July 27, 2016Share:
An S corporation janitorial business was bound by the duty of consistency to recognize in the year reported gross receipts received in a prior year. The S corporation, a cash method taxpayer, deposited prior year checks in January of the following year, but determined its taxable income on the basis of the deposits made into its bank accounts during the calendar year. The S corporation contended that the gross receipts actually received in the prior year should be excluded from its income for the tax year at issue because they were actually received in a prior year and, since that was a closed year, the IRS did not have the authority to make adjustments for that year. However, the taxpayer made a clear representation when it filed Form 1120S claiming it received gross income in the tax year at issue. The IRS relied on that representation when it accepted the taxpayer’s return. Then, after the limitations period expired, the taxpayer attempted to recharacterize the income from the tax year at issue as belonging to the prior, closed year, which would have allowed the taxpayer to avoid tax on the recharacterized income. Therefore, the duty of consistency applied.
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] 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.