I’m going to leave to the trade press and the blogosphere the technicalities of the proper reporting of excess loss accounts for tiered consolidated groups, per the regulations to Section 1502. Most of my readers will never encounter such arcana. But the duty of consistency raises its Hydra heads far and wide.

Y’all will recall that the duty of consistency (son of tax benefit rule) says you can’t take a position on a now-closed year, and take a directly contradictory position on an open year, so IRS can’t go back and hit you for the closed year.

Wherefore I will suggest a close review of the cases cited in Belmont Interests, Inc., T. C., Memo.2022-98, filed 9/26/22. IRS comes unglued because a mutual mistake of law negates the duty of consistency, where both taxpayer and IRS have the same facts and the same erroneous view of the applicable law.

There is a bunch notes (hi, Judge Holmes) from seven (count ’em, seven) members of the group to pay losses they suffered. The question is when said notes became worthless, so that the group had to recognize cancellation of debt income. All the notes said TX law governs. But all my sophisticated readers will say “So what? State law may characterize what a transaction is, but Federal law characterizes how the transaction is taxed.”

True. But here both taxpayer and IRS thought the TX SOL for bringing suit on the notes was six years. Judge James S (“Big Jim”) Halpern checks out TX law and finds it’s four years. And while it might could be maybe so that the seven members had off-balance-sheet assets, “(W)e view as unlikely, and even implausible, that each Loss Subsidiary held sufficient assets not required to be shown on its balance sheet to avoid the application of Treasury Regulation § 1.1502-19(c)(1)(iii)(A) before [Year One]. Nonetheless, that prospect is at least theoretically possible.” T. C. Memo. 2022-98, at p. 33. Except the parties never raised the issue.

The seven claimed they had no assets years before. As both IRS and Belmont got the SOL wrong, that’s a mutual mistake of law, not a misrepresentation of fact relied on by IRS. Hence no duty of consistency as to Year One.

Summary J for the Belmonts on consistency and deficiency for Year One. But as for Year Two, there needs to be a trial, whereat IRS will need to prove that the notes had not been cancelled by the time the TX SOL ran out.

Clear? Thought not.