Presto Change-o: Unwinding Transactions in the Face of Uncertainty

Forty years later, in Revenue Ruling 80-58,2 the Internal Revenue Service acknowledged that rescission could be accomplished by mutual agreement, by one party's declaration of rescission of the contract without the other's consent if sufficient grounds exist, or by court order. [...]the IRS has issued numerous private letter rulings allowing taxpayers to rescind a transaction in order to obtain a better tax result or to correct a tax error, including: * unwinding a liquidation or merger to restore the shareholder's basis in the stock of the liquidated entity or to address uncertainties about the tax consequences of the transaction; * unwinding a sale so that it can be structured as a qualified stock purchase to which a Section 338(h)(10) election can be made; * unwinding the satisfaction of debt using corporate stock to adjust the amount of debt satisfied, with the remainder being canceled via a capital contribution; and * unwinding the transfer of an S corporation so that its suspended losses are not eliminated. Taxpayers should be aware that the IRS no longer issues private letter rulings on rescissions and that it may no longer support some past rulings.3 Additionally, the courts and the IRS generally do not allow for rescission if the transaction involves stock that post-transaction, but pre-rescission, declared a dividend that created an irrevocable vested legal right to the payment.4 The Returning-Parties-to-the-SameRelative-Position Requirement The concept of returning taxpayers to the same relative position they would have occupied if the underlying transaction were never entered into seems relatively straightforward. Additionally, the application of the rescission doctrine does not appear to require the taxpayer to compensate the buyer for the use of its cash between the time of the transaction and the rescission. [...]the taxpayer, in essence, has received an interest-free loan from the buyer.