Friday, September 25, 2009
The Treasury Depatment yesterday issued temporary (T.D. 9466) and proposed regulations defining an omission from gross income for purposes of the six-year limitations period for assessing tax attributable to partnership items, taking a position contrary to that of the Federal Circuit and Ninth Circuit that an overstatement of basis results in an omission from gross income:
Section 6501(e)(1)(A) provides that if the taxpayer omits from gross income an amount properly includible therein that is in excess of 25 percent of the amount of gross income stated in the return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within 6 years after the return was filed. Subsection (i) of this provision provides that, in the case of a trade or business, the term gross income means the total of the amounts received or accrued from the sale of goods or services (if such amounts are required to be shown on the return) prior to diminution by the cost of such sales or services.
These temporary regulations clarify that, outside of the trade or business context, gross income for purposes of sections 6501(e)(1)(A) and 6229(c)(2) has the same meaning as gross income as defined in section 61(a). Under section 61(a), gross income includes "gains derived from dealings in property" and the regulations under section 61(a) further explain that gain equals "the excess of the amount realized over the unrecovered cost or other basis for the property sold or exchanged." Accordingly, outside the context of a trade or business, any basis overstatement that leads to an understatement of gross income under section 61(a) constitutes an omission from gross income for purposes of sections 6501(e)(1)(A) and 6229(c)(2).
Relying on the Supreme Court's opinion in Colony v. Commissioner, 357 U.S. 28 (1958), which dealt with an omission from gross income in the context of a trade or business, the United States Courts of Appeals for the Ninth Circuit and Federal Circuit recently construed section 6501(e)(1)(A) in cases outside the trade or business context contrary to the interpretation provided in these temporary regulations, holding that an "omission" does not occur by an overstatement of basis. Bakersfield Energy Partners v. Commissioner, 568 F.3d 767 (9th Cir. 2009); Salman Ranch Ltd v. United States, 573 F.3d 1362 (Fed. Cir. 2009). The Treasury Department and the Internal Revenue Service disagree with these courts that the Supreme Court's reading of the predecessor to section 6501(e) in Colony applies to sections 6501(e)(1)(A) and 6229(c)(2). ... In this regard, the Treasury Department and the Internal Revenue Service agree with the opinions in Home Concrete & Supply, LLC v. United States, 599 F.Supp.2d 678, 690 (E.D.N.C. 2008) (overstatement of basis can constitute an omission from gross income for purposes of the six-year period of limitations) and Brandon Ridge Partners v. United States, 2007-2 U.S.T.C. (CCH) ¶ 50,573, 100 A.F.T.R.2d (RIA) 5347, 5351-53 (M.D. Fla. 2007) (same).
Consistent with the Ninth Circuit's suggestion in Bakersfield, these temporary regulations clarify what constitutes an "omission from gross income" under sections 6501(e)(1)(A) and 6229(c)(2), as amended in connection with the enactment of the 1954 Internal Revenue Code and continuing in effect under the 1986 Internal Revenue Code. The reasonable interpretation of the provisions of sections 6501(e)(1)(A) and 6229(c)(2) provided in these temporary regulations, acknowledged by both the Ninth and Federal Circuits to be ambiguous, is entitled to deference even if the agency's interpretation may run contrary to the opinions in Bakersfield and Salman Ranch. See Nat'l Cable & Telecomms. Ass'n v. Brand X Internet Servs., 545 U.S. 967, 982-83 (2005); Swallows Holding, Ltd. v. Commissioner, 515 F.3d 162, 170 (3rd Cir. 2008). Because these temporary regulations are a clarification of the period of limitations provided in sections 6501(e)(1)(A) and 6229(c)(2) and are consistent with the Secretary's application of those provisions both with respect to a trade or business (that is, gross income means gross receipts), as well as outside of the trade or business context (that is, section 61 definition of gross income applies), they are applicable to all cases with respect to which the period for assessing tax under the applicable provisions has not expired before the date of filing of these regulations with the Federal Register.