                       T.C. Memo. 2006-113



                     UNITED STATES TAX COURT




 BENTLEY COURT II LIMITED PARTNERSHIP, B.F. BENTLEY, INC., TAX
                 MATTERS PARTNER, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 5393-04.                Filed May 31, 2006.



     Nancy Ortmeyer Kuhn, for petitioner.

     Wilton A. Baker, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     GERBER, Chief Judge:   On December 29, 2003, respondent

issued a Notice of Final Partnership Administrative Adjustment

(FPAA) to Bentley Court II Limited Partnership (Bentley Court)
                               - 2 -

for its calendar years 1993, 1994, and 1995.     After concessions,1

the sole issue for consideration is whether, for its year 1993,

Bentley Court must recapture $528,747 of low-income housing

credits claimed on its income tax returns for 1990, 1991, and

1992.

                         FINDINGS OF FACT2

     At the time the petition in this case was filed, Bentley

Court’s principal place of business was in Columbia, South

Carolina.

     Bentley Court, a limited partnership, was formed in 1989.

The general partners were Edwin Lewis II (Lewis) and an entity he

controlled.   During 1990 and 1991, Bentley Court constructed an

apartment complex in Columbia, South Carolina.     The South

Carolina State Housing Finance and Development Authority

allocated to the complex low-income housing credits for which

Bentley Court claimed Federal income tax low-income housing

credits and qualified basis in the following amounts:


        1
       Petitioner originally alleged error in many of
respondent’s determinations, one of which was entitlement to low-
income housing credits for 1993, 1994, and 1995. However,
petitioner now concedes a portion of the forgiveness of
indebtedness income for 1993 and all of the low-income housing
credits for 1993, 1994, and 1995. Respondent concedes the
deductibility of the legal fees and the remaining portion of the
forgiveness of indebtedness income for 1993 and depreciation
deductions for 1993, 1994, and 1995.
        2
       The parties’ stipulation of facts is incorporated by this
reference.
                                 - 3 -

Year                   Credit            Yearend qualified basis

1990                   $28,508                   $223,770
1991                   699,780                  8,372,263
1992                   859,543                 11,537,221
1993                   918,155
1994                   926,819
1995                   927,606

       On its 1990, 1991, and 1992 returns, Bentley Court reported

that it qualified for the credits under the provisions of section

42 but provided no detail about its qualifications for the

credits, including the nature of the building or its tenants.

Respondent did not examine Bentley Court’s 1990, 1991, or 1992

income tax return, and the statutory period for assessment has

expired for those years.

       On August 25, 2000, Lewis was sentenced to 30 months in

prison following his guilty plea to 1 of 22 counts of obstructing

and impeding the administration of the internal revenue laws.

The count to which Lewis pleaded guilty was as follows:

       Between September 11, 1995, and August 6, 1996, in the
       District of South Carolina, EDWIN LEWIS II did
       corruptly obstruct and impede and endeavor to obstruct
       and impede the due administration of the internal
       revenue laws by losing and concealing tenant files for
       * * * [two tenants] of Bentley Court Apartments, which
       tenant files were to be examined by the Internal
       Revenue Service as part of an audit of the partnership
       return for Bentley Court II Limited Partnership for
       1993;
             In violation of Title 26, United States Code,
       Section 7212(a) and Title 18, United States Code,
       Section 2.

       The remaining 21 counts were similar and related to the one

quoted above and concerned allegations that Lewis willfully made
                               - 4 -

false reports of occupancy beginning in late 1992 through mid-

1997.   The indictment was filed on June 16, 1998.   The 21 related

counts were dropped, including allegations that Lewis falsely

lowered the income amounts for some tenants and indicated that

certain student tenants were not students.

     Following an examination of Bentley Court’s tax returns, the

examining revenue agent concluded that Bentley Court had

falsified documents, including changing income amounts and

indicating that certain Bentley Court tenants were not students,

when, in fact, they were.   These falsifications were effected to

support Bentley Court’s claim for the qualified tax status

involving low-income housing credits.   A review conducted by the

South Carolina State Housing Finance and Development Authority

revealed that 90 percent of the tenants in Bentley Court’s

apartment complex were students.   Respondent’s examining agent

concluded that the apartment complex did not qualify because it

did not have qualified tenants, as defined by law.   Accordingly,

the low-income housing credits were disallowed for Bentley
                                 - 5 -

Court’s 1993, 1994, and 1995 years, and one-third3 of the credits

claimed for the 1990, 1991, and 1992 years was recaptured,

because the units were not occupied by qualifying tenants.

                               OPINION

     Bentley Court claimed low-income housing credits for its

1990, 1991, and 1992 years, which are now closed for tax

purposes.   Respondent disallowed the credit for Bentley Court’s

1993, 1994, and 1995 years.    Respondent also determined that

$528,747 of credits claimed for 1990, 1991, and 1992 should be

recaptured in the 1993 year.    Bentley Court contends that it was

not entitled to the credit for 1993, 1994, and 1995, or for the

closed years, 1990, 1991, and 1992.      Because it was not entitled

to the credit in any of the years, Bentley Court contends that

the credit cannot be recaptured.    The sole issue remaining in

dispute is whether Bentley Court must recapture in 1993, the

$528,747 in housing credits claimed for 1990, 1991, and 1992.




     3
       The Notice of Final Partnership Administrative Adjustment
for 1993 contained the following schedule showing the computation
of the amount of recapture, as follows:

     Tax year   Amount claimed     Rate       Amount recaptured
     12/31/90    $28,508           .333           $9,493
     12/31/91    699,780           .333          233,027
     12/31/92    859,543           .333          286,228
          Total recapture                        528,748

There is no further explanation or dispute about this
computation.
                                - 6 -

       Section 424 provides for a low-income housing credit in

connection with units or buildings that are part of a low-income

housing project.    Sec. 42(a), (c)(2).    Although section 42 is

detailed and complex, generally, to qualify as a low-income

housing project, a certain percentage of residential units must

be both rent restricted and occupied by tenants whose income is a

certain percentage less than the median gross income of the

geographical area.    Sec. 42(g)(1).    With certain limited

exceptions not pertinent here, a unit will not qualify as a low-

income unit if it is occupied by students.      Sec. 42(i)(3)(B)(i),

(D).

       Section 42 provides for the recapture of “excess” low-income

housing credits if at the end of any tax year the qualified basis

of a low-income housing project building is less than that

building’s qualified basis as of the close of the preceding

taxable year.    Sec. 42(j)(1) and (2).    Very generally, qualified

basis is the portion of the building’s acquisition cost allocable

to low-income units.    Recapture is therefore triggered if at the

end of any year during the compliance period (a period of 15 years

beginning usually when the property is placed in service), the

number or size of the units set aside for low-income tenants



       4
       Unless otherwise indicated, all section references are to
the Internal Revenue Code as amended and in effect for the
periods under consideration, and all Rule references are to the
Tax Court Rules of Practice and Procedure.
                                - 7 -

is less than at the close of the preceding year.    Sec. 42(c)(1),

(d)(1).

     Bentley Court argues that its apartment complex buildings or

units failed to qualify as low-income housing units because they

were always occupied by the same types of tenants; i.e.,

predominantly students, and, accordingly, there has been no

“recapture event” triggering a recapture of the previously claimed

low-income housing credits.    Following that line of reasoning,

Bentley Court contends that both the number of units in the

apartment complex and the total low-income floor space were zero

for the tax year for which respondent determined that recapture of

the credit should occur and for the preceding taxable year,

producing no difference in the qualified basis between periods and

thus no excess or recapture.    Bentley Court argues that respondent

is overreaching or maneuvering by determining deficiencies in open

years and using the recapture provision to circumvent the closure

of years in which a deficiency would or should have been

determined.

     Respondent offers a two-part response to Bentley Court’s

position.   Initially, respondent contends that Bentley Court has

offered no evidence to show that Bentley Court’s apartment complex

was not a qualified low-income building during the 1990, 1991, and

1992 tax years.   Alternatively, respondent argues that Bentley

Court is bound by a duty of consistency not to take inconsistent
                                - 8 -

positions; i.e., contending now that it failed to qualify or that

qualified basis was zero for 1990, 1991, and 1992, when Bentley

Court had previously claimed the credit based on the return-

reporting position that a qualified basis existed for those same

tax years.

     The duty of consistency is an affirmative defense.     Cluck v.

Commissioner, 105 T.C. 324, 331 n.11 (1995); Janis v.

Commissioner, T.C. Memo. 2004-117; Bitker v. Commissioner, T.C.

Memo. 2003-209.    If respondent interposes an affirmative defense,

he bears the burden of proof with respect to that matter.    Rule

142(a).    Normally, matters of avoidance, such as affirmative

defenses and collateral estoppel must be set forth in the

pleadings.    Rule 39.

     Bentley Court’s pleadings (petition and amended petition)

contained allegations that it was entitled to the low-income

housing credits for 1993, 1994, and 1995.    After the pleadings

were filed and the case was in issue, Bentley Court, during

settlement negotiations, conceded that it was not entitled to the

low-income housing credits claimed for the 1993, 1994, and 1995

years.    Subsequently and shortly before trial, in its pretrial

memorandum supplied to the Court and respondent, Bentley Court,

for the first time, contended that it had never been entitled to

low-income housing credits for the closed tax years 1990, 1991,

and 1992 and hence, the recapture provisions did not apply.      In
                                - 9 -

any event, Bentley Court does not contend that respondent untimely

raised the affirmative defense.    This matter, having been tried by

consent of the parties is therefore treated as if it had been

raised in the pleadings.    Rule 41(b)(1); see also, e.g., Lilley v.

Commissioner, T.C. Memo. 1989-602, affd without published opinion

925 F.2d 417 (3d Cir. 1991).

       The duty of consistency doctrine is intended to prevent a

taxpayer from taking a position in an earlier year and a contrary

position in a later year after the limitations period has run on

the first year.    Lefever v. Commissioner, 103 T.C. 525, 541-542

(1994) (citing Herrington v. Commissioner, 854 F.2d 755 (5th Cir.

1988), affg. Glass v. Commissioner, 87 T.C. 1087 (1986)),

supplemented by T.C. Memo. 1995-321, affd. 100 F.3d 778 (10th Cir.

1996).    A taxpayer gaining governmental benefits on the basis of a

representation or asserted position is thereafter estopped from

taking a contrary position in an effort to escape taxes.     Id. at

542.    A duty of consistency arises where:

            “(1) the taxpayer has made a representation or
       reported an item for tax purposes in one year,

            (2) the Commissioner has acquiesced in or relied on
       that fact for that year, and

            (3) the taxpayer desires to change the
       representation, previously made, in a later year after
       the statute of limitations on assessments bars
       adjustments for the initial year.” * * * [Id. at 543
       (quoting Beltzer v. United States, 495 F.2d 211, 212
       (8th Cir. 1974)).]
                               - 10 -

     The duty of consistency has been applied to prevent a

taxpayer from denying the accuracy of a previously reported basis

in property after the period of limitations has run on

assessments, see Cluck v. Commissioner, supra, Beltzer v. United

States, supra, and the Commissioner’s acquiescence has been

determined to exist when a taxpayer’s return is accepted as filed,

see Lefever v. Commissioner, supra, Beltzer v. United States,

supra.   The Commissioner’s acquiescence does not require

examination of the taxpayer’s return.   See Estate of Letts v.

Commissioner, 109 T.C. 290, 300-301 (1997), affd. per curiam

without published opinion 212 F.3d 600 (11th Cir. 2000).

     Respondent argues that the facts in this case show that all

three of the criteria have been met and that Bentley Court should

be held to a duty of consistency.   Bentley Court contends that the

duty of consistency is inapplicable, or if it is, it should be

applied to estop respondent from recapturing the credit.    We agree

with respondent.

     Bentley Court construes the following sequence of facts which

it believes should result in the application of a duty of

consistency against respondent:   (1) Bentley Court reported the

low-income tax credits in 1990 to 1995, and respondent

“disallowed” those credits for all years by criminally prosecuting

Lewis; (2) because of the indictments against Lewis, respondent
                                 - 11 -

did not acquiesce to the credits claimed for 1990, 1991, and 1992;

and (3) Bentley Court was compelled to change its initial

representation or claim of credits due to the criminal prosecution

against Lewis.    We conclude that Bentley Court’s approach and

perspective regarding the duty of consistency doctrine are

inapposite.

       As to the first prong, Bentley Court claimed credits and

reported the existence of qualified basis on its tax returns, as

follows:

Year                   Credit        Yearend qualified basis

1990                   $28,508               $223,770
1991                   699,780              8,372,263
1992                   859,543             11,537,221

       The second prong concerns the Commissioner’s acquiescence or

reliance on the above-referenced facts reported by Bentley Court.

On that point, Bentley Court contends that respondent did not

acquiesce or rely, as reflected by respondent’s criminal

prosecution of Lewis with respect to the concealment of

information or records.    That criminal prosecution, however, does

not relieve Bentley Court of the duty of consistency.5    In point of


       5
       The rationale underlying the duty of consistency has been
described, as follows:

       In adjusting values the Commissioner in effect
       represents the interests of all other taxpayers who
       must bear what the particular taxpayer unjustly
       escapes. It is no more right to allow a party to blow
       hot and cold as suits his interests in tax matters than
                                                       (continued...)
                               - 12 -

time, the indictment and criminal proceeding commenced after the

normal 3-year period for assessment of the tax for 1992 had

expired.   Moreover, we note that respondent’s examination did not

extend back prior to Bentley Court’s 1993 tax year.    Accordingly,

it appears that respondent (during the examination) did not gain

access to facts that would have put him on notice that the credit

claimed for 1992 was erroneous.   Cf.   S. Pac. Trans. Corp. v.

Commissioner, 75 T.C. 497, 560 (1980), supplemented by 82 T.C. 122

(1984); Davoli v. Commissioner, T.C. Memo. 1994-326.    Respondent

acquiesced to and relied upon Bentley Court’s representations by

“accepting” the returns as filed, irrespective of the indictment

and conviction of Lewis, Bentley Court’s principal officer.

     Bentley Court’s situation matches the third prong by its

change of position with respect to the closed years.   Bentley

Court first represented that it qualified for low-income housing

credits for the years 1990 through 1992, and had the above-

described yearend qualified bases.   Now that the assessment

periods for those years have expired, Bentley Court claims that

the previously reported yearend qualified bases were actually



     5
      (...continued)
     in other relationships. Whether it be called estoppel,
     or a duty of consistency, or the fixing of a fact by
     agreement, the fact fixed for one year ought to remain
     fixed in all its consequences, unless a more just
     general settlement is proposed and can be effected. * *
     * [Alamo Natl. Bank v. Commissioner, 95 F.2d 622, 623
     (5th Cir. 1938), affg. 36 B.T.A. 402 (1937).]
                                - 13 -

zero.    The duty of consistency elements are accordingly satisfied

as applied against Bentley Court.

     Alternatively, Bentley Court argues that the duty of

consistency doctrine does not apply because Bentley Court’s

mistake was one of law and not fact.     In support of this argument,

Bentley Court contends that opinions of Courts of Appeals

regarding the duty of consistency doctrine have limited that

doctrine to cases involving a mistake of fact.

        The appellate courts, however, focus upon whether there was

a benefit received based on a taxpayer’s representation or

misrepresentation.    See, e.g., LeFever v. Commissioner, 100 F.3d

778, 787 (10th Cir. 1996), affg. 103 T.C. 525 (1994); Banks v.

Commissioner, 345 F.3d 373, 388 (6th Cir. 2003), affg. in part,

revg. in part T.C. Memo. 2001-48, revd. on other issues 543 U.S.

426 (2005).    Bentley Court argues that Lewis made a mistake of law

by his misunderstanding of which type of students could qualify as

low-income individuals under the statutory language, and that this

does not involve a factual issue regarding whether the individuals

were students.    See, e.g., Estate of Posner v. Commissioner, T.C.

Memo. 2004-112.    This case would normally be appealable to the

Court of Appeals for the Fourth Circuit, where the following

approach of the Court of Appeals for the Fifth Circuit has been

adopted:

     “To raise this duty of consistency in tax accounting we
     do not think a willful misrepresentation need be proven,
                               - 14 -

     or all the elements of a technical estoppel. It arises
     rather from the duty of disclosure which the law puts on
     the taxpayer, along with the duty of handling his
     accounting so it will fairly subject his income to
     taxation.” [Interlochen Co. v. Commissioner, 232 F.2d
     873, 878 (4th Cir. 1956), affg. 24 T.C. 1000 (1955)
     (quoting Wichita Coca Cola Bottling Co. v. United
     States, 152 F.2d 6, 8 (5th Cir. 1945))].

     Bentley Court represented on its 1990 through 1992 returns

that it qualified for low-income housing credits.   It generally

claimed compliance with section 42 and did not provide its

reasoning for claiming the credit.   It is obvious from the record

we consider that the criminal matter had to do with

misrepresentations and/or concealment of facts on Bentley Court’s

behalf by Lewis.   Accordingly, Bentley Court’s “mistake of law”

argument has no basis in this record and is not worthy of further

consideration.   See Interlochen Co. v. Commissioner, supra.

Accordingly, we reject Bentley Court’s alternative argument.

      Bentley Court has conceded that it does not qualify for low-

income housing credits for 1993.   Accordingly, the apartment

building’s qualified basis was thus zero at the end of 1993.    In

addition, Bentley Court is estopped to deny that the 1992 yearend

qualified basis was less than $11,537,221.   Because the qualified

basis at the end of 1993 was less than the qualified basis at the

end of 1992, Bentley Court is subject to recapture in 1993.     See

sec. 42(j).
                         - 15 -



To reflect the foregoing and the parties’ concessions,


                                   Decision will be entered

                              under Rule 155.
