The Step-Transaction Doctrine

In the area of corporate reorganizations, there is a theory known as the "Step-Transaction" doctrine. The argument is that you cannot accomplish in two steps what would be disallowed in one. Therefore, any corporate reorganizations, which appear to be non-taxable, are treated as taxable when the taxpayers attempt to accomplish in several steps what is not allowed in one transaction. A further discussion of this topic in the corporate area is beyond the scope of our analysis.

However, the state attempted to apply the doctrine when transfers to disabled children were not allowed. The attempted theory was that if the disabled child transferred the assets to another child after the initial transfer, under the step-transaction the transfer would have been treated to the healthy child and not the disabled child. However, the state has recanted its position. There is no justification for application of the doctrine in the elder law area.

However, in discussing the two-year rule (child providing the necessary care so that a transfer of a house to the child is exempt from the transfer rules), I pointed out that there should not be a preconceived plan that the transferee child divide the transferred assets amongst the protected transferee and the other children. That is, there is always a danger that the state could apply the doctrine, in which case a transfer would not have been deemed made to the child who provided the necessary care, but rather to all the children, which would result in a penalizing transfer.

Disclaimer: This article does not constitute legal advice and each person may have unique facts for which legal consultation may be necessary.

© November 2011, Post 173