Legal Definitions - step-transaction doctrine

The step-transaction doctrine is a method used by the Internal Revenue Service (IRS) to determine tax liability. It involves viewing a series of transactions as a whole, rather than as separate events, and disregarding any nonsubstantive, intervening transactions that were taken to achieve the final result.

For example, let's say that a person wants to transfer ownership of a property to their child. Instead of simply gifting the property, they create a complex series of transactions involving multiple entities and transfers of ownership. The step-transaction doctrine would allow the IRS to disregard these intervening transactions and treat the transfer of ownership as a gift, which may have tax implications for both parties involved.

Another example could be a company that wants to avoid paying taxes on a large sum of money. Instead of simply reporting the income and paying taxes on it, they create a series of transactions involving offshore accounts and shell companies. The step-transaction doctrine would allow the IRS to view these transactions as a whole and disregard any nonsubstantive steps taken to avoid taxes, resulting in the company being required to pay the appropriate amount of taxes.

Overall, the step-transaction doctrine is a tool used by the IRS to prevent individuals and companies from using complex transactions to avoid paying taxes. By viewing transactions as a whole and disregarding any nonsubstantive steps taken, the IRS can ensure that everyone pays their fair share of taxes.