On Thursday, the Tax Court held that gross income for purposes of Sec. 6501(e) statute of limitation calculations includes only the gain from the sale of investments and not the amount realized from their sale ( Barkett, 143 T.C. No. 6 (8/28/14)). The court distinguished its holding from the Supreme Court’s Sec. 6501(e) decision in Home Concrete & Supply, LLC, 132 S. Ct. 1836 (2012).
Under Sec. 6501(a), the IRS must issue a notice of deficiency within three years after a taxpayer files his or her return. A six-year period applies under Sec. 6501(e) if the taxpayer omits from their returns gross income exceeding 25% of the gross income they reported.
The taxpayers reported capital gains from the sale of investments in
2006 and 2007 of $123,000 and $314,000, respectively, and they
reported amounts realized of more than $7 million in 2006 and $4
million in 2007. In September 2012, the IRS issued the taxpayers a
notice of deficiency that included both years, asserting they had
omitted $629,850 in 2006 and $431,957 in 2007 from income. The
three-year statute of limitation for assessing a deficiency had passed
for both years when the IRS issued the notice, but the IRS took the
position that the six-year statute of limitation applied to both years
because the taxpayers had omitted from gross income more than 25% of
the income that they reported on the returns.
The taxpayers claimed that the gross income they stated in their returns included the amounts they reported as realized from the sale of investment assets. Including the full amount realized from these assets in gross income would have meant they had not omitted more than 25% of the gross income from their returns for 2006 and 2007. As a result, the three-year statute of limitation, which would have already expired when the IRS issued its notice of deficiency, applied. The IRS said that only the gain the taxpayers reported from those sales should be included in gross income. Including only the gain in the calculation would result in the taxpayers’ being subject to the six-year statute of limitation.
The Tax Court noted that it had decided this issue before and held that capital gains from the sale of assets, not the gross proceeds from the sale, are considered the “ ‘amount of gross income stated in the return’ for purposes of section 6501(e)” (Barkett, slip op. at 7, quoting Insulglass Corp., 84 T.C. 203 (1985)).
The IRS had adopted the Tax Court’s position on the calculation of gross income for purposes of Sec. 6501(e) in 2010 as part of Regs. Sec. 301.6501(e)-1. The taxpayers argued that the Supreme Court’s decision in Home Concrete & Supply, LLC, changed this rule because Home Concrete invalidated Regs. Sec. 301.6501(e)-1 in its entirety, and, by extension, the Tax Court’s previous decisions regarding the calculation of gross income for Sec. 6501(e) purposes. The Tax Court disagreed. According to the Tax Court, Home Concrete addressed only whether underreported gain on a tax return resulting from the overstatement of basis could be considered omitted income that would trigger the six-year statute of limitation and did not address how gross income is calculated for Sec. 6501(e) purposes. Therefore, the Tax Court saw “no reason to stray from our precedents” and denied the taxpayers’ request for summary judgment.
Sally P. Schreiber (
) is a JofA senior editor.