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Introduction
The rescission doctrine has existed for approximately 31 years. Its origin can be traced to Rev. Rul. 80-58. 1 In a nutshell, the rescission doctrine permits parties to unwind a transaction and return to the same economic positions they occupied before a transaction, as if the transaction had never occurred, provided certain conditions are satisfied. Recent private letter rulings involve a rescission of a completed transaction with undesired tax consequences followed by a different transaction in the same taxation year with desired tax consequences. What is unique is that the second transaction is respected as separate from the original undesired transaction and accorded economic significance. This article will discuss recent examples of the IRS expanding the boundaries of the rescission doctrine.
The Rescission Doctrine âeuro? Revenue Ruling 80-58
The rescission doctrine is articulated in Rev. Rul. 80-58, where A , a calendar year taxpayer, sold land to B and received cash for the entire purchase price. The sale contract obligated A, upon B's request, to accept reconveyance of the land from B if, at any time within nine months of the sale date, B were unable to have the land rezoned for B's business purposes. If a reconveyance were to occur under the sale contract, A and B would be placed in the same positions they occupied before the sale. Within nine months of the sale date, B determined that it was not possible to have the land rezoned and notified A of its intention to reconvey the land to A pursuant to the terms of the sale contract. The reconveyance was consummated during the same tax year as the sale, the tract of land was returned to A, and the purchase price was returned to B. Citing Penn v. Robinson2 and Rev. Rul. 74-501,3 the IRS determined that the original sale was disregarded because A and B were restored, in the same tax year, to the same positions they occupied before the sale.
Thus, the rescission doctrine as articulated in Rev. Rul. 80-58 requires that: (1) the parties to the undesired transaction be restored to the status quo ante, i.e., to the exact economic positions that they occupied immediately before the transaction, and (2) the restoration occur within the same tax year...