Looking for word to describe a tax related legal situation

On 2013-05-03 12:49, JoeTaxpayer wrote: [...]

Something close to what you want may be "step transaction doctrine" (see Wikipedia). Although not specifically limited to fraudulent transactions, it does state that you consider the entire set of steps as a single event for tax purposes.

This doctrine often goes hand-in-hand with the "substance over form" doctrine.

If I recall correctly it's called a step transaction. And what the IRS is allowed to do is to collapse the transaction.

Thank you both. I'm sure I'd heard this here first, and was comfortable with my answer, but wanted to be sure and this it. On a lighter note, my reader said "He [the brother] says his tax attorney says it's completely legal." But the reader said it didn't feel right to him. Again, thanks.

JoeTaxpayer wrote in news:km1ujj$9md$ snipped-for-privacy@dont-email.me:

Some tax professionals have more common sense than others. Years ago I worked for a tax lawyer who was very successful, had very wealthy clients, and one day was indicted for tax fraud. He wasn't convicted, but after he died the IRS got a heck of a lot of money out of his estate because of what they said were shady planning schemes; and they properly (according to the courts) rejected them.

Although I am not a lawyer, I think the word you are looking for is "conspiracy." A single word term is probably not optimum. A full term would be "Criminal conspiracy to commit fraud," or something close to that. Again, I am not a lawyer, but I believe the criterion is two or more parties getting together to plan a crime, and that one of the conspirators actually commits an overt act to implement the crime.

In this case the two parties don't think (and with some though minimal reason) think they're not committing a crime. And it may well not be a crime per se.

They think they are taking a series of legal steps that, if done all at once, would result in underpayment of tax. The idea is that the IRS has the ability to ignore the middle steps and look just at the result.

Exactly. And the 'Step Transaction Doctrine' describes it perfectly. My reader acknowledged my answer. The one thing I never get to see is whether the lawyers who had offered incorrect advice were told they were mistaken, and if so, how they chose to respond.

Interesting thread, Joe. Thanks for starting it.

And, yes, we denizens of Internet tax discussion boards usually never do find out how things actually turned out.

On 2013-05-03 12:49, JoeTaxpayer wrote: [...]

Something close to what you want may be "step transaction doctrine" (see Wikipedia). Although not specifically limited to fraudulent transactions, it does state that you consider the entire set of steps as a single event for tax purposes.

This doctrine often goes hand-in-hand with the "substance over form" doctrine.

================ I have a problem with accepting the "substance over form" doctrine here.

Let's give a much simpler example:

A high-AGI taxpayer (i.e. over the AGI limit) wants to make a Roth IRA contribution. Assume he has no existing traditional IRA.

He performs these steps:

In these two steps, both of them separately legal, he has effectively made an excess Roth contribution under the "substance over form" doctrine w/r to the AGI limit, yet for this particular sequence, the IRS has said that such is actually valid. Form seems to actually dictate over substance in this simplified example. Although there are no current year tax effects, it does avoid future taxes. (cf.

Back to the OP's example: More steps, but each one legal by itself.

I think that the real problem is the "expectation of the gift" by making the disclaimer. A true gift is not a result of another action by the recipient. Is that what makes the difference?

I agree that the Roth backdoor might fall under the step transaction doctrine if it weren't for clear direction that it doesn't.

And I believe that part of the issue for my reader was that no, the gift wasn't a true gift. A high income couple can gift their parents appreciated stock, have them sell it for a zero cap gain, and then gift the proceeds back or fund the kid's 529, say. I am of the opinion that this kind of maneuver would also be disallowed under audit.

D - I think timing comes into play as well. The more time between steps, the tougher it might be to connect the dots.

I am not an expert on taxes. Nevertheless, my working rule is that everything involved in an IRA must be taxable to the owner at least once. This has helped me through a few complications. I can do that with a clear conscience even if may not be sanctioned in the tax. There is just too much to do in living to understand every detail of the tax code when filling out the forms. Income tax takes on too much of my life already.

The example given appears to me as illegal because it ultimately provides income that is not taxed at all.

: > I have a problem with accepting the "substance over form" doctrine here. : > : > Let's give a much simpler example: : > 1) He opens a traditional IRA and makes a non-deducted contribution. : > 2) The next day, he converts that account to a Roth account (then : > combines that new account with his existing one via a rollover). : > : > : > Back to the OP's example: More steps, but each one legal by itself. : > : > I think that the real problem is the "expectation of the gift" by making : > the disclaimer. A true gift is not a result of another action by the : > recipient. Is that what makes the difference?

: I agree that the Roth backdoor might fall under the step transaction : doctrine if it weren't for clear direction that it doesn't.

: And I believe that part of the issue for my reader was that no, the gift : wasn't a true gift. A high income couple can gift their parents : appreciated stock, have them sell it for a zero cap gain, and then gift : the proceeds back or fund the kid's 529, say. I am of the opinion that : this kind of maneuver would also be disallowed under audit.

Does a gift of appreciated property(stock or whaever) really pass to someone witha step-up basis? I thought that only occurred when someone died when the basis gets stepped up.

Wendy Baker

You are correct. The hypothetical scam - I have $10K in stock with $2K basis. I gift it to mom. She is in the 10% bracket and when she sells, has a $8K gain but at 0% rate. She gifts me back $10K. The point is that basis follows a gift for purposes of a gain, and this would avoid tax.

I offered as another example of the Step Transaction Doctrine kicking in. The above is clearly just an attempt to avoid tax, there was no bonafide gift.

Tax would be paid at one brother's lower rate, not avoided altogether. Still, Step Transaction Doctrine, and I advised not to do this.

JoeTaxpayer wrote in news:km6p9s$iog$ snipped-for-privacy@dont-email.me:

Exactly. I've seen lots of cases where this is the issue. For example one parent wanted to increase contributions to a Crummey Trust (otherwise known as an ILIT). His trust allowed several people who were not ultimate beneficiaries the power to withdraw contributions for 30 days, after which time the gift would lapse. This was held to be a phoney gift and the gift tax exemption was disallowed.

In another case two brothers set up trusts for the children of the other brother, to skirt rules on family control. That, too, was held to be form over substance, and was disallowed.

The longer between steps, the more likely it is that the steps were legitimate, independent acts. But time by itself won't do the trick.

You and JoeTaxpayer may be talking about different examples here, or maybe it's just me.

Your "working rule" is correct, as long as you account for after-tax contributions. A non-deductible contribution to a traditional IRA has already been taxed and does not need to be taxed again when it comes out.

Then of course, earnings in a Roth IRA are never taxed, by design.