The step transaction doctrine is a

judicial doctrine A legal doctrine is a framework, set of rules, procedural steps, or test, often established through precedent in the common law, through which judgments can be determined in a given legal case. A doctrine comes about when a judge makes a ruling ...

in the

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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 Substance over form is an accounting principle used "to ensure that financial statements give a complete, relevant, and accurate picture of transactions and events". If an entity practices the 'substance over form' concept, then the financial sta ...

. The doctrine is applied to prevent tax abuse, such as

tax shelters Tax shelters are any method of reducing taxable income resulting in a reduction of the payments to tax collecting entities, including state and federal governments. The methodology can vary depending on local and international tax laws. Types of ...

or bailing assets out of a

corporation A corporation is an organization—usually a group of people or a company—authorized by the state to act as a single entity (a legal entity recognized by private and public law "born out of statute"; a legal person in legal context) and r ...

. The step transaction doctrine originated from a

common law In law, common law (also known as judicial precedent, judge-made law, or case law) is the body of law created by judges and similar quasi-judicial tribunals by virtue of being stated in written opinions."The common law is not a brooding omnipresen ...

principle in ''

Gregory v. Helvering ''Gregory v. Helvering'', 293 U.S. 465 (1935), was a landmark decision by the United States Supreme Court concerned with U.S. income tax law. The case is cited as part of the basis for two legal doctrines: the business purpose doctrine and the do ...

'', 293 U.S. 465 (1935), which allowed the court to recharacterize a tax-motivated transaction.

Application

The doctrine states: 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.

Binding commitment test

The binding commitment test was established in ''Commissioner v. Gordon''.. 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

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.

Intent test

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. This test is more concerned with subjective intent of each step than the mutual interdependence test is.

Examples

*In ''Commissioner v. Court Holding Co.'', 324 U.S. 331 (1945) the

Supreme Court A supreme court is the highest court within the hierarchy of courts in most legal jurisdictions. Other descriptions for such courts include court of last resort, apex court, and high (or final) court of appeal. Broadly speaking, the decisions of ...

affirmed the tax court's treatment of a

liquidating dividend A liquidating distribution (or liquidating dividend) is a type of nondividend distribution made by a corporation or a partnership to its shareholders during its partial or complete liquidation. Liquidating distributions are not paid solely out of th ...

and sale by shareholder as a sale of the corporation. *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.{{cite court , litigants=Kimbell-Diamond Milling Co. v. Commissioner , vol=14 , reporter=T.C. , opinion=74 , pinpoint= , court= , date=1950 , url=https://www.leagle.com/decision/19508814jtc74179 , accessdate=2017-10-19 , quote=

References