BACKDATING: LEGAL AND ETHICAL CONSEQUENCES OF TEMPORAL MODIFICATIONS Tax Update XXXI Robert R. Keatinge Holland & Hart LLP 555 17th Street, Suite 3200 Denver, CO 80202 email@example.com
Not all temporal modifications are illegal, unethical or even ineffective. Some ineffective but nonfraudulent temporal modifications may not be illegal or unethical. All fraudulent backdating is illegal, unethical and ineffective. This outline considers the circumstances in which an attempt to assign a date to an action that is different than the date on which the action actually took place will be illegal, unethical and ineffective. A. Definitions. 1. Temporal Modification. Circumstances in which a document or action attempts to have an effect at a time other than a time at which the action is taken. Generally, the action is sought to be effective at a time that precedes the time of the action, although under some circumstances it may be intended to be effective as of a subsequent date. 2. Backdating. Assigning an event to a date prior to that of actual occurrence; or dating a document “as of” a time prior to execution The two are not mutually exclusive. 1 3. Rescission. The abrogation, canceling, or voiding of a contract that has the effect of releasing the contracting parties from further obligations to each other and restoring the parties to the relative positions that they would have occupied had no contract been made. 2 B. Types of Temporal Modification 1. Nunc pro tunc initial action. An action having legal consequences or an action organization is sought to be created, a person sought to be treated as admitted or removed as an owner or agent of an organization, or a contract or transfer is sought be effective prior to the time that the legal steps to create the organization, admission or removal of the or enter into the contract occurs. 2. Nunc pro tunc change. An action having the effect of changing the terms of an existing arrangement of contact. 3. Rescission. An action having the effect of undoing another action which, but for the rescission would be effective. For a comprehensive analysis on backdating (not focusing primarily on partnership/partner matters), see Jeffrey L. Kwall and Stuart Duhl, Backdating, 63 ABA Business Lawyer 1153-1186 (August 2008), available at SSRN: http://ssrn.com/abstract=1112845. 2 Rev. Rul. 80-58, 1980-1 CB 181. See also, Sheldon I. Banoff, Unwinding or Rescinding a Transaction: Good Tax Planning or Tax Fraud?, 62 TAXES 942, 980 (1984). 2 1
C. Reasons for Temporal Modifications. There are several circumstances in which temporal modifications may take place; not all of them are inappropriate. 1. Defrauding a third party. To the extent a third party’s rights are determined by the date on which an action occurs, temporal modification may be intended to, or may serve to attempt to change the third party’s rights. For purposes of this paper, the third party generally concerned is the Internal Revenue Service (“Service”). The use of temporal modification to obtain a tax or other benefit to which the actor would not be applicable were 2. Non fraudulent memorialization of past actions. There are several ways in which past actions may be reduced to a written document, even though they were taken . Among the most common memorialization is the preparation of minutes of a meeting at which an action was taken. Memorialization reflecting a modification of a partnership or operating agreement through course of conduct may also be appropriate. For example, when A and B are partners under a partnership agreement calling for each to receive 50% of the profits of the organization 3. Ratification of past action. If an agent takes an action on behalf of a principal with appropriate authority, under some circumstances the principal can ratify the action. For example, a party who is not bound by a voidable contract may elect to ratify the contract, in which case the contract will be...
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