When a taxpayer seeks a tax result inconsistent with an earlier position of that same taxpayer, and the fisc is adversely affected by the change in position, the government may argue that the taxpayer's current position is precluded by a "duty of consistency" or doctrine of equitable estoppel. In New Capital Fire v. Commissioner, the Tax Court, in prior litigation, had upheld a taxpayer corporation's position that the period of limitations to assess tax with respect to the final tax period of another corporation that had merged into the taxpayer had run before tax was assessed for that period. Thereafter, the taxpayer corporation reversed its prior position that the merger qualified a "reorganization" for income tax purposes, and instead urged that gain should have been recognized by the merged corporation at the time of the merger (TC Memo 2021-67). The Tax Court concluded that this further result was precluded by equitable estoppel.

Facts in New Capital Fire

Capital Fire Insurance Company (Old Capital), formerly a closely held insurance company, had by 2002 largely left the insurance business and was a family investment company holding a securities portfolio. As some of its shareholders desired to liquidate their investment in Old Capital, but the sale of its securities would result in a large corporate tax, a buyer was sought for the stock of Old Capital. DGI, which specialized in "designing tax-oriented structures and assisting corporations in solving tax problems," offered to purchase the stock of Old Capital for a price equal to 100% of its cash and 90% of the fair market value of its securities. DGI also said that it would adopt a "stand alone tax strategy intended to generate a taxable loss" that would offset any gain from the sale of Old Capital's investments, and required the termination by Old Capital of its insurance license before closing.