It is important to understand the step doctrine and how it applies to California tax. The “step doctrine” is a concept that is not directly found in federal or California law, but that has been borne out of Court decisions since the great depression, including a recent case in Orange County.
Generally speaking, the step doctrine says you can’t avoid the tax burden associated with going from point “1” to point “3” by taking the additional step(s) of going from point “1” to point “2” to point “3”. This may seem a bit complex, but the principles underneath it are highly fact and case specific.
In the recent case a person wanted to purchase a pizza business which would have triggered a substantial tax event. The party first acquired 50% ownership of the business (non-assessable), then liquidated the business while maintaining the 50% ownership of the property (also not generating an assessable event), and finally concluding the process through a buy-out of the remaining 50% interest of the other party – a taxable event, but much less than the total tax that would have resulted by simply purchasing the business directly.
The county assessor in this case asserted (successfully at the trial level) that the buyer had attempted to avoid the tax assessment through the combination of steps above. The taxpayers, however, were able to convince the Court of Appeals through extensive documentation and argument of the facts that the assessor did not have the right to invoke the step doctrine in this case.
How does this apply to most of us? Federal law and the laws of the State of California must be obeyed, and taking actions to avoid the payment of appropriate taxes will result in consequences. Recent advances in technology, and the cooperation between federal and international agencies, banking institutions and taxation agencies has made the process and all transactional details much more transparent from the government’s point of view.
However, tax planning is legal and effective. Structuring transactions and businesses in a strategic manner is legal and can substantially reduce tax burdens at every level of the transaction itself, as well as downstream. It is important to work with experienced tax, legal, accounting and business consulting services of Allen Barron when structuring important business and personal transactions.
If you are structuring a large transaction, selling or acquiring a business interest or planning for the succession of a business, we can help you to structure the deal in a way that maximizes profit while reducing tax liability.
We invite you to contact us or call today to schedule a free consultation at 866-631-3470.
