143 T.C. 149
Tax Ct.2014Background
- Petitioners filed Forms 1040 for 2006 and 2007 and respondent issued a notice of deficiency on September 26, 2012 assessing deficiencies for 2006–2009.
- The notice alleged omitted gross income of $629,850 (2006) and $431,957 (2007); petitioners reported gross income (capital gains) of $271,440 (2006) and $340,591 (2007) on their returns.
- Petitioners were partners/shareholders in passthrough entities that reported large sales proceeds (amounts realized) from investment asset sales; petitioners included only net gains (amount realized minus basis) on their returns.
- Respondent treated the omitted amounts as omitted gross income under I.R.C. §6501(e), which would extend the limitations period from three to six years if omitted income exceeds 25% of gross income stated on the return.
- The parties agree on the omitted amounts but dispute what counts as "gross income stated in the return" for the §6501(e) percentage calculation: petitioners say it should include amounts realized (gross proceeds); respondent says it should be net gain (amount realized minus basis).
- The Tax Court considered prior Tax Court precedent and the Supreme Court’s decision in United States v. Home Concrete, and denied petitioners’ motion for partial summary judgment, holding the six-year limitations period applies.
Issues
| Issue | Petitioners' Argument | Respondent's Argument | Held |
|---|---|---|---|
| What is the denominator — does "gross income stated in the return" include full amounts realized (gross proceeds) from asset sales or only gains (amount realized minus basis)? | "Gross income stated" should include amounts realized (gross proceeds), so omitted income does not exceed 25%. | "Gross income stated" means gains (amount realized minus basis); amounts realized are not the denominator. | The court follows Tax Court precedent: use gains (amount realized minus basis). The omitted amounts exceed 25%, so the six-year period applies. |
| Does the Supreme Court's Home Concrete decision invalidate Tax Court precedent (Insulglass/Schneider) holding that "gross income" for §6501(e) means gains rather than gross proceeds? | Home Concrete invalidates the regulation and thus undermines precedents; petitioners urge recalculation using amounts realized. | Home Concrete addressed when income is "omitted," not how to calculate "gross income stated"; prior Tax Court holdings remain valid. | Home Concrete does not disturb Tax Court precedents on how to calculate gross income; Insulglass controls and the denominator is gains. |
Key Cases Cited
- Colony, Inc. v. Commissioner, 357 U.S. 28 (1958) (understatements from misreported basis are not "omitted gross income" for triggering extended limitations period)
- United States v. Home Concrete & Supply, LLC, 566 U.S. 478 (2012) (invalidated regulation expanding the definition of "omitted gross income" but did not alter calculation of gross income)
- Insulglass Corp. v. Commissioner, 84 T.C. 203 (1985) (for §6501(e) denominator, treat gross income as gains, not gross proceeds)
- Bakersfield Energy Partners, LP v. Commissioner, 128 T.C. 207 (2007) (consistent with Colony regarding when income is omitted)
- Intermountain Ins. Serv. of Vail, LLC v. Commissioner, 134 T.C. 211 (2010) (addressed regulation validity and followed Colony on omission issue)