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the terms of the True Ranches buy-sell agreement. Because of the
transfer of basis to the depletable oil and gas properties, the
ultimate prices to be paid for interests in Smokey Oil under its
buy-sell agreement would have been expected to be reduced to less
than the costs of the purchased ranchlands.
On audit of the True Oil, Smokey Oil, and True Ranches tax
returns for 1989 and 1990, the IRS determined that the substance-
over-form and step transaction doctrines required that the
various intermediate steps of these transactions be collapsed and
that they be viewed as a unitary transaction in which True
Ranches acquired directly the land and depreciable assets of the
ranch properties. Because Smokey Oil was deemed not to have
acquired the ranchlands, the IRS treated these transactions as if
there had been no exchange between Smokey Oil and True Oil. The
IRS disallowed Smokey Oil’s cost depletion deductions claimed on
the leases received in the exchanges, and it allocated the income
from those leases back to True Oil.
The True family paid the deficiencies and filed
administrative claims for refund. After the IRS disallowed the
refund claims, the True family filed a refund suit in U.S.
District Court for the District of Wyoming. The Government filed
motions for partial summary judgment, contending (inter alia)
that under the step transaction doctrine the ranchland exchange
transactions were a single transaction in which True Ranches
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