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The Rescission Doctrine

Daren Shaver, Associate

 
Sometimes taxpayers would like to have the ability to undo, or perhaps even redo, a transaction.  Perhaps the business deal fell apart or unforeseen circumstances have caused the transaction to be less desirable than was initially envisioned.  While it is certainly possible to unwind transactions, it may come as surprise to learn that one may do so without triggering any undesirable income tax consequences—provided certain requirements are satisfied. 


In fact, under U.S. federal income tax law, it’s possible for certain transactions to be treated, for tax purposes, as if they never even happened.  The “Rescission Doctrine,” as it is affectionately known in the practitioner community, finds its modern-day roots in Revenue Ruling 80-58, wherein the Internal Revenue Service (the “Service”) permitted the rescission of a real estate purchase once it was determined that the buyer was unable to rezone the land, a condition of the sale. 


In Rev. Rul. 80-58, the Service held that where:  (1) both the original and rescission transactions occur within the same taxable year; and (2) the parties are returned to the same positions they held prior to the original transaction (i.e., Status quo ante), the transaction can be treated as if it never occurred for federal income tax purposes.  Put differently, “the legal concept of rescission refers to the abrogation, canceling, or voiding of a contract that has the effect of releasing the contracting parties from further obligations to each other and restoring the parties to the relative positions that they would have occupied had no contract been made.” Rev. Rul. 80-58. 


Although the Service has in recent years stopped issuing rulings on rescission transactions, existing precedent paints the picture of a relatively taxpayer friendly policy of blessing rescission across a range of transactions (e.g., sales and other transfers of property or interests, stock issuances, and even mergers).

Although any rescission transaction requires a thorough analysis of the facts and proper documentation, taxpayers should find comfort in knowing that, within the same tax year, it may in fact be possible to get a “do-over” in the eyes of the Service.

For more information, please contact Daren Shaver.


Carle, Mackie, Power & Ross LLP
100 B Street, Suite 400
Santa Rosa, CA 95401
(707) 526 - 4200
www.cmprlaw.com 
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