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Step Transaction Doctrine

This portion of the introduction to the basic principles of United States federal income taxation of corporate acquisitions is part of the Pillsbury Winthrop Shaw Pittman LLP Tax Page, a World Wide Web demonstration project. Comments are welcome on the design or content of this material.

The information presented is only of a general nature, intended simply as background material, is current only as of the latest revision date, October 15, 2007, omits many details and special rules and cannot be regarded as legal or tax advice.

The basic idea behind this judicially created doctrine is that the tax results of a series of steps in a transaction should be determined based on the overall transaction.

Example. Corporation A ("A") acquires all the outstanding stock of Corporation B ("B") in exchange for A stock and immediately liquidates B. This transaction is equivalent to, and under the step transaction doctrine is taxed as, A's acquisition of all the assets of B in exchange for A stock and the assumption by A of B's liabilities with B dissolving and distributing the A stock to the former B shareholders.

The key issue in applying the step transaction doctrine is under what circumstances two or more transactions are viewed as steps in a larger transaction, that is, when will those two or more transactions be integrated for tax purposes.

    Binding commitment test. One transaction is integrated with a second transaction if at the time of the first transaction there exists a binding commitment to undertake the second transaction.

    Mutual interdependence test. Two transactions are integrated if the legal relationships created by the first transaction would be meaningless or fruitless without completion of the second transaction.

    End result test. A series of transactions will be integrated if there exists an intention to undertake each supposedly separate transaction in order to achieve a specific end result.

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