[Federal Register Volume 74, Number 186 (Monday, September 28, 2009)]
[Rules and Regulations]
[Pages 49321-49323]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-23426]



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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 301

[TD 9466]
RIN 1545-BI94


Definition of Omission From Gross Income

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulation.

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SUMMARY: This document contains temporary regulations (replacing an 
existing final regulation) defining an omission from gross income for 
purposes of the six-year minimum period for assessment of tax 
attributable to partnership items and the six-year period for assessing 
tax. The temporary regulations resolve a continuing issue as to whether 
an overstatement of basis in a sold asset results in an omission from 
gross income. The regulations will affect any taxpayer who overstates 
basis in a sold asset creating an omission from gross income exceeding 
twenty-five percent of the income stated in the return. The text of 
these temporary regulations also serves as the text of the proposed 
regulations set forth in the notice of proposed rulemaking on this 
subject in the Proposed Rules section in this issue of the Federal 
Register.

DATES: Effective date: These regulations are effective on September 24, 
2009.
    Applicability date: The rules of this section apply to taxable 
years with respect to which the applicable period for assessing tax did 
not expire before September 24, 2009.

FOR FURTHER INFORMATION CONTACT: William A. Heard III at (202) 622-4570 
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background and Explanation of Provisions

    These temporary regulations amend the Procedure and Administration 
Regulations (26 CFR part 301) relating to sections 6229(c)(2) and 
6501(e). Section 6229(c)(2) provides that if a partnership ``omits from 
gross income an amount properly includible therein which is in excess 
of 25 percent of the amount of gross income stated'' in its return, the 
minimum period for assessing tax attributable to its partnership items 
is extended to six years. The quoted language is identical to language 
used in section 6501(e). An omission from gross income is not further 
defined in section 6229(c) as it is in section 6501(e)(1)(A). But, as 
noted by the courts, section 6229(c) merely serves to extend the 
section 6501 period for each separate partner to a minimum expiration 
date computed from the date the partnership return is filed or due to 
be filed, whichever is later. See section 6501(n)(2). In extending each 
partner's section 6501 period under section 6229, Congress is presumed 
to give the language in section 6229, which is identical to language in 
section 6501, identical meaning. Having defined a phrase in section 
6501, Congress need not redefine the same phrase when it is later used 
to extend that same statute of limitations. Ascribing a different 
interpretation to an identical phrase would result in partners being 
treated differently based on the happenstance of whether the 
transaction is reported on a partnership return rather than on a 
partner's return. For instance, in Son of Boss transactions described 
in Notice 2000-44, 2000-2 CB 255 (Sept. 5, 2000), gross income can be 
generated by the partnership when it sells an inflated basis asset, or 
directly by the partner if the asset is first distributed to the 
partner before being sold. Thus, section 6501(e)(1)(A) defines an 
omission from gross income both for purposes of section 6501 and for 
any extension of section 6501 under section 6229. The temporary 
regulations confirm this point. Further, in light of the different 
interpretations given by courts to the meaning of section 
6501(e)(1)(A), the temporary regulations clarify the meaning of this 
section. See Sec.  601.601(d)(2)(ii)(b).
    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 Court 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). When Congress enacted the 1954 Internal 
Revenue Code, it was aware of the disagreement among the courts that 
existed at the time regarding the proper scope of section 275(c) of the 
1939 Internal Revenue Code. The changes that Congress enacted as part 
of the 1954 Internal Revenue Code predated the Supreme Court's opinion 
in Colony and were intended to resolve the matter for the future. 
Therefore, by amending the Internal Revenue Code, including the 
addition of a special definition of ``gross income'' with respect to a 
trade or business, Congress effectively limited what ultimately became 
the holding in Colony, to cases subject to section 275(c) of the 1939 
Internal Revenue Code. Moreover, under section 6501(e)(1)(A) of the 
1954 Internal Revenue Code, which remains in effect under the 1986 
Internal Revenue Code, when outside of the trade or business context, 
the definition of ``gross income'' in section 61 applies. 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

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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.
    Although these temporary regulations do not provide guidance on 
this issue, section 6501(e)(1)(A)(ii) additionally provides that the 
amount omitted from gross income does not include any amount disclosed 
on the return, or in a statement attached to the return, in a manner 
adequate to apprise the Internal Revenue Service of the nature and 
amount of the item. This adequate disclosure exception to the six-year 
statute of limitations applies to omissions from gross income resulting 
from basis overstatements (as provided for in these temporary 
regulations) in the same manner as it applies to other omissions from 
gross income. Accordingly, taxpayers who adequately disclose the nature 
and amount of the omissions from gross income resulting from dealings 
in property will not be subject to the extended six-year statute of 
limitations.

Special Analyses

    It has been determined that these temporary regulations are not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It also has been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations. For the 
applicability of the Regulatory Flexibility Act (5 U.S.C. chapter 6) 
refer to the Special Analyses section of the preamble of the cross-
reference notice of proposed rulemaking published in the Proposed Rules 
section in this issue of the Federal Register. Pursuant to section 
7805(f) of the Internal Revenue Code, these regulations have been 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on their impact on small business.

Drafting Information

    The principal author of these regulations is William A. Heard III 
of the Office of the Associate Chief Counsel (Procedure and 
Administration).

List of Subjects in 26 CFR Part 301

    Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income 
taxes, Penalties, Reporting and recordkeeping requirements.

Amendments to the Regulations

0
Accordingly, 26 CFR part 301 is amended as follows:

PART 301--PROCEDURE AND ADMINISTRATION

0
Paragraph 1. The authority citation for part 301 is amended by adding 
the entry in numerical order to read in part as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 301.6229(c)(2)-1T is also issued under 26 U.S.C. Sec.  
6230(k). * * *


0
Par. 2. Section 301.6229(c)(2)-1T is added to read as follows:


Sec.  301.6229(c)(2)-1T  Substantial omission of income (temporary).

    (a) Partnership return--(1) General rule. (i) If any partnership 
omits from the gross income stated in its return an amount properly 
includible therein that is in excess of 25 percent of the amount of 
gross income stated in its return, subsection (a) of section 6229 shall 
be applied by substituting ``6 years'' for ``3 years.''
    (ii) For purposes of paragraph (a)(1)(i) of this section, the term 
gross income, as it relates to a trade or business, means the total of 
the amounts received or accrued from the sale of goods or services, to 
the extent required to be shown on the return, without reduction for 
the cost of those goods or services.
    (iii) For purposes of paragraph (a)(1)(i) of this section, the term 
gross income, as it relates to any income other than from the sale of 
goods or services in a trade or business, has the same meaning as 
provided under section 61(a), and includes the total of the amounts 
received or accrued, to the extent required to be shown on the return. 
In the case of amounts received or accrued that relate to the 
disposition of property, and except as provided in paragraph (a)(1)(ii) 
of this section, gross income means the excess of the amount realized 
from the disposition of the property over the unrecovered cost or other 
basis of the property. Consequently, except as provided in paragraph 
(a)(1)(ii) of this section, an understated amount of gross income 
resulting from an overstatement of unrecovered cost or other basis 
constitutes an omission from gross income for purposes of section 
6229(c)(2).
    (iv) An amount shall not be considered as omitted from gross income 
if information sufficient to apprise the Commissioner of the nature and 
amount of the item is disclosed in the return, including any schedule 
or statement attached to the return.
    (2) [Reserved]
    (b) Effective/applicability date. The rules of this section apply 
to taxable years with respect to which the applicable period for 
assessing tax did not expire before September 24, 2009.
    (c) Expiration date. The applicability of this section expires on 
or before September 24, 2012.


Sec.  301.6501(e)-1  [Removed].

0
Par. 3. Section 301.6501(e)-1 is removed.

0
Par. 4. Section 301.6501(e)-1T is added to read as follows:


Sec.  301.6501(e)-1T  Omission from return (temporary).

    (a) Income taxes--(1) General rule. (i) If the taxpayer omits from 
the gross income stated in the return of a tax imposed by subtitle A of 
the Internal Revenue Code an amount properly includible therein that is 
in excess of 25 percent of the gross income so stated, the tax may be 
assessed, or a proceeding in court for the collection of that tax may 
be begun without assessment, at any time within 6 years after the 
return was filed.
    (ii) For purposes of paragraph (a)(1)(i) of this section, the term 
gross income, as it relates to a trade or business, means the total of 
the amounts received or accrued from the sale of goods or services, to 
the extent required to be shown on the return, without reduction for 
the cost of those goods or services.

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    (iii) For purposes of paragraph (a)(1)(i) of this section, the term 
gross income, as it relates to any income other than from the sale of 
goods or services in a trade or business, has the same meaning as 
provided under section 61(a), and includes the total of the amounts 
received or accrued, to the extent required to be shown on the return. 
In the case of amounts received or accrued that relate to the 
disposition of property, and except as provided in paragraph (a)(1)(ii) 
of this section, gross income means the excess of the amount realized 
from the disposition of the property over the unrecovered cost or other 
basis of the property. Consequently, except as provided in paragraph 
(a)(1)(ii) of this section, an understated amount of gross income 
resulting from an overstatement of unrecovered cost or other basis 
constitutes an omission from gross income for purposes of section 
6501(e)(1)(A).
    (iv) An amount shall not be considered as omitted from gross income 
if information sufficient to apprise the Commissioner of the nature and 
amount of the item is disclosed in the return, including any schedule 
or statement attached to the return.
    (2) [Reserved]
    (b) Effective/applicability date. The rules of this section apply 
to taxable years with respect to which the applicable period for 
assessing tax did not expire before September 24, 2009.
    (c) Expiration date. The applicability of this section expires on 
or before September 24, 2012.

Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.

    Approved: September 23, 2009.
Michael Mundaca,
Acting Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. E9-23426 Filed 9-24-09; 4:15 pm]
BILLING CODE 4830-01-P