Thursday, June 21, 2018
Jonathan Grossberg (American), Attacking Tax Shelters: Galloping Toward a Better Step Transaction Doctrine, 78 La. L. Rev. 369 (2018):
Since the beginning of the Internal Revenue Code, taxpayers have sought to lower their tax bills through creative tax planning. The step transaction doctrine is one of several tools used by the Internal Revenue Service and courts to challenge tax shelters and tax evasion. The step transaction doctrine provides that the courts may combine two or more allegedly separate steps in a multi-step transaction into a single step to better reflect the economic reality of the taxpayer’s actions. Derived from Supreme Court decisions in the 1930s, the doctrine deserves renewed scrutiny today because serious conceptual issues exist regarding the three current tests that courts use to determine when to combine various steps in a tax-motivated multiple-step transaction. This Article addresses two perennial themes in tax law: the role of judicial doctrines in a statutory system and the difficulty of taxing related-party transactions.
This Article argues that courts should reformulate the binding commitment, interdependence, and end results tests as two objective tests: an objective test based on the law of offer and acceptance for arms-length transactions and an economic reality test for transactions between related parties. These new tests provide conceptual clarity and promote predictability while protecting the public treasury. The new tests borrow underlying concepts from contract and commercial law. The new tests demonstrate the fruitful possibilities of borrowing across areas of law. They also demonstrate that tax law shares similar concerns with other areas of law—a proposition that is sometimes doubted. This Article further contends that the step transaction doctrine, as reformulated, should be available for assertion by taxpayers in transactions between unrelated parties. Acknowledging the availability of the test for assertion by taxpayers will have the salutary effect of aligning the letter of the doctrine with its application.