Statue of Limitations: Duty of Consistency

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.

• 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 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] 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.

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.