What are the tax consequences of unwinding a transaction?
And just when, if ever, is a taxpayer entitled to the transactional equivalent of a mulligan—a do-over? The ability to unwind a transaction depends upon the particular facts and circumstances of the transaction and the manner in which a transaction is unwound and documented. But where the requirements are met, the so-called “rescission doctrine” offers a potential avenue to unwind a transaction without tax consequences.
Where it applies, the rescission doctrine returns the parties to their original position—the status quo ante. When the necessary conditions are met, in other words, the transaction is disregarded for federal income tax purposes. A rescission may potentially be effected by mutual agreement of the parties, by one of the parties declaring 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.”
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