Rarely in life is there an opportunity for a  “do-over,” especially in the realm of taxes. But the rescission doctrine offers such a chance to taxpayers to rework a business decision for a shot at a better tax outcome. The American Institute of CPAs recently wrote an in-depth review of this little-used tax strategy. Here’s what you should know:

A rescission is a term that originated in the field of contract law. In a rescission, two parties may declare that their original business deal is null and act as if it never happened in the first place. Common examples of a voided transaction could be a sale of property or stock or parts of a business restructuring. 

In Rev. Rul. 80-58 the IRS upheld the ability to rescind transactions for tax purposes. In this case, a piece of property was sold under the condition that it could be returned to the seller if the zoning agent refused to rezone it. In this instance the rezoning request was refused and the original purchaser rescinded the sale, returning the property to it’s original owner. In this instance, the original seller was not required to recognize gain on the original sale and the purchaser was not required to recognize any gain when they returned the property after the rescission was finalized. 

As a result of this ruling, the IRS set two conditions for recognizing rescissions for tax purposes. The first being that after a rescission has taken place, the two parties must have completely returned to their respective positions prior to the original transaction. In addition, the purchase and the rescission must both occur in the same tax year. If these two conditions are met, the rescission will be recognized for tax purposes. 

Examples of favorable private letter rulings the IRS has issued include a company that undid only a portion of a restructuring plan to avoid “springing debt” and, in a separate case, a target company’s merger into a parent company to restore the parent company’s cost basis in the target company’s stock. The IRS has since stopped issuing private letter rulings in cases involving rescissions and has dropped the topic as a subject of a proposed guidance project.  

The IRS appears content for the current time to leave its no-ruling stance in effect in regard to rescissions, allowing taxpayers the opportunity to use rescission as a means of rewinding a bad business move and its tax implications. If you’ve made a business blunder you’d rather forget, a rescission could be a strong option to do just that.