Lucian T. Baldwin, III - Page 47

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               Respondent has demonstrated that each of the elements of the           
          duty of consistency identified in Kielmar v. Commissioner, supra,           
          exists in this case.  First, petitioner consistently represented            
          BAC as an S corporation for Federal income tax purposes by filing           
          Forms 2553 and 1120S and by treating it as a passthrough entity             
          for tax purposes.  Second, respondent has relied upon these                 
          representations to his detriment by auditing BAC as an S                    
          corporation, making adjustments thereto, and adjusting the income           
          of BAC’s sole shareholder as if he were a shareholder in an S               
          corporation.  Third, petitioner has altered his previous                    
          representation that BAC was a valid S corporation during each of            
          the years at issue in favor of the diametrically opposite                   
          representation that BAC was never a valid S corporation.  This              
          alteration occurred after the period of limitations on assessment           
          with respect to BAC’s returns, if BAC were a C corporation, had             
          expired.  See sec. 6501.                                                    
               On these facts, we hold that the duty of consistency applies           
          and that, therefore, petitioner is estopped from claiming that              
          BAC was not a valid S corporation for the years at issue.                   
               B.   BAC Losses                                                        
               Because BAC is treated as an S corporation for purposes of             
          this case, we must next address the substance of the parties’               
          arguments with respect to BAC.  Respondent contends that BAC did            
          not conduct a trade or business under section 162 or an activity            

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