The step transaction doctrine is a judicial doctrine in the United States

United States

The United States of America is a federal constitutional republic comprising fifty states and a federal district...

 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

Substance over form is an accounting principle used "to ensure that financial statements give a complete, relevant and accurate picture of transactions and events"...

. The doctrine is applied to prevent tax abuse, such as tax shelters or bailing assets out of a corporation

Corporation

A corporation is created under the laws of a state as a separate legal entity that has privileges and liabilities that are distinct from those of its members. There are many different forms of corporations, most of which are used to conduct business. Early corporations were established by charter...

. The step transaction doctrine originated from a common law

Common law

Common law is law developed by judges through decisions of courts and similar tribunals rather than through legislative statutes or executive branch action...

 principle in Gregory v. Helvering, 293 U.S. 465 (1935) that allowed the court to recharacterize a tax-motivated transaction.

Application

The doctrine states that:

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.

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 usually applied where 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.

Examples

• In Commissioner v. Court Holding Co., 324 U.S. 331 (1945) the Supreme Court
  Supreme Court of the United States
  The Supreme Court of the United States is the highest court in the United States. It has ultimate appellate jurisdiction over all state and federal courts, and original jurisdiction over a small range of cases...
  
   affirmed the tax court's treatment of a liquidating dividend
  Liquidating dividend
  A liquidating distribution, sometimes called a liquidating dividend, is a type of nondividend distribution made by a corporation to its stockholders during its partial or complete liquidation. Like nondividend distributions, they are not paid out of the earnings and profits of the corporation...
  
   and sale by shareholder as a sale of the corporation.

• In Kimbell-Diamond Milling Co. v. Comissioner, 14 T.C. 74 (1950), the purchase of corporation and subsequent liquidation was disregarded and treated as purchase of assets.

See also

• Judicial doctrines to combat tax shelters
• Economic substance
  Economic substance
  Economic substance is a doctrine in the tax law of the United States under which a transaction must have an economic purpose aside from reduction of tax liability in order to be considered valid...