F I L E D

United States Court of Appeals

Tenth Circuit

SEP 9 1999

PATRICK FISHER

Clerk

PUBLISH

UNITED STATES COURT OF APPEALS

TENTH CIRCUIT

JEAN D. TRUE, individually and as personal

representative of the estate of Henry A. True, Jr.;

HENRY A. TRUE, III; KAREN S. TRUE,

DIEMER D. TRUE; SUSAN L. TRUE; DAVID

L. TRUE; MELANIE A. TRUE,

Plaintiffs-Appellants,

v.

UNITED STATES OF AMERICA,

Defendant-Appellee.

No. 98-8015

Appeal from the United States District Court

for the District of Wyoming

(D.C. No. 96-CV-1050-J)

Richard E. Day (Mark L. Carman of Williams, Porter, Day and Neville, P.C.; and

Ronald M. Morris with him on the briefs) of Williams, Porter, Day and Neville,

P.C., Casper, Wyoming, for Plaintiffs-Appellants.

Jonathan S. Cohen (Loretta C. Argrett, Assistant Attorney General, and Teresa T.

Milton, Department of Justice, Washington, D.C.; David D. Freudenthal, United

States Attorney for the District of Wyoming, Cheyenne, Wyoming, of counsel,

with him on the briefs) of the Department of Justice, Washington, D.C., for

Defendant-Appellee.

Before TACHA, BARRETT and BRORBY, Circuit Judges.
1

 This case originally included a cross-appeal designated No. 98-8018,

which involved a dispute over pipeline depreciation. We need not address this

matter because the parties stipulated to dismissal and the appeal was dismissed by

order dated June 29, 1999. They agree our decision in Duke Energy Natural Gas

Corp. v. Commissioner, 172 F.3d 1255 (10th Cir. 1999), filed during the

pendency of this appeal, effectively settled the pipeline dispute.

2

 We reviewed the government’s motion to dismiss this appeal for lack of

jurisdiction and its arguments in support thereof, and conclude the motion should

be denied.

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BRORBY, Circuit Judge.

Appellants, Jean D. True (individually and personal representative of the

estate of Henry A. True, Jr.), Henry A. True III, Karen S. True, Diemer D. True,

Susan L. True, David L. True, and Melanie A. True (hereinafter “taxpayers,”

“Trues,” or “True family”), challenge the district court’s summary judgment order

in favor of the government, claiming the court erroneously applied the step

transaction doctrine to invalidate certain business transactions they executed. In

addition, Appellants argue the district court erred when it refused to apply the

collateral estoppel doctrine to bar relitigation of particular issues decided in an

earlier tax case involving the same parties.1 We exercise jurisdiction pursuant to

28 U.S.C. § 1291 and affirm in part, reverse in part, and remand for further

proceedings.2
3

 Karen S. True, Susan L. True, and Melanie A. True are parties to this

lawsuit by virtue of having filed joint returns with their husbands, Henry, Diemer,

and David, who are minority shareholders or partners in the True family

businesses.

-3-

I. Background

This tax refund suit arises from the Trues’ dispute with the Internal

Revenue Service over the characterization of certain transactions involving

several True family businesses. The Trues engage in a variety of business

ventures including oil and gas production and exploration, and ranching. They

conduct their family businesses primarily as general partnerships or Subchapter S

Corporations, with Henry True, Jr. (prior to his death) and his wife, Jean, owning

equal controlling interests, and their three sons, Henry, Diemer, and David,

sharing equal minority interests in the ownership and operation of the businesses.3

The family businesses involved in this case are True Ranches, a partnership

engaged in ranching, farming, and feedlot operations; Smokey Oil Company, a

Wyoming corporation engaged in oil and gas production and exploration; True Oil

Company, a general partnership engaged in oil and gas production and

exploration; and Bear Lodge Mountain Corporation and True Land and Royalty

Company, two Subchapter S corporations the Trues organized to acquire and deal

in oil and gas leases.
4

 The Internal Revenue Service has issued a Revenue Ruling stating

improved ranchland and producing oil and gas leases are “like kind” properties

for purposes of I.R.C. § 1031. Rev. Rul. 68-331, 1968-1 C.B. 352.

-4-

Two separate series of transactions involving the Trues’ businesses are

presently in dispute. The first involves a multi-stage purchase, exchange, and

transfer involving ranchland properties (hereinafter “ranchland transactions”), and

the second involves the acquisition and subsequent assignment of oil and gas

leases in exchange for guaranteed minimum overriding royalty payments

(hereinafter “oil and gas lease transactions”). In order to explain clearly the

events giving rise to this suit, we summarize the transactions separately.

A. Ranchland Transactions

During the 1980s, the True family purchased five new ranch properties to

add to their ranching operations. Each purchase took place through the same

series of steps, described as follows. First, instead of True Ranches directly

acquiring the ranchlands, the taxpayers arranged for Smokey Oil Company to

purchase the parcels of real property, while True Ranches acquired the operating

assets of each ranch. Smokey Oil Company then transferred the ranchlands to

True Oil Company in exchange for selected productive oil and gas leases. 

Internal Revenue Code § 1031 permitted the Trues to treat the exchange as a likekind, tax-free exchange.4

 After the transfer, True Oil Company immediately
-5-

distributed the newly acquired ranchlands to the individual family-member

partners of True Oil Company as tenants in common. The partners then

contributed their undivided interests in the lands to True Ranches by general

warranty deed. Internal Revenue Code §§ 721 and 731 allowed the Trues to treat

these distributions as non-recognition transactions.

This series of acquisitions, transfers and exchanges had positive tax

implications for the Trues. Through the operation of I.R.C. § 1031(d), which

essentially provides that the basis of property received in a tax-free exchange is

the same as the basis of the property transferred, Smokey Oil Company received

depletable oil and gas leases with the same cost basis it had in the nondepreciable ranchland it transferred in the exchange with True Oil Company. 

This allowed Smokey Oil Company to claim cost depletion deductions for the

leases on its tax returns for 1989 and 1990 under I.R.C. § 612, resulting in

substantial tax savings for the True family. True Oil Company, on the other hand,

received the non-depreciable ranchland with a zero basis because the oil and gas

leases it exchanged pursuant to I.R.C. § 1031 were fully cost depleted. Through

the subsequent transfers, True Ranches acquired the ranchland with the same zero

basis as True Oil Company’s oil and gas leases. Ultimately, the Trues reaped the

tax benefits of turning non-depreciable assets (ranchlands) into cost-depletable
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assets (oil and gas leases) in the hands of Smokey Oil Company, with the residual

effect of ridding True Oil Company of fully cost-depleted assets (oil and gas

leases) and leaving True Ranches with a zero basis in otherwise non-depreciable

assets (ranchlands).

B. Oil and Gas Lease Transactions

Employing a similar strategy, the Trues utilized Bear Lodge Mountain

Corporation and True Land and Royalty Company to acquire and then assign

numerous oil and gas leases. Neither of these entities had any employees, and

they relied primarily on the land department of True Oil Company or independent

landmen hired by True Oil Company to arrange the lease acquisitions. The Trues

structured the transactions so that Bear Lodge Mountain Corporation and True

Land and Royalty Company acquired the oil and gas leases, and shortly thereafter,

assigned a 100 percent interest in the leases to either True Oil Company or

Smokey Oil Company. In exchange, Bear Lodge Mountain Corporation or True

Land and Royalty Company retained an overriding royalty of five percent, against

which True Oil Company and Smokey Oil Company made annual advance royalty

payments or “guaranteed minimum overriding royalty” payments over the life of

the lease.
-7-

As a result of these transactions, True Oil Company and Smokey Oil

Company deducted the guaranteed minimum overriding royalties paid to Bear

Lodge Mountain Corporation and True Land and Royalty Company on their tax

returns for 1989 and 1990 under Treas. Reg. § 1.612-3(b)(3). This arrangement

allowed True Oil Company and Smokey Oil Company to realize the tax benefits

of immediately expensing the guaranteed minimum overriding royalty payments

instead of capitalizing the purchase of the leases as the Internal Revenue Code

ordinarily requires for direct purchases of those type assets. On the other side of

the transaction, even though the Internal Revenue Code required Bear Lodge

Mountain Corporation and True Land and Royalty Company to report the

guaranteed minimum overriding royalty payments as income they received in

exchange for the oil and gas lease assignments, the companies could claim an

offsetting cost depletion deduction under Treas. Reg. § 1.612-3(b)(1). This

maneuvering resulted in an overall tax advantage for the True family businesses

that passed through to the individual taxpayers.

C. Internal Revenue Service Proceedings

Suspicious of both the ranchland and oil and gas lease transactions, the

Internal Revenue Service audited the Trues’ tax returns for tax years 1989-1990. 

As a result of the audit, the Internal Revenue Service recharacterized both the
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ranchland transactions and oil and gas lease transactions, denying the Trues the

described tax benefits associated with them.

The Internal Revenue Service treated the ranchland transactions as if True

Ranches had acquired the property in the first instance, and thus assigned True

Ranches the same basis in the property as the amount Smokey Oil Company paid

to acquire the land. The Internal Revenue Service also disallowed the cost

depletion deductions Smokey Oil Company took for the leases acquired from True

Oil Company in the tax-free exchange. Instead, the Internal Revenue Service

allocated the income from those leases to True Oil Company and allowed True Oil

Company to take percentage depletion deductions, rather than the cost depletion

Smokey Oil Company originally claimed.

As for the oil and gas lease transactions, the Internal Revenue Service

treated True Oil Company and Smokey Oil Company as having directly acquired

the leases instead of Bear Lodge Mountain Corporation and True Land and

Royalty Company. Accordingly, the Internal Revenue Service (1) disallowed

True Oil Company’s and Smokey Oil Company’s guaranteed minimum overriding

royalty deductions, and (2) required the companies to treat the cost of acquiring

the leases as capital expenditures. The Internal Revenue Service allowed Bear
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Lodge Mountain Corporation and True Land and Royalty Company to exclude the

guaranteed minimum overriding royalty income, but did not permit the companies

to claim a deduction for cost depletion.

The Trues paid under protest the deficiency from the 1989 and 1990 tax

years as determined by the Internal Revenue Service audit, and then promptly

filed an administrative claim for a refund. After the Internal Revenue Service

disallowed the refund, the taxpayers filed the present refund suit in district court.

D. District Court Proceedings

In proceedings before the district court, the government filed motions for

partial summary judgment contending, under the step transaction doctrine, the

court must: (1) treat the series of exchanges and transfers involved in the

ranchland purchases as a single transaction wherein True Ranches alone acquired

the property, and (2) construe the assignment of oil and gas leases from Bear

Lodge Mountain Corporation and True Land and Royalty Company to True Oil

Company and Smokey Oil Company as a single transaction wherein True Oil

Company and Smokey Oil Company directly obtained the leases. In opposition to

these motions, the Trues argued that the business transactions had independent

economic significance, bona fide business purposes, and, in any event, presented
5

 In the 1973-1975 tax case, True family members assigned oil and gas

leases to True Oil Company in exchange for guaranteed minimum overriding

royalty payments. As in the present case, True Oil Company deducted the

guaranteed minimum overriding royalties paid while the recipient recognized the

amount as income and took a cost depletion deduction against the income

received. The government challenged this arrangement, but a jury decided the

guaranteed minimum overriding royalty payments True Oil Company “made to

[True] family members were entered into for valid and substantial business

purposes having economic reality.” True v. United States , 629 F. Supp. 881, 885

(D. Wyo. 1986). Thus, the court ratified the Trues’ treatment of the advanced

royalty payments. Id.

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issues of fact inappropriate for summary judgment. In addition, the Trues filed

their own motion for partial summary judgment arguing on collateral estoppel

grounds that earlier litigation and final judgment in a previous tax case

(hereinafter “1973-1975 tax case”), involving the same parties and same issues as

those involved in the present dispute over the oil and gas lease transactions,

barred the government from relitigating those issues.5

The district court rejected the Trues’ collateral estoppel argument, finding

changes in controlling legal principles since the 1973-1975 tax case precluded its

application in this case. Then, the court granted the government’s motions for

summary judgment, finding the step transaction doctrine required the

recharacterization of both the ranchland transactions and the oil and gas lease

transactions in the way the government requested.
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II. Discussion

On appeal, the taxpayers argue the district court: (1) erred in ruling as a

matter of law that the step transaction doctrine required True Ranches to be

treated as the purchaser of the ranchland, thereby denying the economic benefits

and advantageous tax treatment of the transactions; (2) erred in precluding the

application of collateral estoppel to the dispute over the tax treatment of the oil

and gas lease transactions; and (3) erred in deciding as a matter of law that, under

the step transaction doctrine, the payment of guaranteed minimum overriding

royalties should be collapsed into a single transaction. We review de novo the

district court’s order granting summary judgment, employing the same legal

principles as the district court and construing the factual record and the

reasonable inferences therefrom in the light most favorable to the party opposing

summary judgment. See Byers v. City of Albuquerque 150 F.3d 1271, 1274 (10th

Cir. 1998). Summary judgment is appropriate if the record shows “that there is

no genuine issue as to any material fact and that the moving party is entitled to a

judgment as a matter of law.” Fed. R. Civ. P. 56(c). An issue of material fact is

genuine only if a party presents facts sufficient to show that a reasonable jury

could find in favor of the nonmovant. Anderson v. Liberty Lobby, Inc., 477 U.S.

242, 248 (1986).
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A. Collateral Estoppel

We first examine whether judgment in the 1973-1975 tax case precludes the

government from relitigating the issue of the deductibility of the guaranteed

minimum overriding royalty payments in the context of the oil and gas lease

transactions. In opposition to the Trues’ collateral estoppel claim, the

government initially argues the district court lacked subject matter jurisdiction

over the issue because the Trues failed to raise this argument in their

administrative refund filing. The district court did not address this jurisdictional

challenge, and instead found collateral estoppel inapplicable on other grounds. 

We find it necessary to address the jurisdictional contention.

Internal Revenue Code § 7422(a) provides “[n]o suit or proceeding shall be

maintained in any court for the recovery of any internal revenue tax alleged to

have been erroneously or illegally assessed or collected ... until a claim for refund

or credit has been duly filed with the Secretary.” The claim for refund “must set

forth in detail each ground upon which a credit or refund is claimed and facts

sufficient to apprise the Commissioner of the exact basis thereof.” Treas. Reg. §

301.6402-2(b)(1); see also Herrington v. United States, 416 F.2d 1029, 1032

(10th Cir. 1969) (burden is on the claimant to bring asserted grounds of recovery

to the Internal Revenue Service; the Commissioner is not required to “ferret out
-13-

possible grounds for relief which a taxpayer might assert”). Under these rules, if

the taxpayer does not adequately raise an issue at the administrative level, the

courts have no jurisdiction to consider the issue in a later suit for refund. In re

Estate of Bird, 534 F.2d 1214, 1219 (6th Cir. 1976); see also Alabama

By-Products Corp. v. Patterson, 258 F.2d 892, 900 (5th Cir. 1958), cert. denied,

358 U.S. 930 (1959). These requirements serve to apprise the Internal Revenue

Service of the nature of the claim and its underlying facts, so that it can make a

thorough administrative investigation and determination, correct any errors, and

“‘limit the scope of any ensuing litigation to those issues which have been

examined and which [it] is willing to defend.’” Stelco Holding Co. v. United

States, 42 Fed. Cl. 101, 108 (1998) (quoting Union Pacific R.R. Co. v. United

States, 389 F.2d 437, 442 (Ct. Cl. 1968)); see also McKart v. United States, 395

U.S. 185, 194-95 (1969) (generally addressing administrative exhaustion

requirements to promote the practical notions of judicial efficiency,

administrative autonomy, and effective agency procedures).

Neither the parties nor our own research reveals any controlling authority

specifically addressing whether a taxpayer must raise a collateral estoppel claim

in the course of filing an administrative tax refund in order to preserve the issue

for appeal. Thus, we treat this as an issue of first impression. 
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In support of its position that the Trues must plead collateral estoppel in

the administrative filing, the government relies solely on the plain language of

I.R.C. § 7422(a) and Treas. Reg. § 301.6402-2(b), and asserts the Trues did not

“set forth in detail each ground upon which a credit or refund is claimed.” The

Trues counter this argument, relying on Parke, Davis & Co. v. United States,

1975 WL 787, 76-1 USTC (CCH) ¶ 9280 (E.D. Mich. 1975) (quoting National

Forge & Ordnance Co. v. United States, 151 F. Supp. 937 (Ct. Cl. 1957)), for the

proposition they are not required to state their claims for a refund with any degree

of particularity, and their failure to specifically include collateral estoppel does

not preclude them from raising the issue in this present litigation. In addition, the

Trues argue that because the Internal Revenue Service knew or should have

known about the earlier lawsuit from a review of its own records and would suffer

no prejudice from the application of collateral estoppel, it cannot now evade its

application.

The Trues’ reliance on Parke, Davis & Co. is misplaced. Parke, Davis &

Co. and the cases cited therein

merely stand for the proposition that an issue raised in litigation, but

not specifically referred to in the refund claim, might be permitted, if

the newly raised issue was subsidiary to, or an integral part of, the

grounds presented in the refund claim such that the omitted issue

must have necessarily been considered by the [Internal Revenue

Service] in its review of the refund claim.
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Lockheed Martin Corp. v. United States, 39 Fed. Cl. 197, 201 (1997) (emphasis

added). The estoppel claim in Parke, Davis & Co. clearly was subsidiary to, or an

integral part of, the refund claim wherein the taxpayer alleged the Internal

Revenue Service arbitrarily and capriciously changed its position as documented

in a previous ruling letter that the taxpayer requested, and upon which the

taxpayer relied. Such is not the case here.

The Trues do not attempt to estop the Internal Revenue Service from

changing its position on the tax treatment to be afforded the oil and gas lease

transactions subject to the 1989-1990 audit. Indeed, the Internal Revenue Service

never has adopted the Trues’ position on that issue. The Trues instead attempt to

bind the Internal Revenue Service to the judicial disposition of a percentage

depletion issue involving guaranteed overriding royalty payments in an

independent case litigated some fifteen years earlier. We fail to see how the

Internal Revenue Service would necessarily have considered the judicial

disposition in the 1973-1975 tax case when reviewing the refund claim presently

at issue. Unlike the situation in Parke, Davis & Co., we construe the Trues’

collateral estoppel claim to be an independent ground upon which to base their

refund claim, not an “issue subsidiary to, or an integral part of,” other substantive

claims they raised in the administrative proceeding. Accordingly, the Trues
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should have raised collateral estoppel as a distinct ground for a refund in the

course of filing their administrative refund claim.

As for the Trues’ argument that the Internal Revenue Service ’s knowledge

of the prior lawsuit excuses their failure to raise the issue in their administrative

refund claim, we conclude that in order to preserve the collateral estoppel issue

for our review, “[i]t is not enough that in some roundabout way the facts

supporting the claim may have reached” the attention of the Internal Revenue

Service . Levitsky v. United States, 27 Fed. Cl. 235, 241 (1992). The Trues must

demonstrate the Internal Revenue Service not only knew of the preclusive effect

of the prior litigation, but also that the Service “understood that a claim was being

made based upon” those grounds. Id. (emphasis added). Thus, even if the

Internal Revenue Service knew about the prior case, it was still incumbent on the

Trues to make it plain they based their refund claim in part upon the prior

decision.

Having reviewed the parties’ arguments and the cases generally dealing

with the requirements of an administrative tax appeal, we hold the Trues cannot

assert collateral estoppel for the first time in federal court, because they failed to

raise the issue in the course of their administrative refund filing. See James v.
-17-

Chater, 96 F.3d 1341, 1343 (10th Cir. 1996) (issues omitted from an

administrative appeal are deemed waived for purposes of subsequent judicial

review); Brown v. United States, 890 F.2d 1329, 1346 (5th Cir. 1989) (“[A]

taxpayer is barred from raising in a refund suit grounds for recovery not clearly

and specifically set forth in its claim for a refund.”). Although we do not believe

it was necessary for the Trues to expressly use the words “collateral estoppel” in

their refund claim in order to preserve the issue, they should have presented

enough information to give the Internal Revenue Service notice they intended to

rely on the preclusive effect of the prior litigation as a basis for their refund

claim. See Charter Co. v. United States, 971 F.2d 1576, 1579-80 (11th Cir. 1992)

(“[a]lthough crystal clarity and exact precision are not demanded,” the taxpayer

must identify in its refund claim the "essential requirements" of the refund

demand). In other words, the Trues should have made at least some reference to

the preclusive effect of the 1973-1975 tax case during the course of their

administrative claim. The Trues’ failure to specifically invoke collateral estoppel

or at least reference the prior judgment left the Internal Revenue Service, as the

reviewing agency, without sufficient notice of their intent to rely on the prior

decision and its potential preclusive effect on issues in the present case. The

Supreme Court has consistently and strictly held “[a] reviewing court usurps the

agency’s function when it sets aside the administrative determination upon a
6

 We emphasize, as a prelude to our substance over form analysis, “[t]he

legal right of a taxpayer to decrease the amount of what otherwise would be his

taxes, or altogether avoid them, by means which the law permits.” Gregory v.

Helvering, 293 U.S. 465, 469 (1935). A tax-avoidance motive for structuring a

transaction in a particular way is not inherently fatal, and nothing in this opinion

is intended to invalidate otherwise legitimate tax planning strategies. However,

the structure of the Trues’ transactions, coupled with their familial relationships

and common ownership of the businesses involved, compels us to exercise a

heightened level of skepticism and scrutiny in this matter. See Kornfeld, 137 F.3d

1231, 1235 (10th Cir. 1998) (where the "parties to the transactions in question are

related, the level of skepticism as to the form of the transaction is heightened,

because of the greater potential for complicity between related parties in

arranging their affairs in a manner devoid of legitimate motivations." (Quotation

marks and citation omitted.)), cert. denied, 119 S. Ct. 171 (1998); Milbrew, Inc. v.

Commissioner, 710 F.2d 1302, 1305 (7th Cir. 1983) (“When persons who are not

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ground not theretofore presented and deprives [it] of an opportunity to consider

the matter, make its ruling, and state the reasons for its action.” Unemployment

Compensation Comm’n v. Aragan, 329 U.S. 143, 155 (1946); see also Wilson v.

Hodel, 758 F.2d 1369, 1372-73 (10th Cir. 1985). We will not usurp the Internal

Revenue Service’s function by resolving a collateral estoppel claim not previously

considered in the administrative proceeding. For these reasons, we decline to

consider the Trues’ collateral estoppel claim on appeal.

B. Substance Over Form Principle – Overview 

We must now determine whether the Trues’ business activities pass for

legitimate tax avoidance and sound financial planning, or whether they constitute

manipulation of the intent and purpose of the tax code.6

 In order to ensure proper
dealing with each other at arm's length enter into a transaction that gives them

tremendous tax savings, the Internal Revenue Service is entitled to be suspicious

of the genuineness of the transaction.”). “While it is true that a taxpayer can

structure a transaction to minimize tax liability under the Internal Revenue Code,

that transaction must nevertheless have economic substance in order to be the

thing which the statute intended.” Kirchman v. Commissioner, 862 F.2d 1486,

1491 (11th Cir. 1989) (quotation marks and citation omitted).

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tax treatment for the ranchland transactions and oil and gas lease transactions, we

apply the substance over form principle. See Commissioner v. Hansen, 360 U.S.

446, 461 (1959) (“the incidence of taxation depends upon the substance, not the

form, of the transaction”). This fundamental tax principle operates to prevent

“‘the true nature of a transaction [from being] disguised by mere formalisms,

which exist solely to alter tax liabilities,’” and promotes “‘the effective

administration of the tax policies of Congress.’” Kornfeld, 137 F.3d at 1234

(quoting Commissioner v. Court Holding Co., 324 U.S. 331, 334 (1945)). Thus,

applying the substance over form principle to the complex series of ranchland and

oil and gas lease transactions in dispute in this case, we must look beyond the

taxpayers’ characterization of isolated, individual transactional steps, and also

review the substance of each series of transactions in its entirety.

Deciding “whether to accord the separate steps of a complex transaction

independent significance, or to treat them as related steps in a unified transaction,
7

 While traditionally utilized in the context of corporate liquidationreorganizations, courts also have applied the step transaction doctrine to various

other kinds of taxpayer activities. Jacob Mertens, Jr., The Law of Federal Income

Taxation § 43.253 (1997).

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is a recurring problem in the field of tax law.” King Enters., Inc. v. United

States, 418 F.2d 511, 516 (Ct. Cl. 1969). In search of an answer to this problem,

courts utilize a variety of approaches, including a particular incarnation of the

basic substance over form principle known as the step transaction doctrine. 

Simply stated, the step transaction doctrine provides that “interrelated yet

formally distinct steps in an integrated transaction may not be considered

independently of the overall transaction.” Commissioner v. Clark, 489 U.S. 726,

738 (1989) (quotation marks and citation omitted); see also Security Indus. Ins.

Co. v. United States, 702 F.2d 1234, 1244 (5th Cir. 1983) (“The step transaction

doctrine is a corollary of the general tax principle that ... taxation depends on the

substance of a transaction rather than its form.”). The doctrine requires us to link

together “all interdependent steps with legal or business significance, rather than

[take] them in isolation,” so that “federal tax liability may be based on a realistic

view of the entire transaction."7 Clark, 489 U.S. at 738 (quotation marks and

citation omitted). We proceed, then, to examine the series of potentially

interrelated steps involved in both the ranchland transactions and oil and gas lease

transactions, utilizing this approach.
8

 The binding commitment test is seldom utilized, and only applies to

situations “where the taxpayer is subject to an obligation or binding commitment,

at the time the first step is entered into, to pursue the successive steps in a series

of transactions,” usually spanning several years. See Jacob Mertens, Jr., supra

n.7, § 43.256 (1997). As a general rule, “the binding-commitment test is only

applicable where a substantial period of time has passed between the steps that

are subject to scrutiny.” Id. Because the transactions in the present case do not

span a long period of time or involve a binding commitment to pursue successive

steps, we do not analyze them under this test. See Associated Wholesale Grocers ,

927 F.2d at 1522 n.6 (rejecting use of binding commitment test because the case

did not involve a series of transactions spanning several years).

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C. Step Transaction Doctrine

Courts have developed three tests for determining when the step transaction

doctrine should operate to collapse the individual steps of a complex transaction

into a single integrated transaction for tax purposes: (1) end result, (2)

interdependence, and (3) binding commitment. See Associated Wholesale

Grocers, Inc. v. United States, 927 F.2d 1517, 1522 (10th Cir.1991). More than

one test might be appropriate under any given set of circumstances; however, the

circumstances need only satisfy one of the tests in order for the step transaction

doctrine to operate. See id. at 1527-28 (finding end result test inappropriate, but

applying the step transaction doctrine using the interdependence test). Given the

type of transactions involved in this case, only the end result and interdependence

tests are relevant to our analysis.8

The end result test combines “into a single transaction separate events
9

 We emphasize that under the end result test, our focus is not on the

legitimacy of the intended result, but instead on whether the taxpayer undertook

multiple steps to achieve a particular result. Thus, if a taxpayer engages in a

series of steps that achieve a particular result, he cannot request independent tax

recognition of the individual steps unless he shows that at the time he engaged in

the individual step, its result was the intended end result in and of itself. If this is

not what the taxpayer intended, then we collapse the series of steps and only give

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which appear to be component parts of something undertaken to reach a particular

result.” Kornfeld, 137 F.3d at 1235; Associated Wholesale Grocers, 927 F.2d at

1523. Under this test, if we find the series of closely related steps in a transaction

are merely the means to reach a particular result, we will not separate those steps,

but instead treat them as a single transaction. Kanawha Gas & Utils. Co. v.

Commissioner, 214 F.2d 685, 691 (5th Cir.1954). The taxpayer’s subjective

intent is especially relevant under this test because it allows us to determine

whether the taxpayer directed a series of transactions to an intended purpose. See

Brown v. United States, 782 F.2d 559, 563 (6th Cir. 1986) ("[e]nd result test" for

determining when to apply "step transaction doctrine" makes intent a necessary

element for application of doctrine). The intent we focus on under the end result

test is not whether the taxpayer intended to avoid taxes. Prior case law clearly

instructs that tax reduction and avoidance motives are permissible and do not

alone invalidate a transaction. Gregory, 293 U.S. at 469. Instead, the end result

test focuses on whether the taxpayer intended to reach a particular result by

structuring a series of transactions in a certain way.9 See King Enters., 418 F.2d
tax consideration to the intended end result. See Crenshaw v. United States, 450

F.2d 472, 475 (5th Cir. 1971), cert. denied, 408 U.S. 923 (1972).

-23-

at 516.

The interdependence test takes a slightly different approach. Under this

test, we disregard the tax effects of individual transactional steps if "it is unlikely

that any one step would have been undertaken except in contemplation of the

other integrating acts." Kuper v. Commissioner, 533 F.2d 152, 156 (5th Cir.

1976). The interdependence test relies to a lesser degree on the taxpayer’s

subjective intent than the end result test. It focuses not on a particular result, but

on the relationship between the individual steps and “whether under a reasonably

objective view the steps were so interdependent that the legal relations created by

one of the transactions seem fruitless without completion of the series.” 

Kornfeld, 137 F.3d at 1235. In order to maintain this objectivity and ensure the

steps have independent significance, we find it useful to compare the transactions

in question with those we might usually expect to occur in otherwise bona fide

business settings. See Merryman v. Commissioner, 873 F.2d 879, 881 (5th Cir.

1989).

Prior to our application of the end result and interdependence tests, we note
10 Like the overall question of substance over form embodied by the step

transaction doctrine, the issues involved in our application of the end result and

interdependence tests, especially with regard to the taxpayer’s intent, are

undeniably questions of fact. Kornfeld, 137 F.3d at 1234 (substance of

transaction treated as question of fact); Weisbart v. Commissioner, 564 F.2d 34,

37 (10th Cir. 1977) (same); Brown, 782 F.2d at 564 (taxpayer’s intent is a

question of fact).

-24-

the Trues initially challenge the district court’s summary judgment rulings for

reasons collateral to that court’s step transaction analysis. First, the Trues argue

the evidence they produced in response to the government’s motion for summary

judgment created issues of fact pertaining to their intentions underlying the

ranchland transactions and oil and gas lease transactions sufficient to preclude

summary judgment. The Trues contend the district court inappropriately granted

summary judgment by casting their uncontroverted testimonial evidence as mere

argument, drawing inferences in favor of the moving party, and generally treating

the case as if it was ruling on the issues following a bench trial instead of a

motion for summary judgment.

Cases involving the issue of substance over form require resolution of 

significant questions of fact.10 Nevertheless, the mere presence of a factual

question does not automatically preclude summary judgment. Even in cases

where some issues of fact remain, if no reasonable fact-finder could find in favor
-25-

of the non-moving party, then summary judgment is still appropriate. See

Anderson, 477 U.S. at 247-248. As we have often iterated, the issue must be “a

genuine dispute over a material fact.” Bingaman v. Kansas City Power & Light

Co., 1 F.3d 976, 980 (10th Cir. 1993) (quotation marks and citation omitted). In

some cases there is no dispute of fact, because “[the evidence] is so one-sided

that one party must prevail as a matter of law.” Id. As explained more fully

below, this is precisely what occurred in this case. The district court did not

reduce the Trues’ evidence to mere argument, improperly weigh evidence, or

otherwise ignore fundamental principles of summary judgment. Instead, the court

acknowledged all the evidence and arguments from both parties and then, in

accord with summary judgment standards, simply determined the evidence was so

one-sided that no genuine issue of material fact remained in dispute. For this

reason, we reject the Trues’

 threshold argument that the district court ignored fundamental summary judgment

principles.

In a second threshold argument, the Trues contend their evidence of

legitimate business purposes and corresponding economic effects pertaining to the

ranchland transactions and oil and gas lease transactions renders the step

transaction doctrine inapplicable altogether. The Trues assert economic realities
11 The Trues’ evidence and arguments regarding business purpose and

economic effects raise issues more relevant to a sham transaction doctrine

analysis than a step transaction doctrine analysis . Although both the step

transaction and sham transaction doctrines are corollaries of the basic substance

over form principle, see Kirchman, 862 F.2d at 1491; Security Indus., 702 F.2d at

1244, the sham transaction doctrine focuses on whether a questionable transaction

has a business purpose and economic effects other than the creation of tax

benefits, Kirchman, 862 F.2d at 1492. See also Frank Lyon Co. v. United States,

435 U.S. 561, 583-84 (1978); James v. Commissioner, 899 F.2d 905, 908 (10th

Cir. 1990). As described above, the step transaction doctrine is particularly

tailored to the examination of transactions involving a series of potentially

interrelated steps for which the taxpayer seeks independent tax treatment. 

Consequently, the step transaction doctrine provides the pertinent analytical

framework in this case.

-26-

must govern, and if a legitimate non-tax business purpose motivates a transaction

or actually causes some economic effects, then the transaction is endued with

substance that resolves the substance over form inquiry without the need to

engage the step transaction analysis.

We acknowledge the Trues’ evidence of business purpose and economic

effects. However, we do not agree with their conclusion that business purposes

and economic effects relating to the individual steps in each complex series of

transactions preclude application of the step transaction doctrine in this

instance.11 The substance over form inquiry is not nearly as narrow as the Trues

suggest. To ratify a step transaction that exalts form over substance merely

because the taxpayer can either (1) articulate some business purpose allegedly
12 Just as we reject the Trues’ argument that the effect on their companies’

books automatically gives the transaction economic substance, so too do we

reject the government’s notion that a transaction has no economic substance if it

is possible for the taxpayer to merely adjust his books to reflect the Internal

Revenue Service’s recharacterization of the disputed transaction.

-27-

motivating the indirect nature of the transaction or (2) point to an economic effect

resulting from the series of steps, would frequently defeat the purpose of the

substance over form principle. Events such as the actual payment of money, legal

transfer of property, adjustment of company books,12 and execution of a contract

all produce economic effects and accompany almost any business dealing. Thus,

we do not rely on the occurrence of these events alone to determine whether the

step transaction doctrine applies. Likewise, a taxpayer may proffer some non-tax

business purpose for engaging in a series of transactional steps to accomplish a

result he could have achieved by more direct means, but that business purpose by

itself does not preclude application of the step transaction doctrine. Associated

Wholesale Grocers, 927 F.2d at 1527. Although the absence of economic effects

or business purposes may be fatal to a taxpayer’s step transaction refund suit, the

presence of those factors is not dispositive. See id. at 1526-27. We must still

examine the objective realities of the multi-step transactions to determine their

tax status, and proceed to do so under the end result and interdependence tests.
-28-

D. The “End Result” and “Interdependence” Tests

1. Ranchland Transactions

Applying the end result test to the ranchland transactions, we examine

whether the Trues intended from the outset to place the ranchlands in the hands of

True Ranches. Recall that the individual tax significance of each step of a multistep transaction is irrelevant when, considered as a whole, the steps accomplish

but a single intended result, which in actual purpose and effect is subject to the

given tax consequence. See Crenshaw, 450 F.2d at 476. Thus, if the intended

end result was for True Ranches to own the ranchland, then the Trues cannot

claim a right to favorable tax treatment for the various intermediate transactions

leading up to that intended result. If, on the other hand, the Trues present

evidence showing they initiated the ranchland acquisition with another objective

in mind (i.e., the intended end result was actually one of the intermediate

transactional steps), then they have created a genuine issue of whether that

intermediate step should be afforded favorable tax treatment.

This analysis is inherently factual; however, as we emphasized above, the

mere existence of a fact question does not render summary judgment

inappropriate. If the proffered evidence is so one-sided that no reasonable fact

finder could conclude anything other than that the Trues intended from the outset
13 Because Henry and Jean True (elder Trues) owned a substantially larger

percentage interest in Smokey Oil Company (96.5%) than in True Ranches

(73.9%), purchasing the ranchlands through Smokey Oil Company allowed the

elder Trues to contribute a correspondingly greater share of the purchase price

than the minority shareholders/partners.

-29-

for the True Ranches to acquire additional ranchlands through a series of

separate, otherwise unnecessary conveyances, then summary judgment applying

the step transaction doctrine to collapse that multi-step transaction for tax

purposes is appropriate.

The Trues present evidence showing they intended to expand the land

holdings of True Ranches through a series of transactions so that the elder Trues

(Henry A. True, Jr. and Jean D. True), who had more liquid assets readily

available to finance the acquisition, would contribute a greater share of the

purchase price.13 The Trues emphasize that if the court applies the step

transaction doctrine to collapse the ranchland transactions, then the value

equivalent to the purchase price of the properties will vanish from Smokey Oil

Company’s books. This in turn will deprive Henry and Jean True (elder Trues) of

any compensation for the additional amount they contributed to the purchase of

the ranch properties, as well as the correspondingly greater share in profits they

stood to realize from Smokey Oil Company’s ownership of the oil and gas leases
-30-

acquired in the exchange with True Oil Company.

As mentioned above, we do not dispute the business purposes and economic

effects the Trues cite; nevertheless we conclude those factors do not preclude

summary judgment based on the overwhelming evidence of the Trues’ intent to

achieve a particular end result. The Trues admit they intended from the beginning

to ultimately place the ranch properties in the hands of True Ranches. This intent

is further evidenced by the fact the ranchland was conveyed to Smokey Oil

Company separate from the ranch operating assets, which True Ranches acquired

directly. The fact the Trues arranged the steps so the elder Trues would bear a

greater percentage of the acquisition cost does not establish an alternative

intended end result, but merely demonstrates a financing consideration for

structuring the transaction in a particular way. If the intended end result was in

question, then the business purposes and economic effects the Trues demonstrate

might be probative, but in this case there is no doubt the Trues designed and

executed a series of steps to increase the land holdings of True Ranches. Thus,

applying the end result test, the Internal Revenue Service must give tax

consideration only to that intended result. Cf. Security Indus. , 702 F.2d at 1245-

46.
-31-

We reach the same conclusion reviewing the ranchland transactions under

the interdependence test. Under this test, we objectively examine each step of the

ranchland transactions to see whether the legal relations created by one of the

steps seem fruitless without completion of the overall transaction. See Kornfeld,

137 F.3d at 1235. If the steps have “reasoned economic justification standing

alone,” then summary judgment under the interdependence test is inappropriate.

Security Industrial, 702 F.2d at 1247. However, if the only reasonable conclusion

from the evidence is that the steps have “meaning only as part of the larger

transaction,” then the step transaction doctrine applies as a matter of law. Id. at

1246.

We conclude the steps involved in the ranchland transactions lack any

reasoned economic justification standing alone. The record indicates Smokey Oil

Company is involved only in oil and gas exploration and production. Thus, in the

absence of evidence that Smokey Oil Company acquired the mineral rights

beneath the ranchlands and believed oil or gas to be beneath those lands, its

purchase of ranchland properties makes no objective business sense. In other

words, there was no apparent purpose for Smokey Oil Company to purchase the

ranchlands other than to facilitate the eventual placement of the property into the

hands of True Ranches.
14 We emphasize in response to the cases the Trues cite highlighting the

validity of various I.R.C. § 1031 exchanges, that our opinion has no impact on the

legality of individual like-kind exchanges. A like-kind exchange, standing alone,

-32-

The exchange of producing oil and gas leases for the ranchlands between

Smokey Oil Company and True Oil Company is similarly suspect. Like Smokey

Oil Company, True Oil Company was not involved in ranching, and it had no

apparent reason to exchange its oil and gas leases for ranch property other than to

facilitate the transfer of the ranch property to True Ranches. The Trues argue the

purpose of moving the oil and gas leases from one of their oil companies (True

Oil Company) to another oil company (Smokey Oil Company) in exchange for

ranchland was to allow Smokey Oil Company to grow as an operating entity;

 but that does not explain why True Oil Company, purporting to operate as a

separate entity with its own interests to promote, would accept ranch properties in

exchange for productive oil and gas leases. From the perspective of True Oil

Company, an entity without any interest in ranch property, this step appears

pointless without contemplation of the overall transaction.

None of the individual steps in the ranchland transactions is the type of

business activity we would expect to see in a bona fide, arm’s length business

deal between unrelated parties, and none of them makes any objective sense

standing alone without contemplation of the subsequent steps in the transaction.14
is unproblematic. However, if a taxpayer engages in an I.R.C. § 1031 exchange

as part of an overall plan involving a series of transactional steps designed and

executed to accomplish an end result beyond the exchange, and which otherwise

exalts form over substance and defeats the clear intent of the Internal Revenue

Code, then the Internal Revenue Service is entitled to challenge the transaction.

In the present case, the problem is not with the oil and gas lease/ranchland

exchanges, but with the Trues’ use of those exchanges along with the other

transactional steps to turn an expenditure for non-depreciable land into a

depletable, stepped-up basis in oil and gas leases. End result and

interdependence analysis does not invalidate complex or multiple-party § 1031

exchanges standing alone, only those forming part of an otherwise invalid step

transaction.

-33-

Each step in the ranchland transactions “led inexorably to the next,” and thus

“clearly satisf[ied] the ‘interdependence’ test for application of the step

transaction doctrine .” Security Indus., 702 F.2d at 1247.

Having reviewed the objective realities of the ranchland transactions, we

conclude under either the end result or interdependence test, the step transaction

doctrine applies. The Trues recognized that a large cash outlay for the direct

purchase of the ranchlands through True Ranches would not result in any

depreciation deductions. Consequently, they juggled the ownership of the

ranchlands between their various business entities in order to produce a more

favorable tax result, while still placing the ranchlands in the hands of True

Ranches. By channeling the acquisition and exchange of the ranchlands through

Smokey Oil Company and True Oil Company using a series of unnecessary
-34-

exchanges and transfers, the Trues ended up with True Ranches holding a zero

basis in the newly-purchased ranchlands and Smokey Oil Company holding a

substituted, stepped-up basis in depletable oil and gas leases. We believe no

reasonable juror could find these steps were anything but the Trues’ prearranged,

integrated plan to accomplish indirectly tax advantages they could not accomplish

directly. See Crenshaw, 450 F.2d at 475 (a taxpayer may not secure, by a series

of contrived steps, different tax treatment than if he had carried out the

transaction directly). The Trues changed what would have been the natural result

of a direct purchase of the ranchland by engaging in a series of steps designed

from the outset to circumvent the intent of the tax code . Fundamental principles

of taxation dictate that “[a] given result at the end of a straight path is not made a

different result because reached by following a devious path.” Minnesota Tea Co.

v. Helvering, 302 U.S. 609, 613 (1938). Consequently, we affirm the district

court ’s decision to ignore the indirect route of the individual steps, view the

ranchland transactions in their entireties, and treat them as direct purchases by

True Ranches.

2. Oil and Gas Lease Transactions

The applicability of the step transaction doctrine to the oil and gas lease

transactions under the end result test also turns on the fact question of the
-35-

taxpayers’ intent – specifically, whether the Trues intended to acquire leases in

the ordinary course of their lease brokering business or to accomplish the end

result of placing the oil and gas leases in the hands of True Oil Company or

Smokey Oil Company. See, e.g., Brown, 782 F.2d at 564 (making application of

step transaction doctrine under the end result test turn on the intent of the

taxpayer from the outset of the transaction in question). Again, we acknowledge

this inquiry involves significant questions of fact. Nevertheless, summary

judgment is appropriate if the evidence is so one-sided that no reasonable finder

of fact could find in favor of the non-moving party. See Anderson, 477 U.S. at

247-248.

The evidence of the Trues’ intended end result with regard to the oil and

gas lease transactions is not nearly as one-sided as it was in the case of the

ranchland transactions. The record shows that at the time Bear Lodge Mountain

Corporation or True Land and Royalty Company acquired an oil and gas lease, the

Trues did not know to which exploration and production entity they would

ultimately assign the lease. In fact, Henry True testified Bear Lodge Mountain

Corporation and True Land and Royalty Company operated just like any other

lease broker. The companies acquired leases and then in turn assigned them to

some other entity interested in exploration and production. He also testified the
-36-

oil and gas leases could have been transferred to any one of the Trues’

exploration and production companies or to a third party. We believe this

evidence is sufficient to create a genuine issue as to whether the Trues purchased

the leases intending from the outset to ultimately transfer them to True Oil

Company or Smokey Oil Company. Therefore, to the extent the district court

rested its decision on an end result analysis, we find summary judgment

inappropriate.

Examination of the oil and gas lease transactions under the interdependence

test also undermines the district court ’s ruling. The record indicates the steps of

the oil and gas lease transactions bear some indicia of independent economic

significance. For example, it was entirely normal for Bear Lodge Mountain

Corporation and True Land and Royalty Company to acquire the oil and gas

leases. The Trues organized both entities for that purpose. The assignment of the

leases from the brokerage entities to True Oil Company and Smokey Oil Company

also falls within the realm of objective business activity we would expect to see

between the parties. Neither Bear Lodge Mountain Corporation nor True Land

and Royalty Company engaged in the production of oil and gas, but instead

planned from the beginning of every lease acquisition to assign their interest in

oil and gas leases to other oil and gas production companies. True Oil Company
15 The district court points out a variety of facts that cast suspicion on the

substance of the oil and gas lease transactions . For example, Bear Lodge

Mountain Corporation and True Land and Royalty Company had no employees of

their own. Employees of True Oil Company or independent landmen paid by True

Oil Company actually performed all of the preliminary work in identifying

attractive leases and negotiating their acquisition. However, the record further

indicates Bear Lodge Mountain Corporation and True Land and Royalty Company

each paid a $250 monthly fee to True Oil Company for its services. The district

court notes that if True Oil Company performed or paid for all the work

associated with acquiring the leases, then “no economic rationale would justify

[its] expenditure of amounts greater than the actual lease costs in order to obtain

the leases” through Bear Lodge Mountain Corporation and True Land and

Royalty Company . We agree. Nevertheless, the evidence before the court is not

so one-sided as to apply the step transaction doctrine as a matter of law.

-37-

and Smokey Oil Company, on the other hand, were in the business of oil and gas

production and exploration, so it was natural for them to acquire interests in oil

and gas leases from Bear Lodge Mountain Corporation and True Land and

Royalty Company just as they would from another lease broker.

Viewing the evidence in the light most favorable to the Trues as the nonmoving party, as we must, we conclude the question of whether the Trues

intended from the outset to use Bear Lodge Mountain Corporation and True Land

and Royalty Company solely as conduits to facilitate the transfer of the oil and

gas leases to True Oil Company and Smokey Oil Company remains a disputed

issue of material fact. Such questions are inappropriate for resolution through

summary judgment.15 See Anderson, 477 U.S. at 249 (“at the summary judgment
-38-

stage the judge’s function is not himself to weigh the evidence and determine the

truth of the matter but to determine whether there is a genuine issue for trial”). 

Consequently, we reverse the district court’s award of summary judgment on this

issue and remand for further proceedings consistent with this opinion. 

III. Conclusion

We affirm the district court’s award of summary judgment on the question

of the ranchland transactions. The ranchland transactions fail both the end result

and interdependence tests. Although the Trues introduced some evidence of

business purposes and economic effects pertaining to those transactions, the facts

plainly demonstrate they intended to accomplish through the series of steps the

particular end result of placing the ranchlands in the hands of True Ranches . In

addition, the clear interdependence and lack of independent justification for the

individual steps of the ranchland transactions warrants application of the step

transaction doctrine. However, with regard to the oil and gas lease transactions,

we find the district court improvidently granted summary judgment. We believe

the question of whether the Trues intended from the outset to accomplish the end

result of transferring the oil and gas leases to True Oil Company or Smokey Oil

Company remains a disputed issue of material fact. Moreover, the individual

steps involved in the oil and gas lease transactions do not reflect the degree of
-39-

interdependence necessary to apply the step transaction doctrine as a matter of

law. Finally, we decline to consider whether the collateral estoppel doctrine

applies to the oil and gas lease transactions involved in this case because the

Trues failed to raise the issue in their administrative claim for refund.

Accordingly, we AFFIRM in part, REVERSE in part, and REMAND for

further proceedings consistent with this opinion.