In the best of all possible worlds, our clients would always consult with us as part of the process of planning a transaction. When that does not happen and the tax consequences of the transaction are not as intended or not those desired, in some cases we can help you avoid the bad tax results through the application of the judicial doctrine of rescission. I have used this doctrine several times during my career to good effect.
An article published in June 2015 in The Tax Adviser discusses the doctrine of rescission, which allows the parties to pretend that the original deal never occurred.
The IRS issued Revenue Ruling 80-58, which states that a successful rescission for tax purposes has two characteristics:
- The parties to the transaction must be returned to the status quo ante (their positions had no contract been made); and
- Very importantly, the restoration must be accomplished within the same tax year as the original transaction. This requirement focuses on the importance of the annual accounting period in determining taxable income.
In the past, the IRS has issued several private letter rulings with respect to rescissions. While not precedential, these rulings give a great deal of guidance about a number of situations involving rescissions.
Restoration to the status quo ante involves a fairly straightforward analysis. Reverse engineering a transaction to maintain the transaction and get better tax results, rather than simply “unwinding” the transaction, is a bit trickier and a bit less certain as to its effectiveness. However, there have been at least a couple of private letter rulings that endorsed that kind of reverse engineering.
The IRS issued a no-ruling policy in the area of rescission in 2014. While negating the tool of a comfort ruling, the IRS has not indicated that the doctrine of rescission is under siege.
So, if you forget to tell us about a transaction before you close it, we may still be able to fix some tax-broken deals for you.