Guidelines for Backdating
August 01, 2019
By Lyle C. Mahler, Esq.
In my practice, clients often ask me if they can date a document with a date that is prior to the date they are actually signing the document. This is called “backdating”. While the term backdating often carries with it a negative connotation, there are certain circumstances where backdating is perfectly legitimate.
The most common example of the proper use of backdating is to memorialize an event that has already occurred. For example, if uncle Joe lends $50,000 to his nephew Stevie on March 10, 2019, with a verbal understanding that Stevie is going to pay back uncle Joe in 1 year with interest at 5% per annum, it would be perfectly acceptable to memorialize that agreement by having Stevie execute a promissory note on April 5, 2019 reflecting that understanding and have the note be dated “as of” March 10, 2019.
Courts have held that the use of the words “as of” adequately alert the reader that the document may have been executed after the event occurred, even though in real world practice “as of” dates are often used when the event and the signing of the document actually do occur on the same date. Given that reality, a general guideline I recommend is to use “as of” dates to memorialize events that have occurred within a relatively short time of the actual signing. Within 30 days is a good rule of thumb. Beyond that short period, I prefer to be more overt that the signing of the document and the date of the actual event are different, by either using the phrase “effective as of” or by stating that the document is dated “as of” the date of signing, “but effective as of” the earlier date of the event. I prefer the latter approach when the time period between signing and the event are considerable.
Whether backdating is an improper fabrication or a proper memorialization of the occurrence of a prior event, may not always be as clear as the situation of the loan between uncle Joe and nephew Stevie. Therefore, it is helpful to retain some record or proof that the event did in fact occur at the earlier stated time, especially where the timing of the agreement could impact a third-party or changes the tax effect to the parties.
Clients have also asked to backdate a document to achieve a particular economic result which has been agreed between the parties. As a general rule, parties to an agreement can make their agreement effective on whatever date they choose, provided no third party’s rights are compromised and no law is violated. In such cases, when the backdating is in fact innocuous, backdating may be used, however it is still recommended to use the qualifiers (i)“as of”, (ii) “effective as of” or (iii) dated “as of _______”, “but effective as of _______” discussed earlier to clearly identify that the date of signing and the date of the agreement are not the same.
Can backdating cross tax years? As a general rule, I would not recommend backdating a document which crosses tax years unless it is absolutely clear (and the parties have evidentiary support) that the event in fact occurred in the prior tax year and the parties have been filing their returns consistent with the occurrence of the event. Otherwise, the parties risk having the timing of their agreement attacked by the taxing authorities, especially if the backdating provides an improper tax benefit to one or more of the parties to the agreement.
Given the realities of the world, backdating has become part of everyday business and this is not likely to change any time soon. However, it is important that when signing a backdated document that such fact is clearly disclosed and that it is being used for a legitimate and proper purpose. Backdating that is utilized to deceive a third-party or violates the law is always an improper fabrication and no form of disclosure will cure such wrongdoing.