In Uncategorized on 06/15/2016 at 17:47

Conjoining those two sages Ralph Waldo Emerson and William James Basie, Judge Kerrigan deals with the old game of depositing December’s checks in January in Robert J. Squeri, et al.,  2016 T. C. Memo. 116, filed 6/15/16.

Rob and the et als are shareholders in a cash-basis S Corp that really cleaned up (they were in the full-service janitorial business).

For the open years, they held off the December checks to January. IRS hits them and makes them recognize the income when they got the checks each year, regardless of when they deposited them. And Rob and the et als lose that one.

However, IRS wants to hit them for a closed year, by making them pick up the January open-year deposits in the closed year, even though throwing them backward in the still-open years.

“The parties do not dispute that [Sub S] incorrectly computed its gross receipts by using bank account deposits.  Respondent contends that under the duty of consistency, petitioners should be required to include on their [open-year] returns amounts of [closed-year] income, as they originally reported.  Petitioners contend that gross receipts of $1,634,720 should be excluded from their [open-year] income because they were actually received in [closed-year] and that respondent does not have authority to make adjustments for petitioners’ [closed] tax year.  Petitioners further contend, and respondent does not dispute, that the Tax Court does not have jurisdiction to make adjustments for their [closed] tax year and that the period of limitations… is closed.  See secs. 6214(b), 6501(a).” 2016 T. C. Memo. 116, at p. 7.

So will Rob and the et als walk away with $1.6 million that will stay behind the closed-year door?

Not with Judge Kerrigan on the case.

“The duty of consistency, or quasi-estoppel, is an equitable doctrine which prevents a taxpayer from benefiting in a later year from an error or omission in an earlier year which cannot be corrected because the limitations period for the earlier year has expired.” 2016 T. C. Memo. 116, at p. 8.

Dig that quasi-estoppel (sorry, guys).

The following triggers the duty of consistency: “…(i) a representation or report by the taxpayer, (ii) reliance by the Commissioner, and (iii) an attempt by the taxpayer after the statute of limitations has run to change the previous representation or to recharacterize the situation in such a way as to harm the Commissioner. If all those elements are present, the Commissioner may act as if the previous representation, on which he relied, continues to be true, even if it is not.  The taxpayer is estopped to assert the contrary.” 2016 T. C. Memo. 116, at pp. 9-10. (Citations omitted).

In short, taxpayer, you broke it, you own it.

Report? The tax returns for all the years, open and closed.

Reliance? Although Rob and the et als claimed IRS knew their reporting was bogus because he nailed them for the open years, IRS never objected to the closed year. There is no necessity that IRS audit every return and give it a “no change” to show reliance.

Recharacterize? Here’s the whole point: “Petitioners admit that reporting the [closed-year] payments for [closed-year] rather than for [open-year] would be inconsistent with their previous reporting.  The period of limitations has expired on the [closed] tax year, and allowing petitioners to recharacterize their income as belonging in [closed-year] would harm the Commissioner; it would allow petitioners to avoid tax on $1,634,720.” 2016 T. C. Memo. 116, at p. 13.

It would also harm everyone who paid their taxes honestly.

Rob and the et als claim they made a mistake of law and not of fact. Whatever they made, it was a representation made and relied upon.

Takeaway- The SOL is not a plenary indulgence.

  1. […] The point: Taxpayers can’t hide behind the statute of limitations.  Check out the blog post at Taishoff Law, here. […]


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