Final answer:
The step-transaction doctrine is a principle in tax law that prevents taxpayers from using a series of individual steps to obtain tax advantages. The IRS can collapse related transactions into one transaction for tax purposes using this doctrine.
Step-by-step explanation:
The step-transaction doctrine is a principle that applies in tax law to prevent taxpayers from using a series of individual steps to obtain tax advantages that they would not have been able to obtain through a single transaction. It allows the IRS to collapse a series of related transactions into one transaction for tax purposes.
For example, let's say a taxpayer wants to sell a piece of property to their child at a below-market price to avoid paying a large capital gains tax. However, if the transaction is viewed as a step-by-step process from selling the property to the child and then immediately reselling it to a third party at a higher price, the IRS can apply the step-transaction doctrine to collapse the two transactions into one, considering it as a direct sale to the third party. This prevents the taxpayer from obtaining the tax advantages they were trying to achieve.
Overall, the step-transaction doctrine is a tool used by the IRS to ensure that taxpayers cannot artificially structure a series of transactions to gain tax advantages that they would not have been entitled to otherwise.