The Step Transaction Doctrine (Step Doctrine) determines whether the court should treat a series of transactions as a single taxable event for federal tax purposes.
A series of interrelated transactions may attract different tax consequences depending on whether the transactions are considered individually or whether they are viewed together as component parts of an overall transaction. Courts apply the Step Doctrine to ensure that federal tax liability is based on a realistic view of the substance of the entire transaction instead of viewing steps of a transaction in isolation.1
The application of the Step Doctrine results in an amalgamation of a series of purportedly distinct single-step transactions into one multi-step transaction.2 The effect of this integration is that the series of transactions are treated as a single taxable event.3 As stated by the U.S. Supreme Court, “federal tax liability may be based on a more realistic view of the entire transaction” by “linking together all interdependent steps with legal or business significance, rather than taking them in isolation”.4
This primer explains the Step Doctrine and its purpose, as well as the three legal tests used by courts to apply the Step Doctrine: (1) the end result test; (2) the mutual interdependence test; and (3) the binding commitment test.5
1 See e.g. King Enterprises, Inc. v. United States, 418 F.2d 511, 517, 189 Ct.Cl. 466 (Fed. Cl., 1969) [hereinafter King].
2 Crenshaw v. United States, 450 F.2d 472, 475 (5th Cir. 1971).
3 See e.g. King, supra note 1 at 516.
4 Commissioner of Internal Revenue v. Clark 489 U.S. 726, 738, 109 S.Ct. 1455, (1989).
5 See e.g. Penrod v. Commissioner of Internal Revenue, 88 T.C. 1415, 1429 – 1433, 1987 WL 49335, (1987) [hereinafter Penrod].
Find diagram examples of the Step Transaction Doctrine, including Revenue Rulings we have diagrammed, available for free, here at our Resource Library:
Rev. Rul. 99-6: Termination of partnership
Rev. Rul. 2003-51: Successive § 351 exchanges and control requirement
Rev. Rul. 2017-9, Sit. 1: "North-South" Ruling - Transfers treated as separate
Rev. Rul. 2017-9, Sit. 2: "North-South" Ruling - Distribution pursuant to a plan
Rev. Rul. 2015-9: Section 351 transfer with D reorg and step transaction
Rev. Rul. 2015-10: Triple drop and check (351 exchanges with D reorg)
Rev. Rul. 99-5: Conversion to Partnership
Rev. Rul. 2001-24: Forward triangular merger not disqualified by drop
Rev. Rul. 2008-18, Sit. 1: "F" reorganization for S Corp; EIN advice
Rev. Rul. 2001-46, Sit. 1: Acquisition merger & upstream merger collapsed
Rev. Rul. 2008-25: § 338 policy and §368(a)(2)(E) with § 332
Rev. Rul. 2001-26, Sit 1: Tender offer as part of reverse triangular merger
Rev. Rul. 2001-26, Sit. 2: Tender offer as part of reverse triangular merger
Rev. Rul. 98-27: "Control" satisfied despite post-distribution reorg
Rev. Rul. 90-95, Sit.1: Reverse sub cash merger treated as QSP
Rev. Rul. 90-95, Sit.2: Reverse sub cash merger is QSP and liquidation
Rev. Rul. 2003-79: Sub-all transferred in "C" reorg of spun Controlled
Rev. Rul. 2004-85, Sit. 1: A QSub election is not terminated by an F reorg
Rev. Rul. 2004-85, Sit. 2: QSub election terminates after non-F reorg
Rev. Rul. 2004-85, Sit 3: Transfer of all interest does not cancel CTB
Rev. Rul. 2004-83, Sit.1: § 304 and § 368(a)(1)(D); consolidated group
Rev. Rul. 2004-83, Sit.2: § 304 and § 368(a)(1)(D); non-consolidated
Rev. Rul. 83-142: Interim steps to comply local law are disregarded
Rev. Rul. 70-140: Transitory stock ownership fails § 368(c) control
Rev. Rul. 78-250: Transitory corp disregarded; recast as redemption
Rev. Rul. 75-447, Sit.1: § 302(b)(2) redemption after adding new SH
Rev. Rul. 73-427: Multistep acquisition treated as exchange
Rev. Rul. 79-70: § 368(c) control is broken by a planned sale of stock
Rev. Rul. 79-10: IRS recasts a non pro-rata liquidating distribution
Rev. Rul. 78-330: Cancellation of debt respected; § 357(c) does not apply in merger
Rev. Rul. 75-493: § 301 applies to distribution of unwanted cash
Rev. Rul. 70-106: § 331 applies to liquidation after 25% redemption
Rev. Rul. 72-405: Forward triangular merger and liquidation of sub
Rev. Rul. 76-123: "C" reorg in context of § 351
Rev. Rul. 78-397: Circular flow of cash is disregarded for tax purposes
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