This Article addresses the current application of the step-transaction doctrine to multi-step corporate transactions, with emphasis on the general fact pattern of Kimbell-Diamond Milling Co. v. Commissioner, in which a corporation (P) first acquires stock of a second corporation (T), shortly after which, pursuant to a pre-existing plan, P or a P subsidiary (S) acquires T’s assets and T’s existence terminates for tax purposes. Additional attention is paid to “reverse” Kimbell-Diamond transactions, in which assets are first transferred to an existing or newly formed T in an exchange intended to qualify for nonrecognition treatment under section 351, after which P, an existing and often publicly traded corporation, acquires the stock or assets of T in a transaction intended to qualify as a reorganization.
The Article concludes that, today, seven fundamental principles are applied to multi-step corporate transactions of the kind described above:
First, the authorities addressing multi-step Kimbell-Diamond acquisitions, when determining whether the steps should be “collapsed” into a single transaction, generally apply the liberal end-result arm of the step-transaction doctrine based on the unilateral intent of P at the time it acquires the T stock. In contrast, in the context of reverse Kimbell-Diamond acquisitions, the courts generally have applied the narrower mutual interdependence test, concluding the step-transaction doctrine does not apply if (1) the first step is significantly motivated by an independent business purpose achievable regardless of whether the next step or steps are completed, and (2) there is no binding commitment or “economic compulsion” to complete the next step or steps at the time the first step is completed.
Second, for multi-step Kimbell-Diamond acquisitions, the pre-existing plan or intention to acquire T assets includes a plan or intention to have all or part of the T assets transferred to S, a subsidiary controlled (directly or indirectly) by P.
Third, in the context of multi-step Kimbell-Diamond acquisitions, the step-transaction analysis employed to collapse the multiple steps into a single asset acquisition today applies solely for purposes of determining whether the overall transaction qualifies as a reorganization described in section 368(a). If the integrated transaction fails to qualify as a reorganization, then (1) the first step standing alone cannot qualify as a reorganization and may constitute a “qualified stock purchase” (QSP) of T within the meaning of section 338(d)(3), and (2) the second step should be analyzed as a separate transaction for all tax purposes. This is true whether or not the first step per se constitutes a QSP of T.
Fourth, the step-transaction doctrine will not be applied to combine one step of a multi-step Kimbell-Diamond acquisition with one or more subsequent steps if a special rule (such as the expanded application of section 368(a)(2)(C) by Regulation section 1.368-2(k), the “F” reorganization “bubble” rule of Regulation section 1.368-2(m)(3), or the “cascading section 351” rulings discussed in the Article) applies to turn off the doctrine.
Fifth, if the steps are integrated under Kimbell-Diamond, the tax consequences to all parties to the transactions (T, P, S, and their constituents, including T’s shareholders) are governed by the characterization of the integrated transactions.
Sixth, if the integration of a multiple-step acquisition under the Kimbell-Diamond doctrine does not result in a good reorganization that includes the first step, with the result that the first step (the T stock acquisition) is taxable, the Kimbell-Diamond doctrine may still apply to integrate the subsequent steps unless the “F” reorganization “bubble” rule of Regulation section 1.368-2(m)(3)(ii), Regulation section 1.368-2(k), or the “cascading section 351” rulings require the segregation of one or more of the subsequent steps.
Seventh, the anti-Yoc Heating rules of Regulation section 1.338-3(d) play a diminished role in the analysis because (1) even if the first step standing alone is a QSP, the rules do not apply to prevent application of the step-transaction doctrine to integrate the first step with the later step or steps when doing so results in a good reorganization, and (2) even if the T stock acquisition per se is not a QSP, the T stock acquisition cannot be integrated with later transactions involving T’s assets when doing so does not cause the overall transaction to qualify as a reorganization.
This Article also suggests that consideration should be given to not integrating multiple steps when the final step or series of steps is not intended by both T (including T’s shareholders) and P prior to the completion of the first step and integrating the steps results in tax consequences to T or its constituents (such as its shareholders) different from the tax consequences resulting from the treatment of the steps as separate transactions. Otherwise, because integration is consistently applied in determining the tax consequences to P (and its relevant affiliates) and T (and its constituents, such as T’s shareholders), integrating the two steps may result in tax consequences to T (and its constituents) that deny them the tax consequences they bargained for.