You are the owner and chief operating officer of a Subchapter S corporation, which reports on the cash basis of accounting. For years, you have been reporting amounts received toward the end of the calendar year as having been received only when they were deposited the following January. In several instances, this has had the effect of shifting income forward into a later year, deferring your tax liability on the passthrough amounts.

Eventually, the Internal Revenue Service (“IRS”) catches on, and after examining the three returns for which the limitations period has not already closed, issues deficiency notices on the two older returns, with penalties, and acknowledges an overpayment in the most recent year.

You file a timely petition with the Tax Court to adjust the deficiency assessed for the earliest year, point- ing out that in recalculating gross receipts for that year, IRS did not back out the amounts deposited in

January which should have been reported for the previous year – which, of course, is now closed.

The Case at Hand

This was precisely the scenario in Squeri v. Commissioner1, a 2016 mem- orandum decision of the Tax Court. The court rejected the taxpayer’s argument, holding that a “duty of consistency,” which it also character- ized as “quasi-estoppel,” prevented him from “benefiting in a later year from an error or omission in an ear- lier year which cannot be corrected because the limitations period for the earlier year has expired.”

For the duty of consistency to ap- ply, the 9th Circuit has held that “the following requirements must be met: (1) a representation or report by the taxpayer, (2) reliance by the Commissioner, and (3) 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.”2

Duty of Consistency in Other Matters

More typically, the duty of consis- tency arises in connection with the reporting of adjusted basis in con- nection with calculating the amount of realized gains on the sale of property. For example, in Janis v. Com- missioner3, a 2004 memorandum de- cision later affirmed by the United States Court of Appeals for the Ninth Circuit, the Tax Court ruled that the heirs to artwork that had been val- ued in their father’s estate at a steep discount due to “blockage” were bound by the discounted value in calculating their gains upon a later sale of the artwork.

In Janis, the heirs had also been the executors of their father’s estate, and had negotiated the valuation discount with the IRS in the course of an examination of the estate tax return. But heirs may also find themselves bound by discounted estate tax valecutor had claimed special use valuation under Code section 2032A on an estate tax return, were bound by that value in calculating their gain when the property was later sold.

Although the heirs now claimed that the executor had made an error in determining the special use valuation, and they should not be “saddled” with the “lowball” basis figure, the court said they had a sufficient “identity of interest” with the executor – their stepmother – to bind them to a duty of consistency in reporting their basis. Not only had they benefited from the reduction in the estate tax attributable to the valuation discount, but they had signed off on the requisite consents to the executor making the section 2032A election.5