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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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