William & Mary Business Law Review


Philip G. Cohen


Over thirty years ago, Professor Ronald H. Jensen authored an article in the Virginia Tax Review, titled “Of Form and Substance: Tax Free Incorporations and Other Transactions Under Section 351.” Professor Jensen asserted that it was inappropriate to utilize the step transaction doctrine to determine whether the control requirement was met in a purported section 351 transaction, involving a disposition of some, or all, of the transferor’s shares even if effected by a binding contract made prior to the contribution.

Professor Jensen concluded that the courts and the Internal Revenue Service (Service) have produced a hodgepodge of intellectually inconsistent decisions and rulings making predictability problematic. There is no doubt of the many inconsistencies rendered by the Service and the courts in addressing the use of the step transaction to determine whether the control test under section 351 has been satisfied when there had been dispositions connected with the initial contribution. Nevertheless, there are sound policy reasons for the application of this judicial canon in certain circumstances and that Professor Jensen’s prescription for remedying the problem, i.e., by the complete elimination of the doctrine’s utilization in this context, is unwarranted.

This Article also considers the recent Tax Court decision, Complex Media, Inc. v. Commissioner, which addresses a different facet of section 351 control. The case involved, inter alia, the taxpayer’s successful attempt to invoke the step transaction doctrine to treat as boot, payments made to one of the partners of the transferor. Another aspect of the arrangement, however, is particularly troubling and the reason why discussion of the case is part of this Article examining section 351 control. This concerns the taxpayer’s position regarding how the requisite ownership was achieved. The court, at the behest of both parties, reluctantly agreed to include an act, i.e., a merger, in allowing the section to apply when the taxpayer’s form arguably did not comport with the statutory requirements. The Service’s concurrence to section 351 treatment was apparently motivated by its desire to minimize taxpayer’s amortization deductions rather than seeking to achieve a sound policy outcome.