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I. INTRODUCTION
This outline reviews how the step transaction doctrine has been applied in some of the common types of internal restructuring transactions, in order to illustrate that the approach in the recent tax shelter cases of focusing on "no business purpose" is contrary to the approach followed by the courts and the Internal Revenue Service ("the IRS" or "the Service") when applying step transaction principles to these various restructurings. While it may be difficult to discern when it may be sensible to apply the more rigorous version of step transaction from the recent tax shelter cases, I propose the test that I used as IRS Deputy Chief Counsel to determine whether to describe a particular transaction as a tax shelter: Was there a structure in search of transaction, or a transaction in search of a structure? The former often had the hallmarks of a tax shelter, while the latter did not. In the latter case, the well-known principles of tax planning in the corporate and partnership restructuring area should continue to apply.
A. General Concepts
The step transaction doctrine is a familiar concept to those who advise corporations on various types of internal restructurings. Often the doctrine is applied without regard to whether there is a tax avoidance motive driving the transaction. For example, if target stock is acquired in a purported "B" reorganization, and then the target is liquidated pursuant to an overall plan, practitioners understand that the transaction may not be tax-free unless it qualifies as a "C" reorganization.1 Tax avoidance has nothing to do with this concern. Rather, there is simply a factual question presented of whether the stock acquisition and liquidation are part of the "plan of reorganization."
B. Taxpayers' Affirmative Use of Doctrine
The step transaction doctrine can be a friend as well as an enemy. For example, assume a U.S. parent wants to transfer one controlled foreign corporation ("CFC 1") to another controlled foreign corporation ("CFC 2") for cash and then have CFC 1 make a check-the-box election. It is desired that the overall transaction be treated as a "D" reorganization, rather than a §304 2 transaction followed by a §332 liquidation. Practitioners are entitled to rely affirmatively on step transaction principles in collapsing the stock purchase...