A taxpayer's duty of consistency.

• Author: Oliver, Anne

A transaction may affect a taxpayer's federal income tax liability for multiple tax periods. If a taxpayer were able to change its treatment of a transaction when the assessment statute of limitation had closed for one of the periods, the government would be prevented from assessing and collecting any additional tax that may be owed. As a result, the taxpayer could possibly benefit by, for example, deducting the same expenses multiple times or excluding certain income so that it is never taxed. The duty of consistency was developed to address these situations.

The duty-of-consistency doctrine is an equitable remedy that has developed over the past 80 years; however, its application has been anything but consistent. Generally speaking, the doctrine precludes a taxpayer from taking one position on one tax return and then, after the assessment statute of limitation closes for that tax return, taking a contrary position on a subsequently filed tax return.

A recent Tax Court case illustrated the IRS's ability to successfully argue that taxpayers should not benefit from their own mistakes if the result is less tax being paid. In Squeri, T.C. Memo. 2016-116, the IRS argued that the duty of consistency required the taxpayers to recognize $1,634,720 as income in 2009, the year in which the gross receipts were reported, rather than in 2008, the year in which the gross receipts were actually received, because the assessment statute of limitation for 2008 had closed.

The taxpayers in Squeri were the owners of an S corporation. For each of the years from 2008 to 2011, the cash-basis S corporation had incorrectly computed its gross receipts by using only the deposits made into its bank account during the year and ignoring checks received during the year but deposited in the following year. For example, the S corporation received checks in 2008 that were not deposited in its bank account until January 2009 and did not include these checks in its 2008 gross receipts.

The IRS issued notices of deficiency to recalculate the gross receipts for each of the years from 2009 to 2011 to treat the amounts received before the end of each of those years as gross receipts for the year of the receipt of the payment. In calculating the adjustment to the S corporation's gross receipts for 2010 and 2011, the IRS first included the checks that were received during the year but deposited in January of the following year and then excluded the checks that were deposited in January of that year but received in the prior year. For 2009, while the IRS included the checks that were received during 2009 but deposited in January 2010, it did not exclude the checks that were deposited in January 2009 but received in 2008, as the assessment period for 2008 was closed and the IRS was therefore unable to assess any additional tax in 2008.

The taxpayers argued that the notice of deficiency for 2009 was incorrect because it did not take into account the $1,634,720 of gross receipts that had been originally reported in 2009 but which actually belonged in 2008. The Tax Court acknowledged that, because the taxpayers used the cash method of accounting, the checks received in 2008 but deposited in 2009 should be included on the 2008 return. However, the Tax Court looked to the duty of consistency as applied by the Ninth Circuit, to which an appeal of this case would lie, which had previously stated:

When all is said and done, we are of the opinion that the duty of consistency not only reflects basic fairness, but also shows a proper regard for the administration of justice and the dignity of the law. The law should not be such a[n] idiot that it cannot prevent a taxpayer from changing the historical facts from year to year in order to escape a fair share of the burdens of maintaining our government. Our tax system depends upon self assessment and honesty, rather than upon hiding of the pea or forgetful...