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INTRODUCTION
The step transaction doctrine (STD) requires that, in appropriate circumstances, one or more seemingly separate transactions be treated as one transaction for tax purposes. Conversely, a complicated transaction with several steps may be treated as several transactions rather than one. The doctrine has been applied to a broad range of tax issues.
Ordinarily, in interpreting tax law, one looks to the Internal Revenue Code, Treasury Regulations and court decisions. When issues are complex and litigation results, the courts also rely upon various common law doctrines to interpret the tax law. The step transaction doctrine (STD) is often used by the courts to look past the form of a transaction and examine any underlying motives and issues that might indicate the transaction's substance is something other than its form.(1)
Unfortunately, there is no guidance in the code or regulations as to when the STD will be applied. When a taxpayer is entering into a complex transaction that may consist of several related steps, there may be a great deal of uncertainty as to how the IRS and the courts will view the transaction. The difference in treating the steps as one transaction or as many may be significant in terms of tax liabilities. The resulting uncertainty is generally viewed as a serious deficiency in the tax law.(2)
The purpose of the study reported in this article is to attempt to determine if there is a set of objective and predictable factors used by the courts in deciding these cases upon which a taxpayer may rely when trying to determine the tax effect of a contemplated transaction. If these factors could be identified, this information could be used to reduce uncertainty.
FACTORS
The following factors have been used in court cases involving the STD:
I. Timing of the transactions-(DAYS)-A short period of time between transactions may imply that the steps should be viewed as a whole and a long period of time may imply the converse. The common wisdom often dispensed is that an "old and cold" transaction will not be stepped together with a "new and hot" transaction. Although it appears that this is generally the case, there are many instances where the opposite has been true. In several cases, a period of several years...