The Step Transaction Doctrine

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

References

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

Download PDF

Discover More

Related Blogs

Newsletter

Get blogs directly to your inbox

Sign up for the Blue J newsletter today.

Get Started

Start enjoying better, faster analysis with Blue J

Whether you have questions or are interested in booking a demo, we would love to hear from you.