Recently, the IRS reaffirmed its ruling policy for a rescission of a transaction and said it will review its policy. (Daily Tax Reporter, 17 DTR G-10 (January 26, 2011)). The IRS rescission policy is based on Rev. Rul. 80-58, 1980-1 CB 181. As applied by the IRS, in order to have a valid rescission:

  • There must be a contract that can be undone.
  • The rescission transaction must be completed in the same taxable year as the original transaction.
  • The parties must be restored to their status quo before the original transaction.
  • The rescission is affected by one of three ways, such as mutual agreement of the parties.

Where the rescission requirements are met, a transaction, such as a sale of real estate or a sale of the stock or assets of a corporation, can be voided after the fact with no resulting income tax liability.