Category: Real Estate; Sales & Exchanges Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com Background Shortly after the trustee sale (but still within 1996), the taxpayer entered into an agreement with the lender. Even though the agreement is titled "Rescission of Foreclosure" and the agreement recites that the parties desire to rescind the foreclosure, it appears that the effect of the agreement is merely to give the taxpayer the right to repurchase the property. The taxpayer deposited into escrow some $250,000 in late December, 1996 for the purpose of the repurchase. The viability of the agreement with the lender was dependent upon the taxpayer raising money from outside investors and/or finding a new lender willing to refinance the property. The taxpayer was unsuccessful in its efforts to bring in investors and/or new lenders. The repurchase arrangement with the foreclosure lender ultimately fell through, and all negotiations ceased in February, 1997. The taxpayer wishes to report the foreclosure transaction in 1997 under the theory that the existence of a binding "Rescission of Foreclosure" agreement sets aside the 1996 transaction. Discussion It is well settled for tax purposes that a foreclosure is a sale of the underlying property securing the debt. There is precedent for the proposition that a sale can be rescinded for tax purposes. Revenue Ruling 80-58, 1980-1 CB 181, deals with a sale of real estate which was reconveyed to the seller in the same tax year. The original contract of sale gave the purchaser the right to rescind the sale if the property could not be rezoned within a certain time period. Citing Penn v. Robertson, 115 F2d 167 (4th Cir. 1940), the IRS held that because the parties were restored to their pre-sale positions prior to the end of the tax year in which the sale occurred, the original sale could be ignored for tax purposes. The IRS also held in the same ruling that a sale rescinded after the end of the tax year in which it occurred could not be ignored for tax purposes. It seems to me that despite the title of the agreement entered into by the taxpayer and despite the recitation that the parties wish to rescind the foreclosure, the effect of the agreement is to provide to the taxpayer an option to repurchase the property. It is my view that even if the taxpayer had been successful in reacquiring the property pursuant to the agreement, reporting of the original transaction (the foreclosure) would be required. As I understand the facts, the lender took title to the property as of the date of the trustee's sale. I further understand that the lender collected rents and paid expenses relative to the property after the date of the trustee's sale. Further, it is my understanding the when the whole arrangement with the lender became untenable because of lack of investors and/or new financing to take out the old lender, the foreclosure lender was not legally required to do anything to continue its possession and enjoyment of the property. In effect, when the deal fell apart in February of 1997, the foreclosure lender simply let the status quo continue. It seems to me that the foreclosure lender had legal title to the property at all times subsequent to the foreclosure. Further, the foreclosure lender had all the benefits and burdens of ownership as well. As I understand it, nothing in the agreement even remotely suggests that the parties were restored (at any time) to the positions they were in prior to the original transaction. It is my very strong view, therefore, that the taxpayer's desire to defer recognition of the foreclosure until 1997 is completely untenable – not because it is impossible as a matter of law to rescind a sale, but rather that the taxpayer's facts do not support the premise that a rescission actually occurred.
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