David Hasen (University of Michigan at Ann Arbor – Law School) has posted Unwinding Unwinding on SSRN. Here is the abstract:
"Unwinding" is a common, if not ubiquitous, feature of tax practice. In a successful unwind, parties to a prior transaction or arrangement back out of it by means of a later transaction and are treated as having engaged in no transactions at all. In an unsuccessful unwind, the parties undertake the later transaction, but it is not treated as nullifying the effects of the first transaction; rather two separate transactions are deemed to have taken place, each with its own consequences. In the tax context, the question is whether no taxable events have occurred, or two have occurred.
No unified or consistent theoretical framework exists for analyzing the phenomenon of unwinding. This article develops such a framework. In doing so, it also provides an organizing principle applicable to other kinds of corrective action that taxpayers or the government undertake. The types include equitable recoupment, the tax benefit rule and the claim of right. Each involves resolution of a different kind of excusable inconsistency in taxpayer conduct. In the case of unwinding, the inconsistency arises between the taxpayer’s understanding of the circumstances in which she acts and the circumstances as they actually are; it concerns the possible efficacy of a chosen action to realize an end the taxpayer has. In some such cases, unwinding relief may be appropriate, but more often only where the relevant taxes are themselves transactionally based. Moreover, administrative considerations often militate against an expansive unwinding doctrine, even where the transactional nature of the tax might otherwise justify it.