isolation, federal tax liability may be based on a realistic view of the entire transaction.[2]
There are three tests for applying the step transaction doctrine: (1) a binding commitment, (2) a mutual interdependence of steps, or (3) the intent of particular result.[3]
Binding commitment testedit
The binding commitment test was established in Commissioner v. Gordon.[4] Under this strict test, a court will combine a series of separate steps if the parties had a formal obligation to complete each step. This test is applied usually when there are long periods of time between steps in the transaction.
Mutual interdependence testedit
The mutual interdependence test combines a series of events if the steps are so interdependent that the legal relations created by one transaction would have been fruitless without a completion of the series.[5]
Intent testedit
The intent, or end result, test combines a series of closely related events that do not have independent purposes. If the intent of a step was merely to serve the next step, the court may consider the steps together.[6] This test is more concerned with subjective intent of each step than the mutual interdependence test is.
Examplesedit
In Commissioner v. Court Holding Co., 324 U.S. 331 (1945) the Supreme Court affirmed the tax court's treatment of a liquidating dividend and sale by shareholder as a sale of the corporation.[7]
In Kimbell-Diamond Milling Co. v. Commissioner, 14 T.C. 74 (1950), the purchase of a corporation and subsequent liquidation were disregarded and treated as purchase of assets.[8]
^Keinan, Yoram (2007). "Rethinking the Role of the Judicial Step Transaction Principle and a Proposal for Codification" (PDF). Akron Tax Journal. 22: 45. As early as 1938, the United States Supreme Court has indicated that "a given result at the end of a straight path is not made a different result because reached by following a devious path."
^Commissioner v. Court Holding Co., 324U.S. 331 (1945).
^Kimbell-Diamond Milling Co. v. Commissioner, 14 T.C. 74 (1950).
January 01, 1970
step, transaction, doctrine, step, transaction, doctrine, judicial, doctrine, united, states, that, combines, series, formally, separate, steps, resulting, treatment, single, integrated, event, doctrine, often, used, combination, with, other, doctrines, such, . The step transaction doctrine is a judicial doctrine in the United States that combines a series of formally separate steps resulting in tax treatment as a single integrated event The doctrine is often used in combination with other doctrines such as substance over form The doctrine is applied to prevent tax abuse such as tax shelters or bailing assets out of a corporation The step transaction doctrine originated from a common law principle in Gregory v Helvering 293 U S 465 1935 which allowed the court to recharacterize a tax motivated transaction 1 Contents 1 Application 1 1 Binding commitment test 1 2 Mutual interdependence test 1 3 Intent test 2 Examples 3 See also 4 ReferencesApplication editThe doctrine states interrelated yet formally distinct steps in an integrated transaction may not be considered independently of the overall transaction By thus linking together all interdependent steps with legal or business significance rather than taking them in isolation federal tax liability may be based on a realistic view of the entire transaction 2 There are three tests for applying the step transaction doctrine 1 a binding commitment 2 a mutual interdependence of steps or 3 the intent of particular result 3 Binding commitment test edit The binding commitment test was established in Commissioner v Gordon 4 Under this strict test a court will combine a series of separate steps if the parties had a formal obligation to complete each step This test is applied usually when there are long periods of time between steps in the transaction Mutual interdependence test edit The mutual interdependence test combines a series of events if the steps are so interdependent that the legal relations created by one transaction would have been fruitless without a completion of the series 5 Intent test edit The intent or end result test combines a series of closely related events that do not have independent purposes If the intent of a step was merely to serve the next step the court may consider the steps together 6 This test is more concerned with subjective intent of each step than the mutual interdependence test is Examples editIn Commissioner v Court Holding Co 324 U S 331 1945 the Supreme Court affirmed the tax court s treatment of a liquidating dividend and sale by shareholder as a sale of the corporation 7 In Kimbell Diamond Milling Co v Commissioner 14 T C 74 1950 the purchase of a corporation and subsequent liquidation were disregarded and treated as purchase of assets 8 See also editJudicial doctrines to combat tax shelters Economic substanceReferences edit Keinan Yoram 2007 Rethinking the Role of the Judicial Step Transaction Principle and a Proposal for Codification PDF Akron Tax Journal 22 45 As early as 1938 the United States Supreme Court has indicated that a given result at the end of a straight path is not made a different result because reached by following a devious path Commissioner v Clark 489 U S 726 738 1989 Rosenberg Joshua November 1988 Tax Avoidance and Income Measurement Michigan Law Review 87 2 365 497 doi 10 2307 1289221 JSTOR 1289221 Commissioner v Gordon 391 U S 83 93 1968 Paul Randolph Zimet Phillip 1938 Step Transaction Selected Studies in Federal Taxation Long Term Capital Holdings v United States 330 F Supp 2d 122 D Conn 2004 Commissioner v Court Holding Co 324 U S 331 1945 Kimbell Diamond Milling Co v Commissioner 14 T C 74 1950 Retrieved from https en wikipedia org w index php title Step transaction doctrine amp oldid 1081324294, wikipedia, wiki, book, books, library,
