IRS maintains stance on omissions from gross income and overstatement of basis.

• Author: Nevius, Alistair M.

On December 15, the IRS released final regulations 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 (T.D. 9511). The regulations are designed to resolve whether an overstatement of basis in a sold asset results in an omission from gross income. However, the regulations finalize without change temporary regulations (T.D. 9466) that the Tax Court held to be invalid last May (Intermountain Ins. Serv. of Vail, LLC, 134 T.C. No. 11 (2010)).

Under Sec. 6229(c)(2), if a partnership "omits from gross income" an amount that should be included and that exceeds 25% of the amount of gross income stated in its return, the period for assessing tax attributable to its partnership items is extended to six years. Similarly, Sec. 6501(e)(1)(A) provides that if a taxpayer omits from gross income an amount that should be included and that exceeds 25% of the amount of gross income stated in the return, the period of time for assessment is extended to six years. Sec. 6501(e)(1)(A) also defines the term "gross income." The regulations confirm that the Sec. 6501(e)(1)(A) definition of an omission from gross income applies for purposes of Sec. 6229.

The final regulations define gross income, as it relates to a trade or business, as "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" (Regs. Secs. 301.6229(c)(2)-1(a)(1)(ii) and 301.6501(e)-1(a)(1)(ii)). They further state that 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 Sec. 61(a), and includes the total of the amounts received or accrued, to the extent required to be shown on the return" (Regs. Secs. 301.6229(c)(2)-1(a)(1)(iii) and 301.6501(e)-1(a)(1)(iii)).

Under Regs. Sec. 1.61-6(a), gross income includes gains derived from dealings in property, which arc defined as "the excess of the amount realized over the unrecovered cost or other basis for the property sold or exchanged." The final regulations provide that, outside the trade or business context, "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 Secs. 6229(c)(2) and 6501(e)...