T.C. Memo. 2016-116



                        UNITED STATES TAX COURT



              ROBERT J. SQUERI, ET AL.,1 Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket Nos. 12317-13, 12460-13,             Filed June 15, 2016.
                  12464-13, 12465-13.



      G. Michelle Ferreira and Courtney A. Hopley, for petitioners.

      Lesley A. Hale, for respondent.




      1
       Cases of the following petitioners are consolidated herewith: Peter G.
Dellanini and Rebecca R. Dellanini, docket No. 12460-13; Robert C. Nave, docket
No. 12464-13; and Gregory D. Dellanini and Carol A. Dellanini, docket No.
12465-13.
                                        -2-

[*2]                         MEMORANDUM OPINION


       KERRIGAN, Judge: For tax years 2009 and 2010 respondent determined

the following deficiencies and penalties:2

Docket No. 12317-13--Robert J. Squeri

                                                     Penalty
                      Year          Deficiency     sec. 6663(a)
                      2009           $305,562       $229,172
                      2010              69,486        52,115

Docket No. 12460-13--Peter G. Dellanini and Rebecca R. Dellanini

                                                     Penalty
                      Year          Deficiency     sec. 6663(a)
                      2009           $144,826       $108,620
                      2010              56,192        42,144




       2
       For tax year 2011 respondent determined overassessments of $153,797 for
Robert Squeri, $41,684 for Peter and Rebecca Dellanini, $13,901 for Robert Nave,
and $26,053 for Gregory and Carol Dellanini. For tax year 2010 respondent
determined an overassessment of $1,766 for Gregory and Carol Dellanini.
                                        -3-

[*3] Docket No. 12464-13--Robert C. Nave

                                                        Penalty
                      Year           Deficiency       sec. 6663(a)
                      2009            $53,973           $40,480
                      2010             18,529            13,897

Docket No. 12465-13--Gregory D. Dellanini and Carol A. Dellanini

                                                        Penalty
                      Year           Deficiency       sec. 6663(a)
                      2009            $82,965           $62,224

      Unless otherwise indicated, all section references are to the Internal

Revenue Code in effect for the years at issue, and all Rule references are to the

Tax Court Rules of Practice and Procedure. We round all monetary amounts to

the nearest dollar.

      The parties filed a stipulation of settled issues. The remaining issue for our

consideration is whether petitioners are bound under the doctrine of the duty of

consistency to recognize $1,634,720 in gross receipts that Preferred Building

Services, Inc. (PBS), received in 2008 as income for tax year 2009, the year for

which it was reported.
                                         -4-

[*4]                                  Background

       These four consolidated cases were submitted fully stipulated under Rule

122. The stipulated facts are incorporated in our findings by this reference. At the

time of filing the consolidated petitions, all petitioners resided in California.

       PBS is a full-service janitorial business organized as a California subchapter

S corporation. Petitioners Robert Squeri and Gregory Dellanini organized PBS in

1992. Peter Dellanini joined PBS in 1995. Peter is the son of Gregory. Robert

Nave joined PBS in or about 1998.3 Robert Squeri graduated from California

State University Hayward with a degree in history and is the chief executive

officer of PBS. Gregory Dellanini is the president of PBS. Peter Dellanini is the

vice president of PBS. Robert Nave is the general manager of PBS.

       Robert Squeri, Gregory Dellanini, Peter Dellanini, and Robert Nave are

shareholders of PBS. During 2009, 2010, and 2011 (tax years at issue) the shares

of stock of PBS were held as follows:

                        Shareholder             Shares (percent)
                       Robert Squeri                    51
                       Gregory Dellanini                15



       3
       The stipulation of facts states 1989, which we believe is a typographical
error and should be 1998.
                                         -5-

                  [*5] Peter Dellanini                 24
                      Robert Nave                      10

      During the tax years at issue and in 2008 PBS was a cash basis taxpayer.

PBS determined the gross receipts reported on its Forms 1120S, U.S. Income Tax

Return for an S Corporation, using the deposits made into its bank accounts during

the calendar year. During the tax years at issue and in 2008 PBS maintained two

bank accounts. Both Robert Squeri and Gregory Dellanini had signatory authority

over both accounts during the tax years at issue.

      PBS deposited checks that were probably received in 2008 totaling

$1,634,720 into its bank account in January 2009. PBS deposited checks that

were probably received in 2009 totaling $1,893,851 into its bank account in

January 2010. PBS deposited checks that were probably received in 2010 totaling

$2,271,175 into its bank account in January 2011. PBS deposited checks that

were probably received in 2011 totaling $1,564,602 into its bank account in

January 2012.

      PBS timely filed 2009, 2010, and 2011 Forms 1120S. On its Forms 1120S

PBS reported its gross receipts as follows:

                             Year             Gross receipts
                             2009              $7,217,362
                                        -6-

                       [*6] 2010               7,934,376
                              2011             8,716,194

      PBS determined the reported gross receipts on the basis of the deposits

made into its bank accounts during the calendar year. The reported gross receipts

did not include the checks that were received in each year at issue but deposited in

January of the following year. Rather, each year’s reported gross receipts included

the checks that were deposited in the year at issue but received in the prior year.

      Petitioners all filed timely Forms 1040, U.S. Individual Income Tax Return,

that reported their proportionate shares of income from PBS on their Schedules E,

Supplemental Income and Loss. Petitioners Gregory Dellanini and Peter Dellanini

filed joint returns with their spouses, Carol Dellanini and Rebecca Dellanini,

respectively.

      Respondent issued petitioners notices of deficiency on March 6, 2013. In

the notices respondent determined that PBS had improperly computed its gross

receipts by excluding the checks that were received during the last quarter of each

tax year at issue. In calculating the adjustment to PBS’ gross receipts for each tax

year at issue except 2009, respondent: (i) included the checks that were received

in the year at issue but deposited by PBS in January of the following year and (ii)

excluded the checks that were deposited in January of the tax year at issue, but
                                        -7-

[*7] received in the prior year. To illustrate: respondent adjusted the 2010 gross

receipts by excluding the checks that had been received in 2009 but deposited in

January 2010 and by including the checks that had been received in 2010 but

deposited in January 2011. For 2009, however, respondent did not do the second

adjustment and did not exclude the checks that had been received in the prior year,

2008, but deposited in January 2009.

                                     Discussion

       The parties do not dispute that PBS 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 2009 returns

amounts of 2008 income, as they originally reported. Petitioners contend that

gross receipts of $1,634,720 should be excluded from their 2009 income because

they were actually received in 2008 and that respondent does not have authority to

make adjustments for petitioners’ 2008 tax year. Petitioners further contend, and

respondent does not dispute, that the Tax Court does not have jurisdiction to make

adjustments for their 2008 tax year and that the period of limitations for tax year

2008 is closed. See secs. 6214(b), 6501(a).

       Section 441(a) requires that taxable income be computed on the basis of the

taxpayer’s taxable year. Section 441(b)(1) defines a “taxable year” as a taxpayer’s
                                        -8-

[*8] annual accounting period in the case of a calendar year or a fiscal year. A

taxpayer’s “annual accounting period” is the annual period on the basis of which

the taxpayer regularly computes his income in maintaining his accounting books.

Sec. 441(c).

      For purposes of calculating taxable income, section 451(a) provides that all

items of income received in a taxable year must be reported as income for that

taxable year unless the method of accounting requires that the item be accounted

for in a different tax period. We have held that income properly accruable for one

year is not deemed income for some other year, even if it was not reported for the

proper year. See Policy Holders Agency, Inc. v. Commissioner, 

, 48

(1963); see also Commissioner v. Mnookin’s Estate, 

 (8th Cir. 1950),

aff’g 

 (1949). Because PBS is a cash method taxpayer, all of the

checks received in 2008 should have been included in PBS’ gross receipts for tax

year 2008.

      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. Estate of Letts v. Commissioner, 

, 296 (1997), aff’d

without published opinion, 

 (11th Cir. 2000).
                                         -9-

[*9] The Court of Appeals for the Ninth Circuit, to which an appeal of these cases

would lie absent a stipulation to the contrary, see sec. 7482(b)(1)(A), and whose

law we therefore follow when it is squarely on point, see Golsen v. Commissioner,

, 757 (1970), aff’d, 

 (10th Cir. 1971), has held:

      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 tergiversation.

Janis v. Commissioner, 

, 1085 (9th Cir. 2006) (quoting Estate of

Ashman v. Commissioner, 

, 544 (9th Cir. 2000), aff’g T.C. Memo.

1998-145), aff’g T.C. Memo. 2004-117.

      The Court of Appeals for the Ninth Circuit has held that for the duty of

consistency to apply, the following requirements must be met: (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. Estate of Ashman v. Commissioner, 231 F.3d at 545. If all those

elements are present, the Commissioner may act as if the previous representation,
                                        - 10 -

[*10] on which he relied, continues to be true, even if it is not. Id. The taxpayer is

estopped to assert the contrary.

      The duty of consistency is an affirmative defense. Estate of Ashman v.

Commissioner, T.C. Memo. 1998-145. Therefore, the party asserting the duty of

consistency bears the burden of proving that it applies; thus respondent bears the

burden. See Rule 142(a).

A.    Representation or Report by the Taxpayer

      In applying the first element of the duty of consistency, the Court of Appeals

for the Ninth Circuit requires that a taxpayer make a representation or report.

Petitioners contend that while they made a mistaken representation, it was

consistent, and they rely upon Rivers v. Commissioner, 

 (1968). In

Rivers the taxpayer transferred assets to two corporations in exchange for shares of

stock and promissory notes. The corporations made payments on the notes, but the

taxpayer did not include any portion of the principal payments on the notes in his

tax returns for 1951 through 1960. The Commissioner argued that the taxpayer

should be required to report the income under the duty of consistency and the

payments should be construed such that all of the early payments, made during

years that were not at issue in the case, were payments for the recovery of basis in

their entirety, rather than prorating the basis among all of the payments. Id. at 667.
                                          - 11 -

[*11] We stated that the duty of consistency requires the taxpayer to take a

consistent position with regard to a similar transaction for different tax years. We

reasoned that the taxpayer had taken a consistent position with respect to the notes

for all of the tax years. Id.

      Rivers is distinguishable from the instant cases because we are not being

asked to reach a conclusion that conjures a scenario. In Rivers the taxpayer failed

consistently to report income from the notes and the Commissioner asked that we

disregard the consistency of his reporting. In the instant cases petitioners

consistently reported income on the basis of their bank deposits, and respondent is

asking that we hold them to this consistent reporting.

      The instant cases are more analogous to Estate of Ashman v. Commissioner,

. In Estate of Ashman the taxpayer reported that an IRA rollover had

occurred in an earlier tax year. In the tax year at issue after the statute of

limitations had expired for the earlier year, the taxpayer argued that the income she

had received from the IRA distribution was not taxable for the year received

because the money had not been properly rolled over and so should have been

taxable for the year received. Under the duty of consistency the court held the

taxpayer to her earlier position, even though it was incorrect. The court held that

she had made “a clear representation” when she “declared as a matter of fact” on
                                        - 12 -

[*12] her tax return that the funds had been properly rolled over. Id. at 545; see

also Estate of Letts v. Commissioner, 109 T.C. at 299-300 (“[A] taxpayer’s

treatment of an item on a return can be a representation that facts exist which are

consistent with how the taxpayer reports the item on the return.”). In the instant

cases petitioners made a clear representation on the 2009 Form 1120S for PBS

when they represented that PBS had received the $1,634,720 of gross receipts in

2009. This element of the duty of consistency has been met.

B.    Reliance by the Commissioner

      The second element of the duty of consistency is reliance by the

Commissioner on the taxpayer’s representation. “Caselaw establishes that the

necessary acquiescence exists where a taxpayer’s return is accepted as filed;

examination of the return is not required.” Arberg v. Commissioner, T.C. Memo.

2007-244, slip op. at 32. “The Commissioner may rely on a presumption of

correctness of a return or report that is given to the Commissioner under penalties

of perjury.” Estate of Letts v. Commissioner, 109 T.C. at 301.

      Petitioners claim that respondent did not reasonably rely on petitioners’

representation because respondent knew that the notices of deficiency did not

accurately reflect petitioners’ income from 2009. Respondent had already relied

upon petitioners’ representations by accepting the 2008 tax returns and allowing
                                          - 13 -

[*13] the statutory period of limitations to expire. See Estate of Ashman v.

Commissioner, 231 F.3d at 546 (citing Herrington v. Commissioner, 

,

758 (5th Cir. 1988), aff’g Glass v. Commissioner, 

 (1986), and

Mayfair Minerals, Inc. v. Commissioner, 

, 623 (5th Cir. 1972), aff’g

 (1971)). This element of the duty of consistency has been met.

C.    Taxpayers’ Change in Position After Period of Limitations Has Expired

      The third element of the duty of consistency requires an attempt by the

taxpayer after the statutory period of limitations has expired to change the previous

representation or to recharacterize the situation in such a way as to harm the

Commissioner.

      Petitioners admit that reporting the 2008 payments for 2008 rather than for

2009 would be inconsistent with their previous reporting. The period of limitations

has expired on the 2008 tax year, and allowing petitioners to recharacterize their

income as belonging in 2008 would harm the Commissioner; it would allow

petitioners to avoid tax on $1,634,720.

      We find respondent has established that all of the elements for the duty of

consistency have been met.
                                       - 14 -

[*14] D.     Mistake of Fact or Law

      Petitioners additionally argue that the duty of consistency doctrine does not

apply because their mistake was one of law and not of fact. In support of this

contention petitioners point to Banks v. Commissioner, 

, 388 (6th Cir.

2003), aff’g in part, rev’g in part T.C. Memo. 2001-48, rev’d on other issues 

 (2005), and to LeFever v. Commissioner, 

, 787 (10th Cir.

1996), aff’g 

 (1994). The Court of Appeals for the Ninth Circuit has

looked to whether there was a representation by the taxpayer. See Estate of

Ashman v. Commissioner, 231 F.3d at 545. In the instant cases there was a

representation by petitioners.

      We conclude that the duty of consistency requires that the $1,634,720 in

gross receipts that PBS received in 2008 but reported for 2009 be recognized as

income for tax year 2009.

      Any contentions we have not addressed are irrelevant, moot, or meritless.

      To reflect the foregoing,


                                                Decisions will be entered

                                      under Rule 155.