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The Step Transaction Doctrine

Introduction

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

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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].

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