Opinion ID: 415638
Heading Depth: 3
Heading Rank: 1

Heading: Articulating the Standards

Text: 44 The step transaction doctrine is a corollary of the general tax principle that the incidence of taxation depends upon the substance of a transaction rather than its form. See Kuper v. Commissioner, 533 F.2d 152, 155 (5th Cir.1976) (citing cases). Under the step transaction doctrine, the tax consequences of an interrelated series of transactions are not to be determined by viewing each of them in isolation but by considering them together as component parts of an overall plan. Crenshaw v. United States, 450 F.2d 472, 475 (5th Cir.1971). When considered individually, each step in the series may well escape taxation. The individual tax significance of each step is irrelevant, however, if the steps when viewed as a whole amount to a single taxable transaction. Id. at 476. [Taxpayers] cannot compel a court to characterize the transaction solely upon the basis of a concentration on one facet of it when the totality of circumstances determines its tax status. Id. at 477. 45 The types of step transactions are as varied as the choreographer's art: there are two steps, waltzes, fox trots, and even Virginia reels. As a consequence, the courts' applications of the step transaction doctrine have been enigmatic. As the Seventh Circuit observed: 46 The commentators have attempted to synthesize from judicial decisions several tests to determine whether the step transaction doctrine is applicable to a particular set of circumstances in order to combine a series of steps into one transaction for tax purposes. Unfortunately, these tests are notably abstruse--even for such an abstruse field as tax law. 47 Redding v. Commissioner, 630 F.2d 1169, 1175 (7th Cir.1980), cert. denied, 450 U.S. 913, 101 S.Ct. 1353, 67 L.Ed.2d 338 (1981). Although no test seems to be universally accepted, it is possible to articulate several standards used by the courts in determining when and how to apply the step transaction doctrine. See B. Bittker & J. Eustice, supra, p 14.51 (suggesting that different tests are applicable in different contexts). 48 The test most often invoked in connection with the application of the step transaction doctrine is the end result test. Under this test, purportedly separate transactions will be amalgamated into a single transaction when it appears that they were really component parts of a single transaction intended from the outset to be taken for the purpose of reaching the ultimate result. King Enterprises, Inc. v. United States, 418 F.2d 511, 516 (Ct.Cl.1969). As the Fifth Circuit has noted, when cases involve a series of transactions designed and executed as parts of a unitary plan to achieve an intended result, the plans will be viewed as a whole regardless of whether the effect of doing so is imposition of or relief from taxation. Kanawha Gas & Utilities Co. v. Commissioner, 214 F.2d 685, 691 (5th Cir.1954) (emphasis added). See also Kuper, 533 F.2d at 155-56; Crenshaw, 450 F.2d at 476; Redwing Carriers, Inc. v. Tomlinson, 399 F.2d 652, 658 (5th Cir.1968). 49 A second test for determining whether the step transaction doctrine applies is labelled the interdependence test. This test focuses on whether the steps were so interdependent that the legal relations created by one transaction would have been fruitless without a completion of the series. Paul & Zimet, Step Transactions, in Selected Studies in Federal Taxation 200, 254 (2d Ser.1938), quoted in King Enterprises, 418 F.2d at 516. See also Redding, 630 F.2d at 1177; American Bantam Car Co. v. Commissioner, 11 T.C. 397 (1948), aff'd per curiam, 177 F.2d 513 (3d Cir.1949), cert. denied, 339 U.S. 920, 70 S.Ct. 622, 94 L.Ed. 1344 (1950); 3 J. Mertens, The Law of Federal Income Taxation Sec. 20.161 (Doheny ed. 1981). When it is unlikely that any one step would have been undertaken except in contemplation of the other integrating acts, Kuper, 533 F.2d at 156, step transaction treatment may be deemed appropriate. 50 The third and most restrictive test permitting invocation of the step transaction doctrine is the binding commitment test. The Supreme Court enunciated this standard in Commissioner v. Gordon, 391 U.S. 83, 88 S.Ct. 1517, 20 L.Ed.2d 448 (1968), when it refused to aggregate stock distributions occurring several years apart for tax purposes. The Court commented that if one transaction is to be characterized as a 'first step' there must be a binding commitment to take the later steps. Id. at 96, 88 S.Ct. at 1524. Thus the binding commitment test requires telescoping several steps into one transaction only if a binding commitment existed as to the second step at the time the first step was taken. Subsequent decisions, however, have tended to confine Gordon to its facts. The Seventh Circuit, for example, has concluded that lack of a binding commitment should be determinative only in cases involving multi-year transactions; in other situations, the presence or absence of a binding commitment is simply one factor to be considered. See McDonald's Restaurants v. Commissioner, 688 F.2d 520, 525 (7th Cir.1982); Redding, 630 F.2d at 1178. Similarly, the Court of Claims has read Gordon 's binding commitment requirement as limited to an interpretation of particular statutory language in section 355 concerning divisive reorganizations. See King Enterprises, 418 F.2d at 517-18. The King court reasoned: 51 The opinion in Gordon contains not the slightest indication that the Supreme Court intended the binding commitment requirement as the touchstone of the step transaction doctrine in tax law .... Clearly, the step transaction doctrine would be a dead letter if restricted to situations where the parties were bound to take certain steps. 52 Id. at 518 (emphasis in original). See also B. Bittker & J. Eustice, supra, p 14.51 (binding commitment standard may be reserved for situations where taxpayer rather than government invokes step transaction doctrine); Levin & Bowen, Taxable and Tax-Free Two-Step Acquisitions and Minority Squeezeouts, 33 Tax L.Rev. 425, 428 n.6 (1978) (Gordon limited to divestiture of control requirement in D reorganization). 53 We believe that both the end result test and the interdependence test are helpful in analyzing multiphase transactions in terms of the step transaction doctrine. Each is faithful to the central purpose of the step transaction doctrine: ensuring that the tax consequences of a particular transaction turn on substance rather than form. In prior cases involving step transaction treatment, the Fifth Circuit has employed both tests on various occasions. See Kuper, 533 F.2d at 155-56 (end result and interdependence); Crenshaw, 450 F.2d at 475-78 (end result and interdependence); Kanawha Gas & Utilities Co., 214 F.2d 685, 691 (end result). Furthermore, we conclude that the Gordon binding commitment test should be strictly limited to the facts of the case that gave it life. General application of the binding commitment standard would effectively permit taxpayers to evade the step transaction doctrine merely by abstaining from formal commitments. Such a result, which would emasculate the doctrine itself, is in no way mandated by the Gordon opinion. See King Enterprises, 418 F.2d at 518. We therefore turn to an examination of the facts of this case in light of the end result and interdependence tests.