On June 23, 2020, the US Court of Appeals for the Fourth Circuit affirmed the Tax Court’s decision in Estate of Kechijian that the taxpayers could not apply the rescission doctrine to each avoid tax on $41.5 million of compensation income. The taxpayers in the case held stock that had been subject to a substantial risk of forfeiture. In 2004, the risk of forfeiture expired, and they then surrendered the stock back to the issuing corporation and claimed that the rescission doctrine allowed them to avoid the tax on the value of the vested stock. Following the forfeiture, they purchased stock that restored them to their proportionate interest in the issuer. The court not only held that these facts prevented the application of the rescission doctrine but imposed substantial penalties on the taxpayers. Mark Leeds and Minju Kim, both tax lawyers with the New York office of Mayer Brown, analyze this new decision and its implications for applications of the rescission doctrine on compensatory transactions.
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