As a business owner, you're entering into transactions potentially on a daily basis. Suppose you enter into a transaction with someone, hurrying to get the deal closed as you're set to rake it in. It comes around to December, and your accountant is preparing a projection of what your tax liability will likely be for the year.
Then you get a call that you're going to owe a boat load of money to the government for that transaction you failed to consult with your accountant about beforehand. What do you do now?
Luckily, you may have the possibility of rescinding the sale via the Rescission Doctrine. Rescission is a means where the parties to a transaction can mutually agree to undo a contractual arrangement, as though it had never happened. Think of the rescission doctrine as the business equivalent of an "undo button" for business transactions. The IRS generally respects a rescission for tax purposes if the original transaction and the rescission take place in the same taxable year, the rescission is carried out by both of the original parties to the transaction, and the parties are restored to the positions they had before executing the agreement.
A rescission should be accomplished by mutual agreement of the parties involved. However, should the other party not agree, one of the parties may declare a rescission of the contract without the consent of the other.if sufficient grounds exist, or by applying to the court for a decree of rescission, but only if absolutely necessary.
Say, for example, you wanted to sell some land to a third party. However, the third party would not have any use for the land, unless it can be rezoned for the third party's business purpose. You and the buyer agree that you'll attempt to get the land rezoned in a reasonable period of time. But, if the rezoning request is unsuccessful, you'll take the land back and return any money received. Now, if the rezoning fails and the transaction is undone within the same tax year as the sale, the IRS would respect the rescission and no tax effect will occur under Revenue Ruling 80-58. However, say the initial sale occurred at the end of the year, and it isn't determined that the rezoning won't be approved until the beginning of the following tax year, any attempts at a rescission will not be respected. Any gain or loss from the original sale will hold, as well as any tax consequences of the third party returning the land, should there be any gain or loss to recognize by the third party.
Due to the unique facts and circumstances surrounding each transaction attempted to rescind, in the past, taxpayers typically relied on Private Letter Rulings from the IRS for confirmation that a rescission will be respected (note: Private Letter Rulings require payment of a fee for consideration). Some previous types of transactions requesting rescissions via Private LetterRulings include termination of an S-corporation elections, and conversions of LLC's into corporations. The IRS has since directed taxpayers to rely on Revenue Ruling 80-58, and has subsequently stopped issuing Private Letter Rulings concerning recissions. It should also be noted that as the Rescission Doctrine is available to taxpayers, the IRS may also use the Rescission Doctrine when arguing a case against a taxpayer.
Should you forget to discuss a significant transaction with your accountant, there just might be away to hit the "undo button" before that tax bill comes due. Just make sure to consult with your tax advisor well before year-end.
Do you have questions about a potential do-over? I'm ready to help! Contact us at info@zinnerco.com or 216.831.0733 to learn more.