“So, we’ll take step one, and then step two and then step three and then pay no tax!? Wow, that’s great, we should have been doing this 
for years!” Maybe you have heard these words, or even said these words. With all the current tax law, tax attorneys, CPAs, accountants and others have found loopholes of which transactions can be arranged, organized and carried out in a manner that provide the taxpayer with a benefit that was never intended by Congress upon the passing of the tax law or tax laws. Although, our tax attorneys may find these transactions creative, they may be illegal and certainly could be questioned and not upheld by the Internal Revenue or a court. Therefore, we recommend you discuss any proposed transaction with a tax attorney if it sounds too good to be true. The article below discusses one doctrine, the Step Transaction Doctrine that can be used by the Internal Revenue Service or a court when reviewing certain transactions and what the correct tax implications should be to the transaction(s).
One Judicial Doctrine that tax lawyers are familiar with is the Step Transaction Doctrine. The Step Transaction Doctrine allows for the combination of separate “steps” or transactions and taxes them as a single occurrence or transaction. As the court stated in Comm’r v. Clark, 489 U.S. 726, 738 (1989), “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.”
The Internal Revenue Service or a court may look for a binding commitment to complete any one step within a series of transactions, which appears separate from the others. Another factor the Internal Revenue Service or a court may consider is how likely one party would be to enter into the transaction(s) or agreement(s) if the other steps never took place or occurred. Further, the parties subjective intent can be considered and whether the separate steps or transactions have an independent purpose. If each step or transaction is related to a former or later step or transaction, it is likely the Internal Revenue Service or a court would apply the Step Transaction Doctrine and view them as a single event for tax purposes.
As a Denver tax attorney and business attorney, John McGuire is familiar with the Step Transaction Doctrine and other doctrines that can be applied by the IRS to alter the tax outcome of certain transactions. We would gladly assist you in examining any proposed transactions that you are considering entering into.
