143 T.C. No. 6
T.C.2014Background
- Petitioners (G. Douglas Barkett and Rita M. Barkett) filed 2006 and 2007 individual returns reporting capital gains (net gains ≈ $123k for 2006; $314k for 2007) but reporting amounts realized from sales exceeding $7M (2006) and $4M (2007) via passthrough entities.
- Respondent (IRS) issued a notice of deficiency on September 26, 2012, more than three but less than six years after petitioners filed their 2006 and 2007 returns.
- IRS determined petitioners omitted gross income of $629,850 (2006) and $431,957 (2007) unrelated to the investment-sales amounts (these omitted items are agreed for §6501(e) numerator purposes).
- The parties dispute what counts as the amount of "gross income stated in the return" (the §6501(e) denominator): petitioners say include amounts realized (gross proceeds); respondent says include only gains (amount realized minus basis).
- Prior Tax Court precedent (Insulglass, Schneider) treated gross income as gains, not gross proceeds; petitioners argued that the Supreme Court’s decision in United States v. Home Concrete & Supply, LLC undermines those precedents.
- The Tax Court denied petitioners’ motion for partial summary judgment, holding that Home Concrete did not change the Tax Court’s prior rule and that the omitted income exceeded 25% of reported gross income, so the six-year limitations period applies.
Issues
| Issue | Petitioners' Argument | Respondent's Argument | Held |
|---|---|---|---|
| Whether "gross income stated in the return" for §6501(e) includes amounts realized (gross proceeds) from investment sales or only gains (amount realized minus basis) | Include amounts realized (gross proceeds) in the denominator | Include only gains (amount realized less basis) in the denominator | Only gains count; gross income stated in the return is calculated as gain for investment sales (Tax Court follows Insulglass) |
| Whether United States v. Home Concrete invalidates Tax Court precedents (Insulglass/Schneider) on how to calculate gross income for §6501(e) | Home Concrete undermines the regulation and therefore the Tax Court’s calculation rule; amounts realized should be used | Home Concrete addressed when income is "omitted" but did not overturn the method of calculating gross income; prior Tax Court cases remain good law | Home Concrete does not affect prior Tax Court holdings that gross income for sales is gain, not gross proceeds |
| Whether the omitted gross income exceeds 25% of gross income stated in the returns, triggering the six-year limitations period | Argued that using amounts realized inflates denominator so omitted income is not >25% | Using gains in denominator yields omitted income >25% | Under the gains measure, omissions exceed 25% for 2006 and 2007; six-year period applies |
Key Cases Cited
- United States v. Home Concrete & Supply, LLC, 566 U.S. 478 (2012) (addressed validity of Treasury regulation defining when gross income is "omitted" for §6501(e) and reaffirmed Colony on omission issue)
- Colony, Inc. v. Commissioner, 357 U.S. 28 (1958) (held understatements caused by misreported basis are not "omitted gross income" triggering extended limitations)
- Insulglass Corp. v. Commissioner, 84 T.C. 203 (1985) (Tax Court held "gross income stated in the return" includes capital gains, not gross proceeds)