# UNITED STATES TAX COURT > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/agency%3Atax-court%3Ac29105e857c44d32 ## Record - **Collection:** Agency decision - **Document type:** Agency decision ## Text 116 T.C. No. 4 UNITED STATES TAX COURT RIDGE L. HARLAN AND MARJORY C. HARLAN, Petitioners y. COMMISSIONER OF INTERNAL REVENUE, Respondent THEODORE S. OCKELS AND ROSEMARIE G. OCKELS, Petitioners y. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket Nos. 21214-92, 24609-92. Filed January.17, 2001. Ps are partners in partnerships (the 1st-tier partnerships); some of the 1st-tier partnerships are partners in other partnerships (the 2d-tier partnerships). R maintains that the 6-year period of limitations under sec. 6501(e)(1) (A), I.R.C. 1986, applies to notices of deficiency sent in 1992 with respect to Ps' 1985 tax year. In determining the applicability of sec. 6501(e)(1) (A), I.R.C. 1986, R includes in Ps' "gross income stated in the return" Ps' distributive shares of the gross incomes of the 1st-tier partnerships, but does not take account of the 1st-tier partnerships' distributive shares of the gross incomes of the 2d-tier partnerships. Ps contend to the contrary. Held: In determining the amount of "gross income stated in the return" (the denominator in the 25-percent test of sec. 6501(e)(1)(A), I.R.C. 1986) for petitioners, the 2d-tier partnerships' information returns are treated as ERVED [gW j 7 NM - 2 - adjuncts to, and parts of, the 1st-tier partnerships' information returns, which in turn are treated as adjunc:s to, and parts of, petitioner's tax return . Craig A. Etter, Timothy J. Jessell, and Michael I. Sanders, for petitioners. Carol E. Schultze, for respondent. OPINION CHABOT, Judge: This matter is before us lfor determination as to whether, in applying the 6-year period of limitations sec. 6501(e)(1) (A))¹, when a petitioner's tax return reflects income from a partnership (hereinafter sometimes referred to as the 1sttier partnership) that is itself a partner in |another partneyship (hereinafter sometimes referred to as the 2d-tier partnership), the statutory phrase "gross income stated in the return" (the denominator in the 25-percent test) requires a tracing of the flow of gross income from not only the 1st-tièr partnership' 3 information return but also from the 2d-tier partnership'.s information return in order to determine petitioners' appropriate ¹ Unless otherwise indicated, all subtitle, chapter, subchapter, and section references are to subtitles, chapters, subchapters, and sections of the Internal Revenue Code of 1554 as in effect for 1985; except that references to section 6501 cre to section 6501 of the Internal Revenue Code of 1986 as in eff 254ct for notices of deficiency mailed in 1992. - 3 - distributive share of partnership gross income from the 1st-tier partnership's tax return.2 Respondent determined deficiencies in individual income tax and additions to tax under sections 6653(a) (negligence, etc.) and 6661 (substantial understatement) against (1) petitioners Ridge L. Harlan (hereinafter sometimes referred to as Ridge) and Marjory C. Harlan (hereinafter sometimes referred to as Marjory) (Ridge and Marjory are hereinafter sometimes referred to collectively as the Harlans) and (2) petitioners Theodore S. Ockels (hereinafter sometimes referred to as Theodore) and Rosemarie G. Ockels (Theodore and Rosemarie G. Ockels are hereinafter sometimes referred to collectively as the Ockels) for 1985 as follows: 2 On brief, petitioners state that this is a jurisdictional issue. However, the instant cases are deficiency cases; thus, the statute of limitations is an affirmative defense and not a jurisdictional issue. See sec. 7459(e); Rule 39; Davenport Recycling Associates v. Commissioner, 220 F.3d 1255, 1259-1260 (11th Cir. 2000), affg. T.C. Memo. 1998-347 (in deficiency cases, assertion of the bar of the statute of limitations is an affirmative defense, not a jurisdictional question); Columbia Building, Ltd. v. Commissioner, 98 T.C. 607, 611 (1992) (same); compare Commissioner v. Lundy, 516 U.S. 235 (1996) (in refund cases in the Tax Court, the statute of limitations is a jurisdictional question). Unless otherwise indicated, all Rule references are to the Tax Court Rules of Practice and Procedure. - 4 Additions to Tax Petitioners Deficiency The Harlans The Ockels $548,186 62,490 ¹ 2 Sec. 6653 (a) (1) · Sec. 66:53 (a) (2) $27,409 3,125 . Sec. 66 1 1 . 2 $137,.0 7 15,6 3 50 percent of interest due on $548,186. 50 percent of interest due on $62,490. The inst'ant cases have been severed from docket Nos. 1565392 and 15654-923 for briefing and opinion on the 2d-tier partnership issue. The 2d-tier partnership issue has been submitted fully stipulated; the stipulations and the stipulated exhibits are incorporated herein by this reference. Background When the respective petitions in the instant cases were filed, the Harlans resided in Hillsborough, California, and he Ockels resided in Lafayette, California. 3 Cases of the following petitioners had ciriginally been consolidated: (1) Alan B. Steiner and Barbara W. Steiner, docket No. 28182-92; (2) Estate of James Beaton, deceased, Shirley Beaton, Executrix, and Shirley Beaton, docket No. 28181-92; (3) James F. Ottinger and Bonnie J. Ottinger, docket No. 15654- 2; (4) Theodore S. Ockels and Rosemarie G. Ockels, docket No. 460992; (5) Ridge L. Harlan and Marjory C. Harlan, docket No. 2 21492; and (6) Estate of William H. Abildgaard, deceased, Will am Abildgaard, Jr., Executor, and Marlene Abildgaard, docket NJ. 15653-92. See Steiner v. Commissioner, T.C. Memo. 1995-122. The Beaton, docket No. 28181-92, and Steiner, docket No. 28182-92, cases were severed from the group and were disposed of on another issue. See Beaton v. Commissioner, T.C. Memo. 1997-140. - 5 A. The Harlans The Harlans filed their joint 1985 tax return on or about August 12, 1986. On June 26, 1992, respondent issued a notice of deficiency to the Harlans for 1985. The 3-year period of limitations for assessment of tax under section 6501(a) with respect to the Harlans for 1985 expired before the notice of deficiency was mailed. The Harlans did not execute any.extensions of the period of limitations on assessment with respect to 1985. The Harlans' 1985 tax return has attached to the Form 1040, the following: Schedules A, B, C, D, E, and SE; Forms 3468, 3800, 4136, 4797, 4868, 6251, 1116, 2210, 4562, 4835, 4952; 27 numbered "statements"; and a Treasury Department Form TD F 9022.1. The Harlans' 1985 tax return shows an ordinary loss of $56,069 from several partnerships, identified by name, address, and employer identification number. The record includes 1985 partnership information returns, or parts of those returns, from each of the identified partnerships, as well as stipulations as to the Harlans' shares of the partnerships' gross incomes, determined without regard to the 2d-tier partnership gross incomes. During 1985, Ridge was a partner in three single-tier partnerships, and Marjorie was a partner in one single-tier partnership. - 6 - During 1985, Ridge was a partner in two multiple tier partnerships: (1) Pacific Real Estate Investors Partnership (hereinafter sometimes referred to as Pacific) and (2) Carlyle Real Estate Limited Partnership-VI (hereinafter sometimes referred to as Carlyle). Pacific was a partner in at least one other partnership Pacific's 1985 information return shows an ordinary loss of $7,705 from another partnership, identified by name and empl yer identification number. The record does not include informat'on as to the amount of the gross income stated on this 2d-tier partnership's 1985 information return. Carlyle was a partner in several other partnerships. Carlyle's 1985 information return shows ordinary income of $674,791.81 from four other partnerships, each identified b and employer identification number. name The record does not in lude information as to the amounts of Carlyle's shares of the gr ss incomes stated on these 2d-tier partnerships' 1985 informat on returns. On one of the schedules.attached to their 1985 tax ret rn, the Harlans show their gross income as $1,216,099. This sch dule is for purposes of Form 1116, part I, line 2.d.(v), and is an element of the formula used in the computation of their fo eign tax credit. Nevertheless, the parties have stipulated tha 042 the gross income for purposes of section 6501(e) that is "reflected - 7 on the Harlan's 1985.Form 1040 and on the first-tier partnership returns of the partnerships in which Ridge or Marjory Harlan owned a direct interest", i.e., excluding "the flow of gross income from" the 2d-tier partnerships, is $1,410,077. B. The Ockels The Ockels filed their 1985 joint tax return on October 15, 1986. On August 11, .1992, respondent issued a notice of deficiency to the Ockels for 1985. The 3-year period of limitations for assessment of tax under section 6501(a) with respect to the Ockels for 1985 expired before the notice of deficiency was mailed. The Ockels did not execute any extensions of the period of limitations on assessment with respect to 1985. The Ockels' 1985 tax return has, attached to the Form 1040, the following: Schedules A, B, C, D, E, and SE; Forms 2688, 3468, 4797, 6198, 6251, 4684, 8283, 4255, 4562, 4868, 4952, 8082, 6248; and numerous schedules, attachments, and other documents. The Ockels' 1985 tax return shows net income of $7,900 from several partnerships and one independent oil producer, identified by name and employer identification number. The record includes 1985 partnership information returns, or parts of those returns, from each of the identified partnerships, and a 1985 windfall profit tax information return (Form 6248) from the oil producer, as well as stipulations as to Theodore's shares of the - 8 - partnerships' gross incomes, and the oil produ¢er's gross sal s price, determined without regard to the 2d-tie:r partnerships' gross incomes. During 1985, Theodore was a partner in nihe single-tier partnerships. During 1985, Theodore was a partner in one multiple tier partnership, Mission Resources Development Drilling Program ·· Belridge II (hereinafter sometimes referred to as Mission Resources). Mission Resources was a partner in at least one other partnership. Mission Resources' 1985 ir1formation return shows ordinary income of $286,137 from anothet partnership, identified by name but not otherwise. The rebord does not include information as to the amount of the ghoss income st ted on this 2d-tier partnership's 1985 information return. The Ockels do not claim a foreign tax credit on their 985 tax return, and so do not have any equivalent of the Harlan.' above-noted schedule. The parties have stipulated that the gross income for purposes of section 6501(e) that is "reflected on the Ockels' 1985 Form 1040 and on the first-tier.partnership re:urn [sic] of the partnerships in which the Ockel$ owned a direc interest", i.e., excluding "the flow of gross income from" the 2d-tier partnerships, is $407,819. This total includes Theodore's share of the gross receipts of the independent producer. il _ 9 _ C. The VeloBind Stock At the start of.1985, Ridge owned 80,000 shares of junior common stock in VeloBind that he had bought in 1983 for $3 per share. In 1985, Theodore owned 7,500 shares of junior common stock in VeloBind that he had bought in 1983 for $3 per share. In Steiner v. Commissioner, T.C. Memo. 1995-122, we determined that these shares converted to VeloBind common stock in 1985. The VeloBind common stock traded at $17 per share on February 12, 1985. In the respective notices of deficiency, respondent determined that the Harlans4 and the Ockels5 received 1985 income from the stock conversion. Discussion I. The Parties' Contentions; Summary of Court's Conclusion Petitioners have properly raised in their petitions the affirmative defense of the statute of limitations for 1985. See Rule 39. The parties have·stipulated that the 3-year period of limitations (sec. 6501(a)) expired for both the Harlans and the 4 In the notice of deficiency, respondent determined that the Harlans' income from the VeloBind stock conversion was $1,275,200. However, in respondent's answer and on brief, respondent asserts the correct income amount was $1,120,000. s In the notice of deficiency, respondent determined that the Ockels' income from the VeloBind stock conversion was $119,550. However, in respondent's answer and on brief, respondent asserts the correct income amount was $105,000. - 10 Ockels before respondent issued the respective notices of deficiency. Respondent contends that the instant case fall within an exception to the 3-year rule--the 6-year statute of limitations set forth in section 6501(e)(1) (A)--because eabh set of petitioners has omitted from gross income more than "25 percent of the amount of gross income stated in the return" for that set of petitioners. Petitioners contend that the income that respondent con ends was omitted from their 1985 tax returns6 is leps than 25 per ent of the amounts of gross income stated in their respective ta . returns because (1) their tax returns are tre ted as having set forth their shares of the gross incomes set f rth on the information returns of their 1st-tier partnerShips and (2) the information returns of their 1st-tier partnerships should b treated as setting forth their 1st-tier partnerships' respective shares of the gross incomes set forth on the information returns of their 2d-tier partnerships. Respondent argues that the 2d-tier part erships' inforrtation returns are to be ignored because (1) "The plain language o the Code and the regulations" require considerat on of only The question of whether petitioners omitted any gross income--whether the 1985 conversions of the Ýelobind stock produced gross income and, if so, then in whett amounts--has been set aside for determination at a later date. - 11 petitioners' tax returns and not the partnerships' information returns, (2) the regulations' concept of setting forth on a tax return applies only to what is set forth on petitioners' tax returns, and (3) a contrary interpretation "would impose an excessive administrative burden on the Service and on taxpayers." Petitioners·maintain that section 702(c) and the regulations plainly require that whenever it is necessary to determine the amount of a partner's gross income, that amount is to include the partner's distributive share.of the partnership's gross income. As applied to the instant cases, in order to determine the amount of petitioners' gross 2ncome from the 1st-tier partnerships, there must first be determined the amount of each 1st-tier partnership's gross income. Section 702(c)'s rule then applies, petitioners contend, so that in order to determine the amount of any 1st-tier partnership's gross income, there must first be determined the amount of each 2d-tier partnership's gross income. Petitioners maintain that this rule is consistent with the "lookthrough" approaches of other subchapter K provisions (e.g., in secs. 1.704-3(a)(8), 1.704-2(k), and 1.752-4, Income Tax Regs.), and provisions outside subchapter K, such as sections 108(a)(1)(C) and 904(d). Under section 6501(e)(1.)(A), the denominator of the 25percent fraction is "the amount of gross income stated in the return". But the taxpayer ordinarily does not state the amount - 12 - of gross income anywhere on the tax return.7 As a result, we must look through the various forms, etc., attached to the taxpayer's basic tax return form in order to identify the components of gross income that must be added together in order to determine the total amount of gross income stated in the taxpayer's tax return. It has long been accepted that, for hese purposes, the information return of the taxpayer's properly identified 1st-tier partnership is treated as part of the taxpayer's tax return. But the 1st-tier partnership's information return suffers from the same "defect" in that we must look through the various forms, etc., attached to the 1st-tier partnership's information return in order to identify the components of gross income that must be added together in order to determine the total amount of gross income stated in the 1sttier partnership's information return. Every explanation t at has been drawn to our attention, or that we have discovered, as to why we must treat the properly identified 1st-tier partnership's information return as part of the taxpayer's tax return applies with equal force to treating the properly identified 2d-tier partnership's information return as part of the 1st-tier partnership's information return. Accordingly, we agree with petitioners' conclusion. As is the case in the Harlan's docket, even if the tahpayer does state such an amount and clearly labels it as such, that may not be the correct amount for purposes of sec. 6501(e)(1)(A), even if it is the correct amount for other purposes. - 13 II. Overview In general, section 6501(a)8 bars assessment of an income Sec. 6501 provides, in pertinent part, as follows: SEC. 6501. LIMITATIONS ON ASSESSMENT AND COLLECTION. (a) General Rule.--Except as otherwise provided in this section, the amount of any tax imposed by this title shall be assessed within 3 years after the return was filed (whether or not .such return was filed on or after the date prescribed) * * * and no proceeding in court without assessment for the collection of such tax shall be begun after the expiration of such period. * * * * * * * (e) Substantial Omission of Items.--Except as otherwise provided in subsection (c)-(1) Income Taxes.--In the case of any tax imposed by subtitle A [relating to income taxes]-(A) General rule.--If the taxpayer omits from gross income an amount properly includible therein which 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. For purposes of this subparagraph-(i) 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; and (ii) In determining the amount omitted from gross income, there shall not be taken into account any amount which is omitted from gross income stated in the return if such (continued...) - 14 - tax deficiency more than 3 years after the latdr of the date :he tax return was filed or the due date of the tax return. The parties stipulated that the 3-year general period of limitations on assessment under section 6501(a) expired for petitioners' 1985 tax year before the respective notices of deficiency were sert. Respondent has the burden of proving the applicability of an exception to the general limitations period. v. Commissioner, 142 F.2d 900 See Rule 142; Feis (6th Cir. 1944), affg. 1 T.C. 9, 12 (1942), as modified by a Memorandum Opinion of this Court dat.ed June 4, 1943. In particular, as respondent acknowledges, in order for the 6-year period of limitations under section 650 L(e) to apply, respondent must show that the taxpayer has omitted an amount of gross income which is more than 25 percent of the amount of gröss income stated in the tax return. v. Commissioner, 48 T.C. 921, 928 (1967) See Davenport (taxpayers' tax returns showed net losses from a partnership; 6-year statute of limitations did not apply because the Commissioner "has not shown whether a partnership return was filed for those years and jf so the gross income reported thereon"); Hurley vi. Commissioner, 22 T.C. 1256, 1264-1265 (1954), affd. 233 F.2d 177 (6th Cir. 1956) (...continued) amount is disclosed in the return, or il a statement attached to the return, in a anner adequate to apprise the Secretary of th nature and amount of such item. - 15 (using net worth method, Commissioner showed omission of net income; held, Commissioner failed to carry burden.of proving how much of this omission was due to omission of gross income); Seltzer v. Commissioner, 21 T.C. 398, 402-403 (1953) (Commissioner failed to prove taxpayer's basis in a sold capital asset, and so "has not sustained his burden of proof to show" that taxpayer omitted gross income which was more than 25 percent of the gross income stated in her tax return); see also Colestock v. Commissioner, 102 T.C. 380, 383, 390-391 v. Commissioner, 88 T.C. 1020, 1023 n.8 (1994); Estate of Fry (1987); .Stratton v. Commissioner, 54 T.C. 255, 289 (1970), and cases there cited; Philipp Bros. Chemicals, Inc. v. Commissioner, 52 T.C. 240, 254255 (1969), affd. 435 F.2d 53 Commissioner, 47 T.C. 75, 85 (2d Cir. 1970); Rhombar Co. v. (1966), affd. 386 F.2d 510 1967); Bardwell v. Commissioner, 38 T.C. 84, another issue 318 F.2d 786 92 (2d Cir. (1962), affd. on (10th Cir. 1963); Green v. Commissioner, 7 T.C. 263, 277 (1946), affd. 168 F.2d 994 (6th Cir. 1948). The test for the extended limitations period under section 6501(e.) may be expressed as a fraction. The numerator is the amount of properly includable gross income that was omitted from a taxpayer's return, and the denominator is "the amount of gross income stated in the return". Sec. 6501(e)(1) (A). If the fraction exceeds 25 percent, then the 6-year limitations period - 16 - under section 6501(e) applies. In the instant cases, the parties' dispute focuses on the denominator. Two aspects of this dispute make it clear that more is involved than meets the eye, as follows: Firstly, although the statutory language is "the amount of gross income stated in the return" (emphasis added), both si er in determining the total gross income stated therein for ihe purposes of section 275(c). [Emphasis added.] - 31 In Roschuni v. Commissioner, 44 T.C. 80 (1965), the taxpayer-wife owned an S corporation, which filed an information return for 1958, a year for which the Commissioner determined a deficiency against the taxpayers. The notice of deficiency was issued more than 3 years, but less than 6 years, after petitioners filed their 1958 tax return. We quoted extensively from our opinion in Rose v. Commissioner, supra, concluded that the S corporation was not a taxable entity, and stated that the principle of Rose v. Commissioner applied. Commissioner, 44 T.C. at 85-86. See Roschuni v. We described this principle as requiring the information return of the nontaxable entity to be treated as an adjunct of the taxpayers' tax return. 85-86. See id. at We also held that the taxpayers' reference, in their 1958 tax return, to the S corporation's 1958 information return and the disputed transaction, was sufficient to satisfy the requirements of section 6501(e)(1)(A)(ii), and so any omitted gross income from that transaction was not to be taken into account. See id. at 85-86. In Davenport v. Commissioner, 48 T.C. 921 (1967), the taxpayers' 1958, 1959, and 1960 tax returns reported losses from a specified partnership. See id. at 924-925. The taxpayer-wife contended that assessment of any deficiencies for these 3 years was barred by the statute of limitations; the Commissioner contended that the 6-year limitations period applied. See id. at - 32 927-928. We held that the Commissioner failed' to carry the burden of proving an omission of more·than 25 percent of the gross incomes stated in the taxpayers' tax returns, as follo is (id. at 928, 929): To satisfy his burden in proving the omission, respondent must show the amount of gross income stated in the return and the amount of income propèrly includable therein which has been omitted. Elizabeth Bardwell, 38 T.C. 84 (1962), affd. 318 F. 2d 786 (C.A. 10, 1963), and Lois Seltzer, 21 T.C. 398 (1953). In the inst:ant case respondent has not shown the amount of gross income stated in the return. On each of the returns for the years 1958 through 1960 there is reported on Schedule H a net loss figure for certain partnership income. Respondent has not shown whether a partnership return was filed fbr those years and if so the gross income reported thereon. Under sectior 6501(e)(1) (A) the term "gross income from a trade or business" means the amount received or accrued from the sales of goods or services undiminished !by the cost of such goods or services. Since there is no evidence indicating the manner in which petitioner arrived at the loss figtre for income from the partnership, there is nothing in t e record to show petitioner's gross income from the partnership. Respondent's Rev. Rul. 55-415, 1955-1 C. . 412, following his ruling in I.T. 3981, 1949-2 C.B. 78 as to a partner's gross income for the purpose of section 251 of the Internal Revenue Code of 1939, provides, and th s Court has recognized, that a partnership return is to be considered together with an individual teturn in determining the total gross income stated in the individual return for the purpose of determining whether the 6-year statute Of limitations is applicable. Jack Rose, 24 T.C. 755, 763-769 (1955). See also Elliott J. Roschuni, 44 T.C. 80 (1965), and Genevieve B. Walker, 46 T.C 630, 637-738 (1966). [Emphasis added.] We therefore conclude that respondent has failed to establish that petitioner and Richard omitted from an one of their joint Federal income tax returns for the yea s 1958, 1959, and 1960 an amount of gross income properly includable therein in excess of 25 percent of the amo nt of gross income stated in such return and therefore respondent has failed to show that the 6-year statute is applica le. - 33 - * * * * * * * We, therefore, sustain respondent's determination as modified by the stipulation of the parties filed in this case for the years 1961, 1962, and 1963 but hold that the assessment or collection of any deficiency against petitioner is barred by the statute of limitations for the years 1958, 1959, and 1960. In Estate of Klein v. Commissioner, 63 T.C. 585 (1975), affd. 537 F.2d 701 (2d Cir. 1976), we were called upon to determine the meaning of "the amount of gross income stated in the return", within the meaning of section 6013(e) (1)(A), relating to relief from joint liability, as that provision applied to 1955. See 63 T.C. at 589. Relying in part on section 6013(e)(2) (B), we held that the quoted phrase in section 6013(e)(1) (A) must be given the same meaning that it has in section 6501(e)(1)(A), and that under the latter provision-the only way "the amount of gross income stated in the return" can be determined, where a partner of a partnership which has filed a return is concerned, is to consider the partnership return together with the individual return in determining "the total gross income stated in the return" of the individual partner. Genevieve B. Walker, 46 T.C. 630 (1966). See Nadine I. Davenport, 48 T.C. 921, 928 (1967); accord, Elliott J. Roschuni, 44 T.C. 80 (1965), and Jack Rose, 24 T.C. 755 (1955). Cf. sec. 702(c); sec. 1.702- 1(c)(2), Income Tax Regs. [Estate of Klein v. Commissioner, 63 T.C. at 590-591.] As a result, we held, for the Commissioner, that-the partnership return, must be read as an adjunct with the individual partner's return in determining the total gross income stated in the individual's return. Indeed, that determination with respect to partnerships arose from the gloss upon the section by the decided cases, compare L Glenn Switzer, 20 T.C. 759 (1953), with Genevieve B. Walker, - 34 - supra, and Nadine I. Davenport, supra; cf. Elliott J. Roschuni, supra; Jack Rose, supra.' [Emphasis added.] See also Harry Landau, 21 T.C. 414 (1953);.Norman Rodman, T.C. Memo. 1973-277; and Vernie S. Belcher, T.C. Memo.. 1958-180, where ; t is pointed out that a "partner' s share of the gross income on the partnership returns must be imputed to the individual return." An that if the partnership return is not in evidence it is impossible to k ow the "gross income stated in the return." The 6-year limitation do s not apply if disclosure "is made on or with the tax return." (Emphasis supplied.) H. Rept. No. 1337, 83d Cong., 2d Ses ., p. 107 (1954); S. Rept. No. 1622, 83d Cong., 2d Seas., pp. 143-144 (1954). [Id. at 592.) Taking into account the taxpayers' share of the gross income shown on their partnership's information retu|rn as having been shown on the taxpayers' tax return, we held that the gross income omitted from the taxpayers' tax return was less than 25 percent of the gross income stated on the taxpayers' tax return. Estate of Klein v. Commissioner, 63 T. C. at 588. Sne We concluded from this that the taxpayer-wife failed to qqalify for reliaf from joint liability under the law then in effect. 589. See id at Although we ruled for the Commissioner based on the language of sections 6013 and 6501, we commented as follows on the Commissioner's argument under section 70!2 (c) (Estate of Klein v. Commissioner, 63 T.C. at 591 & n.6): As we read the first sentence (of the Finance Committe e report on the 1970 enactment of sec. 6013 (e) ] we thinP "the income reported" by a partner includes his share of tl e gross income, as defined in section 6501(e)(1)(A)(i), lof the partnership. Rev. Rul. 55-415, 1955-1 C.B. 412; I.T. 3981, 1949-2 C.B. 78.6 Respondent cites sec. 702(c) and sec. 1.702-1(c) (2), Incope Tax Regs., in support of this position. We note in passing our belief that - 35 the example given in sec. 1.702(c)(2), Income Tax Regs., conflicts with sec. 6501(e) (1) (A) (i) and (ii) because under the latter section "gross income" is specially defined and if a partnership return is filed the entire amount of such "gross income" allocable to a partner is deemed reported on the return. We do not think the gross income referred to in sec. 702 (c) is the equivalent of the "gross income" defined under sec. 6501(e) (1) (A) . In affirming our.determination and agreeing with our analysis, the Court of Appeals took the occasion to state agreement with our comment on section 702 (c) , as follows (537 F.2d at 705 n.9): We further note that we share the tax court's opinion that the example in Treas. Reg. § 1.702-1(c) appears to conflict with § 6501(e)(1)(A)(ii)'s method for determining the amount "omitted" from gross income when a partnership return has been filed. We conclude that one pattern that emerges from our prior opinions dealing with the denominator in the 25-percent calculation, is relevant to the limited matter now before us. In dealing with documents that were not physically attached to the taxpayer' s tax return, we have consistently¹² drawn a line between (1) documents that have been filed as tax returns of ¹² In Switzer v. Commissioner, 20 T.C. 759, 767-768 (1953), we pointed to computational anomalies that might result from applying this approach to partnerships, and there declined to so apply this approach. However, on appeal the Commissioner joined the taxpayers to persuade the Court of Appeals to order us to vacate our decisions and enter decisions for the taxpayers. After we complied with the Court of Appeals' order in the Switzer dockets, we recognized that the Commissioner had, in effect, conceded error in Switzer's statute of limitations rulings and meant to apply that concession generally. See Rose v. Commissioner, 24 T.C. 755, 768-769 (1955) . In Rose, we merely distinguished Switzer but did not formally overrule it. See 24 T.C. at 769. However, since that time, we have not followed Switzer on this point. In the instant cases, neither side cites Switzer. Clearly, Switzer has been sapped of its vitality. - 36 - other taxpayers, and (2) documents that, even if filed as tax returns, were not tax returns of other taxpayet:s. Documents in the former category have not been taken into account in determining the amount of gross income "stated in the return", see, e.g., Masterson v. Commissioner, supra; Retto v. Commissioner, supra. On the other hand, the second category--documents that were not filed as tax returns of other taxpayers--have been treated as adjuncts to and part of the taxpayers' tax returns for purposes of determining "the amount of gross income stated in the rettrn". This approach has been applied to partnership tax returns (see, e.g., Davenport v. Commissioner, supra), S corporation tax returns (see, e.g., Roschuni v. Commissioner, jsupra), and other documents which are not tax returns of taxpayers, see, e.g., Rose v. Commissioner, supra. V. Analysis Section 6501(e) and its predecessors require omitted gross income to be compared to gross income stated in the return. Green v. Commissioner, 7 T.C. 263, 277 In (1946), affd. 168 F.2d 994 (6th Cir. 1948), we concluded that "'Gross income' has a wel. established meaning in the revenue laws, denoting statutory ross income as defined by section 22 [of the Revenue Act of 1938, predecessor of present sec. 61)." In enacting the Internal Revenue Code of 1954, the Congress added clausé (i) to secti3n - 37 6501(e)(1) (A) to modify the definition of gross income in the case of trades or businesses. Except for that modification, "the general definition of gross income found in the Code applies." Northern Ind. Pub. Serv. Co. & Subs. v. Commissioner, 101 T.C. 294, 299 n.7 (1993). However, taxpayers' tax returns ordinarily do not provide any place for stating gross income.23 See, e.g., Estate of Klein v. Commissioner., 537 F.2d at 704; Davis v. Hightower, 230 F.2d 549, 552, 553 (5th Cir. 1956). We have held that "total income", as used in the Form 1040 is not the equivalent of "gross income" for purposes of the extended statute of limitations. v. Commissioner, 7 T.C. at 276-277. See Green As a result, we have dealt with the taxpayers' tax returns by determining whether one or another item was properly an item of gross income within the appropriate contemporary statutory definition of gross income. As noted, supra, when the taxpayers' tax returns stated taxable income from partnerships or S corporations, we declared that the information returns of these pass-through entities would be treated as adjuncts to, and part of, the taxpayers' tax returns. See, e.g., Davenport v. Commissioner, supra ¹³ See supra our findings with regard to the Harlans' 1985 tax return. Note that the parties have stipulated that the Harlans' gross income stated on their tax return ($1,410,077) is almost $200,000 more than the amount that the Harlans' tax return labeled as gross income ($1,216,099), even without taking account of flow of gross income from the 2d-tier partnerships. - 38 - (partnership), Roschuni v. Commissioner, supra (S corp.). Indeed, the Court of Appeals for the Second Circuit described the process thusly in Estate of Klein v. Commissioner, 537 F.2d at 704: Schedule H [more recently, Schedule E) of Form 1040, labelled "Income from Partnerships, Estates, Trusts, anc Other Sources," provides only one line for reporting partnership income together with the name and address of the partnership from which that income was derived. ScheduJe H speaks in terms of "[t]otal income (or lops)," the reference to losses obviously suggesting only a net (adjusted gros s) rather than a gross income figure. Given that limitation upon the scope of the Form 1040, it is clear that the róturn neither.intends nor purports to show a taxpayer's gross income·when that taxpayer has partnership income. Indeed, gross income is not "stated in the return" in the case of such a taxpayer unless one looks at the partnership return as being a part of the personal income tax return. * * 1 When we take the partnership''s information return into consideration as part of the partner's tax return, we find the same limitations in the former document that dhe Court of Appeals described in Estate of Klein v. Commissioner, supra, as to t7e latter document. That is, the 1985 partnership information returns for Pacific and Carlyle (Ridge's 1st-tier partnerships) and for Mission Resources (Theodore's 1st-tier partnership) 30 not provide for a showing of "gross income". "total income (loss) There is a lina for (combine lines 3 through 10)", (Form 1055, 1st p., 1.11), but it is evident that several of the components of total income are themselves net amounts. In those instances, recourse must be had to other forms, schedules, statements, and other documents attached to the 1st-tier partnership's - 39 information return in order to determine the amount of gross income stated on the partnership's information return, which in turn is necessary in iorder to determine the amount of the taxpayer partner's gross income stated in the taxpayer's tax return. There does not appear to be any dispute that these other forms, schedules, statements, and other documents of the 1st-tier partnership's information return are treated collectively as adjuncts to, and part of, the taxpayer partner's tax return for purposes of determining the amount of gross income stated on the taxpayer, partner's tax return, even though they are not attached to the taxpayer partner's tax return. If the 1st-tier partnership's information return discloses net income or loss from a 2d-tier partnership, then the same analysis requires us to consider the 2d-tier partnership's information return as merely another document that is an adjunct to, and part of, the taxpayer partner's tax return. That is, to paraphrase the Court of Appeals for the Second Circuit (see Estate of Klein v. Commissioner, 537 F.2d at 704), gross income is not "stated in the return" of a taxpayer partner who reports net partnership income from a 1st-tier partnership which in turn reports net partnership income from a 2d-tier partnership unless one looks at the 1st-tier partnership's information return together with all its adjuncts--among them being the 2d-tier - 40 - partnership's information return--as being part of the taxpayer partner's tax return. Thus, we conclude that petitioners are correct in their contention that 2d-tier partnerships' information returns are to be taken into account in determini'ng., for purposes of sectior 6501(e)(1) (A), the amount of gross income stated in the taxpayer's tax return. VI. Other Considerations Both sides rely on section 702(c) and section 1.702-1(c) (2), Income Tax Regs. Respondent asserts that "The plain language of the Code and the regulations requires" consideration of only the 1st-tier partnerships' information returns. Petitioners assert that "Therefore, under this explicit statutory rule [sec. 702(c)], * * * respondent must necessarily" take account of the 2d-tier partnerships' gross income. The short answer is that the texts of both section 702(c) and section 1.702-1(c)(2), Income Tax Regs., are silent on the matter of 2d-tier partnerships. The little legislative history we have found regariding section 7(2(c) also is silent on this matter. We have not found any indication that the Congress was aware of the question when it considered and crafted section 702(c), or that the Treasury Department was aware of the question when it issued the regulation. Indeed, it may be argued that the statutory language ("determine the gross income of a partner") may apply to the numerator of the 25- - 41 - percent fraction of section 6501(e)(1)(A) ("omits from gross income an amount properly includible therein") but not to the denominator--"amount of gross income stated in the return" (emphasis added). See also the comments of this Court and the Court of Appeals of the Second Circuit in Estate of Klein v. Commissioner, 63 T.C. at 591 n.6, affd. 537 F.2d at 705 n.9, pointing out that "gross income" within the meaning of section 702(c) differs from "gross income" within the meaning of section 6501(e)(1) (A). Thus, notwithstanding both sides' reliance, we conclude that neither section 702(c) nor section 1.702-1(c)(2), Income Tax Regs., leads us to a resolution of the 2d-tier partnership matter, especially in the context of the denominator of the 25-percent fraction. Respondent contends as follows: The partnership return (Form 1065) itself further supports looking only to the direct partnership return to determine gross income for section 6501(e) purposes. The total gross income of the partnership is the sum of the amounts on lines 1 through 7 with the exception of the I.R.C. § 6501(e)(1)(A)(i) exclusion for cost of goods sold. * * * These contentions do not support respondent's position. The sum of the items on lines 1 through 7 frequently is not "The total gross income of the [1st-tier] partnership." Firstly, an element of gross income may appear on another line, after line 7. Secondly, several of the items on lines 1 through 7 are net amounts, and the underlying gross income may have to be - 42 determined by inspection of other parts of the partnership information return, Form 1065. This may be illustrated in the instant cases by comparing lines 1 through 11 of the stipulated 1985 Pacific partnership information return with the parties' stipulation as to Pacific's gross income. Table 1 Pacific's Partnership Information Return (Form 1065, 1st. page)2 Pacific's Stipulated Gross Income2 4. Ordinary income (loss) -7,705 from other partnerships and fiduciaries See STMT#2 6a. Gross rents $63,723 -275,383 6b. Minus rental expenses $ STMT ATTACHED 6c. Rental income (loss) Rental income (gross) Rental income (gross) Rental income (gross) Rental income (gross) Rental income (gross) Total rental income $13,708 1L,730 1.1,048 ),024 13,213 6 1,723 Form 4797, lir(e 19 Form 4797 , lirie 1d 703, 950 24 i , 000 Total 9. Net gain (loss) (Form 4797, line 17) 1, 01 , 673 34,935 11. TOTAL income (loss) -248,153 (combine lihes 3 through 10) ¹ Lines 1,2,3,5,7,8, and 10 do not have any .entries. 2 The stipulation specifically excludes any gross rincome from Pacific's 2d-tier partnership. As is apparent, more than 90 percent of Pácific's stipulated gross income shown on its partnership information return is related to line 9, and not lines 1 through 7. Further, line 3 does not tell the whole story--it shows only $34,935 net incone from Form 4797, but the parties' stipulation shows a total of $949, 950 gross income from Form 4797. Thus, contrary to the implicat ions of respondent ' s content ions , respondent ' s action s in the stipulations show that it is necessary to examine more th in - 43 - lines 1 through 7 of Pacific's Form 1065 in order to determine Pacific's gross incomé. When we do that, we find .that on line 4 of Pacific's Form 1065 we are told to "See STMT #2". That statement is as follows: STATEMENT # 2 - INC OTH PARTNERSHIPS TEROS-PER K 1 94-2735621 INTEREST-33% SECTION 743 (B) ADJ -6,633 -1,072 TOTAL STATEMENT # 2 - TO FORM 1065, LINE 4 -7,705 The record does not include information about the gross income stated in the information return of Pacific's 2d-tier partnership. We conclude that (1) respondent's contentions are contrary to the parties' stipulations and (2) the parties' stipulations are consistent with the Court's analysis. That is, (a) the 1st- tier partnership's information return is treated as an adjunct to, and a part of, the taxpayer's tax return, (b) the 2d-tier partnership's information return is treated as an adjunct to, and a part of, the 1st-tier partnership's tax return, and (c) in determining the amount of gross income stated in the taxpayer's tax return, neither the Court nor.the parties are limited to what is stated on the first page of the tax return. Respondent's brief closes as follows: Finally, respondent's interpretation of Section 6501(e) yields a sensible, administrable result. Looking through to the lower tiers might require an audit of each of those - 44 - partnerships. This would impose an excessive administrative burden both on the Service and on taxpayers. Petitioners respond as follows: Respondent claims that following statutory mandate of Code section 702(c) would cause an "excessive administrLtive burden" on the IRS and taxpayers. Incredibly, respondent states that adopting a "look-through" rule to lower-tier partnerships "might require an audit of each of those partnerships." In this case, respondent was able to make computations of gross income of the Upper-Tier Partnerships without an audit. There is no reason to suggest an audjt of the Lower-Tier Partnerships would be required. The record in the instant cases thus far does not disclose either the magnitude of the problem respondent warns against or the extent of respondent's activities with regard to the grot:s income stated in the 1st-tier partnerships' information retuyns. We note that the parties' stipulations deal with the components of the gross incomes stated on the partnership information returns of 16 entities, and there are only three 2d-tier partnerships involved in the instant cases. Thus, whatever the level of effort that respondent expended, it does not appear that including the 2d-tier partnerships would cause that level to be substantially increased in the instant cases. In addition, the Supreme Court's opinion in Colony, Inc. v. Commissioner, 357 U.S. at 36-37, suggests that respondent is not obligated to audit or otherwise examine beyond what is disclosed on the tax return, for purposes of applying the amount of the denominator in the 25-percent fraction. Clearly, it is now accepted that respondent must deal with the 1st-tier - 45 partnerships' information returns. This was established before 1958, when the Supreme Court ruled in Colony, Inc. We have no reason to believe that the standards for respondent's work on the 1st-tier partnerships' information returns were intended to be any different from those applicable to the taxpayers' tax returns. Given that these obligations exist as to the 1st-tier partnerships' information returns, we do not see any principled basis for concluding that the 2d-tier partnerships' information returns require so heightened a level of examination or audit, that our analysis of the law ought to be affected by that heightened level. Respondent's brief, almost afterthought, speculation is far short of a cogent argument that principled distinction can be drawn between 1st-tier partnerships' information returns and all 2d-tier partnerships' information returns. We do not change our analysis on account of respondent's warning. Our holding in this opinion will be incorporated into the decision to be entered in these cases when all the other issues are resolved." The parties' stipulations and stipulated exhibits are not treated as exhausting the record as to the subject matter of the instant opinion. In further proceedings, the parties will be free to provide such additional evidence on this subject matter as is not inconsistent with our holdings and is otherwise admissible. See also Reis v. Commissioner, 142 F.2d 900, 902, 903 (6th Cir. 1944), affg. 1 T.C. 9 (1942), as modified by a Memorandum Opinion of this Court dated June 4, 1943. --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Atax-court%3Ac29105e857c44d32. Public record. Not legal advice.