IV. Argument
The parties dispute whether the transaction to divest its RCI waste management assets in exchange for $6.2 Million paid by ICC can legally convert to pay dividend $3.7 million in cash in favor of 80% dividend deduction and sale rest stock share in $ 2.5 million cash. IRS claims that Urquardt was not entitled to deduct its 80% under IRC section 243 with over 20% ownership because the transaction between Urquardt and ICC were inextricably tied together and should be treated as one transaction and get it taxed at the capital gains rate. However, Urquardt believes the transactions of ownership of RCI are four different transactions for legally tax purpose to circumvent capital gains treatment.
The step transaction doctrine requires the linking together of “all interdependent steps with legal or business significance, rather than taking them in isolation” so that “federal tax liability may be based on a realistic view of the entire transaction. Commissioner v. Clark, 489 U.S. 726, 738 (1989). According to Esmark, 90 T.C. 171 (1988), “We recently described the step-transaction doctrine as another rule of substance over form that "treats a series of formally separate 'steps' as a single transaction if such steps are in substance integrated, interdependent, and focused toward a particular result. The existence of an overall plan does not alone, however, justify application of the step-transaction doctrine.” The step transaction doctrine requires that the tax consequences of interrelated steps in an integrated transaction be determined by viewing the transaction as a whole, rather than by viewing each step separately.
To determine whether Urquardt is entitled to deduct its 80% of dividend income, the Court must determine whether the 4-step transaction is one single transaction or four different transaction for tax propose by answering the three formulations