2001 U.S. Tax Ct. LEXIS 4">*4 Our holding in this opinion will be incorporated into the decision to be entered in these cases when all the other issues are resolved.
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
respect to Ps' 1985 tax year. In determining the applicability
of
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),
2001 U.S. Tax Ct. LEXIS 4">*5 partnerships' information returns are treated as adjuncts to,
and parts of, the 1st-tier partnerships' information returns,
which in turn are treated as adjuncts to, and parts of,
petitioner's tax returns.
116 T.C. 31">*32 OPINION
CHABOT, JUDGE: This matter is before us for determination as to whether, in applying the 6-year period of limitations (
2001 U.S. Tax Ct. LEXIS 4">*7 Respondent determined deficiencies in individual income tax and additions to tax under
Additions to Tax | |||
Petitioners | Deficiency | Sec. 6653(a)(1) | Sec. 6653(a)(2) |
Sec. | 6661 | ||
The Harlans | $ 548,186 | $ 27,409 1 | $ 137,047 |
The Ockels | 62,490 | 3,125 2 | 15,623 |
2001 U.S. Tax Ct. LEXIS 4">*8 The instant cases have been severed from docket Nos. 15653-92 and 15654-92 3 for briefing and opinion on the 2d-tier partnership issue.
The 2d-tier partnership issue has been submitted2001 U.S. Tax Ct. LEXIS 4">*9 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 the Ockels resided in Lafayette, California.
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
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 90-22.1.
116 T.C. 31">*34 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, or2001 U.S. Tax Ct. LEXIS 4">*10 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.
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 employer identification number. The record does not include information 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 by name and employer identification number. The record does not include information2001 U.S. Tax Ct. LEXIS 4">*11 as to the amounts of Carlyle's shares of the gross incomes stated on these 2d-tier partnerships' 1985 information returns.
On one of the schedules attached to their 1985 tax return, the Harlans show their gross income as $ 1,216,099. This schedule 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 foreign tax credit. Nevertheless, the parties have stipulated that the gross income for purposes of
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
The Ockels' 19852001 U.S. Tax Ct. LEXIS 4">*12 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 partnerships' gross incomes, and the oil producer's gross sales price, determined without regard to the 2d-tier partnerships' gross incomes.
During 1985, Theodore was a partner in nine 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 information return shows ordinary2001 U.S. Tax Ct. LEXIS 4">*13 income of $ 286,137 from another partnership, identified by name but not otherwise. The record does not include information as to the amount of the gross income stated on this 2d-tier partnership's 1985 information return.
The Ockels do not claim a foreign tax credit on their 1985 tax return, and so do not have any equivalent of the Harlans' above- noted schedule. The parties have stipulated that the gross income for purposes of
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
In the respective notices of deficiency, respondent determined that the Harlans 4 and the Ockels 5 received 1985 income from the stock conversion.
DISCUSSION
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 (
Respondent contends that the instant cases fall within an exception to the 3-year rule -- the 6-year statute of limitations set forth in
116 T.C. 31">*37 Petitioners contend that the income that respondent contends was omitted from their 1985 tax returns 6 is less than 25 percent of the amounts of gross income stated in their respective tax returns because (1) their tax returns are treated as having set forth their shares of the gross incomes set forth on the information returns of their 1st-tier partnerships and (2) the information returns of their 1st-tier partnerships should be 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.
2001 U.S. Tax Ct. LEXIS 4">*16 Respondent argues that the 2d-tier partnerships' information returns are to be ignored because (1) "The plain language of the Code and the regulations" require consideration of only 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
Under
Accordingly, we agree with petitioners' conclusion.
In general,
2001 U.S. Tax Ct. LEXIS 4">*22
The test for the extended limitations period under
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 sides agree that, where the taxpayer is a partner in a 1st-tier partnership, the language is treated as including amounts that do not appear anywhere on the only document that has been filed as the taxpayer's tax return.
SECONDLY, although the potential for the parties' dispute herein has existed since the 1934 enactment of the predecessor of
In light of the foregoing, we start our analysis with matters that are not in dispute2001 U.S. Tax Ct. LEXIS 4">*23 between the parties, in order better to understand the context in which the disputed matters operate.
Section 250(d) of the Revenue Act of 1918 (Pub. L. 65-254, 40 Stat. 1057, 1083) provided a general 5-year statute of limitations, but no limit in the case of fraud.
Section 250(d) of the Revenue Act of 1921 (Pub. L. 67-98, 42 Stat. 227, 265) reduced the general period of limitations to 4 years.
The Revenue Act of 1924 (Pub. L. 68-176, 43 Stat. 253, 299) kept the 4-year general statute of limitations, as section 277(a)(1); it provided that there was no limit in the case of fraud or failure to file a tax return, as section 278(a).
Section 277(a)(1) of the Revenue Act of 1926 (Pub. L. 69- 20, 44 Stat. 9, 58, 59) reduced the general period of limitations 116 T.C. 31">*41 to 3 years; the 1926 Act left unchanged the fraud and failure-to-file rule.
2001 U.S. Tax Ct. LEXIS 4">*24 In what became the Revenue Act of 1934 (Pub. L. 73-216, 48 Stat. 680), the House Bill provided (1) that the general statute of limitations be lengthened to 3 years and (2) that the fraud and failure-to-file rule be expanded to apply also to substantial understatements of gross income. The Ways and Means Committee report (H. Rept. 73-704, pp. 34, 35 (1934), 1939-1 C.B. (Part 2) 554, 580) explains these changes as follows:
* * * * * * *
2001 U.S. Tax Ct. LEXIS 4">*25 Section 276(a). No return or false return. The present law permits the Government to assess the tax without regard to the statute of limitations in case of failure to file a return or in case of a fraudulent return. The change in this section continues this policy, but enlarges the scope of this provision to include cases wherein the taxpayer understates gross income on his return by an amount which is in excess of 25 percent of the gross income stated in the return. It is not believed that taxpayers who are so negligent as to leave out of their returns items of such magnitude should be accorded the privilege of pleading the bar of the statute.
The House passed the following statutory language:
SEC. 276. SAME -- EXCEPTIONS.
(a) No Return or False Return. -- If the taxpayer fails to file a return, or files a false or fraudulent return with intent to evade tax, OR OMITS FROM GROSS INCOME AN AMOUNT properly includible therein which is in excess of 25 per CENTUM OF THE AMOUNT OF GROSS INCOME STATED IN THE RETURN, the tax2001 U.S. Tax Ct. LEXIS 4">*26 may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time. [Emphasis added.]
116 T.C. 31">*42 In the Senate, the Finance Committee changed the approach, explaining in the report as follows (S. Rept. 73-558, pp. 43-44 (1934), 1939-1 C.B. (Part 2) 586, 619-620):
The present law limits the time for assessments to 2 years from the date the return is filed. Experience has shown that this period is too short in a substantial number of large cases resulting oftentimes in hastily prepared determinations, with the result that additional burdens are thrown upon taxpayers in contesting ill-advised assessments. In other cases, revenue is lost by reason of the fact that sufficient time is not allowed for disclosure of all the facts. Subsection (a), therefore, increases the period of 2 years to 3 years.
* * * * * * *
The present law permits the Government to assess the tax without regard to2001 U.S. Tax Ct. LEXIS 4">*27 the statute of limitations in case of failure to file a return or in case of a fraudulent return. The House bill continues this policy, but enlarges the scope of this provision to include cases wherein the taxpayer understates gross income on his return by an amount which is in excess of 25 percent of the gross income stated in the return. Your committee is in general accord with the policy expressed in this section of the House bill. However, it is believed that in the case of a taxpayer who makes an honest mistake, it would be unfair to keep the statute open indefinitely. For instance, a case might arise where a taxpayer failed to report a dividend because he was erroneously advised by the officers of the corporation that it was paid out of capital or he might report as income for one year an item of income which properly belonged in another year. Accordingly, your committee has provided for a 5-year statute in such cases. This amendment also necessitates a change in section 276(a) of the bill.
SECTION 276(a). FALSE RETURN OR2001 U.S. Tax Ct. LEXIS 4">*28 NO RETURN
This section is explained in connection with the change in
Although the Finance Committee's rationale was different from that of the Ways and Means Committee, the Finance Committee's statutory language describing the omission that would trigger a 5- year limitation period (
In conference, the House receded and the Senate amendments were agreed to. See H. Rept. (Conference Report) 73-1385, at 25 (1934), 1939-1 C.B. (Part 2) 627, 634. None of the referenced committee reports explains the intended meaning of the phrase "the amount of gross income stated in the return". Also, we have not found in the hearings or the 116 T.C. 31">*43 floor debates any discussion of the meaning of that phrase. See
The language of
(1) the 5-year limitations period of former law was changed to 6 years;
(2) "gross income" from a trade or business was redefined for these purposes to not include the subtraction for cost of sales or services; and
(3) for purposes of the numerator of the fraction, adequate disclosure of an item will preclude that item being treated as omitted.
The Ways and Means Committee report for H.R. 8300, which became the Internal Revenue Code of 1954 (H. Rept. 83-1337, p. 107 (1954)), describes these changes as follows:
(2) The period of limitation for assessment is made 6 years instead of 5 in the case of the omission of 25 percent of gross income, and a similar rule is applied in the bill to the estate and gift taxes. However, under the bill this longer period is not to apply if disclosure of the nature and amount of omitted items is made on or with the tax return.
The report goes on to state as follows (id. at A414):
Several changes from existing law have been made2001 U.S. Tax Ct. LEXIS 4">*30 in subsection (e) of this section. In paragraph (1), which relates to income tax, the existing 5-year rule in the case of an omission of 25 percent of gross income has been extended to 6 years. The term gross income as used in this paragraph has been redefined to mean the total receipts from the sale of goods or services prior to diminution by the cost of such sales or services. A further change from existing law is the provision which states that any amount as to which adequate information is given on the return will not be taken into account in determining whether there has been an omission of 25 percent.
The Finance Committee report is almost identical to the Ways and Means Committee report. See S. Rept. 83-1622, pp. 143-144, 584 (1954).
In addition, in
* * * * * * *
(c) Gross Income of a Partner. -- In any case where it is necessary to determine the gross income of a partner for 2001 U.S. Tax Ct. LEXIS 4">*31 purposes of this title [i.e., title 26, the Internal Revenue Code], such amount shall include his distributive share of the gross income of the partnership.
116 T.C. 31">*44 This provision is explained as follows in the Ways and Means Committee report, H. Rept. 83-1337,
A. GENERAL RULES (SECS. 701-707)
(1) INCOME OF PARTNERS. -- Under your committee's bill, as under present law, partners will be liable individually for income tax on their distributive shares of partnership income. The bill provides that the partnership will act as a mere conduit as to income and loss items, transferring such items directly to the individual partners.
The items required to be segregated will retain their original character in the hands of the partner as though they were realized directly by him from the same source from which realized by the partnership and in the same manner. After excluding the items required to be separately treated, the remaining income or loss, which corresponds to the ordinary income or loss of the2001 U.S. Tax Ct. LEXIS 4">*32 partnership under present law, is attributed to the partners.
The computation of partnership income is generally on the same basis as existing law. The partnership is allowed the usual business deductions, but is denied the deductions peculiar to individuals.
The bill provides that all elections with respect to income derived from a partnership (other than the election to claim a credit for foreign taxes) are to be made at the partnership level and not by the individual partners. This rule recognizes the partnership as an entity for purposes of income reporting. It avoids the confusion which would occur if each partner were to determine partnership income separately for his own purposes.
(2) DISTRIBUTIVE SHARES. -- The taxation of partnership income or other items directly to the partners requires a determination of each partner's share of such items. In general, such shares will be determined in accordance with the partnership agreement as under existing practice.
The report goes on to state as follows, id. 2001 U.S. Tax Ct. LEXIS 4">*33 at A221, A222:
This provision represents no change in current law and practice. It incorporates provisions of sections 182, 183(c), 184, 186, and 189 of present law.
* * * * * * *
Subsection (c) makes clear that, whenever the gross income of a partner is to be determined, such amount shall include his distributive share of the partnership gross income. For example, a partner is required to include his distributive share of partnership gross income in determining his individual gross income for the purposes of determining the necessity of filing a return, the application of the provision permitting the spreading of income for services rendered over a 3-year period, the amount of gross income received from possessions of the United States, AND WHETHER THE EXTENDED PERIOD OF LIMITATION PROVIDED IN THE CASE OF 25-PERCENT OMISSION FROM GROSS INCOME IS APPLICABLE. [Emphasis added.]
The Finance Committee report, S. Rept. 83-1622,
In 1956, the Treasury Department promulgated regulations (
* * * * * * *
(c) Gross income of a partner. --
* * * * * * *
(2) In determining the applicability of the 6-year period of limitation on assessment and collection provided in
In providing for an extended limitations period, the Congress did not indicate why gross income, rather than adjusted gross income or any other concept, was chosen as the touchstone for the extended statute of limitations, 9 nor did the Congress provide a clue as to what is meant by "the return" for purposes of determining the amount of the denominator in the 25-percent calculation. Compare
In
In
This Court and the circuit courts of appeals have specifically held that for the purposes of applying
* * * * * * *
Petitioner's2001 U.S. Tax Ct. LEXIS 4">*39 complaint that "it does not seem equitable to deny a taxpayer the benefit of the statute of limitations merely because of a failure to duplicate the purely mechanical computation of gross sales less cost of sales to show the gross income amount which has already been fairly reported" is also without merit.
The gross income stated in petitioner's income tax return is therefore limited to the $ 5,014.60 shown therein and does not include any amounts stated in her husband's return.
In
2001 U.S. Tax Ct. LEXIS 4">*41 In
The Ventura store was not operated by a partnership. It was community property of the petitioners and the income therefrom was community income. Each of the petitioners, therefore, should have reported one-half of the gross income from the business.
In
In
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 properly includable therein which has been omitted.
We therefore conclude that respondent has failed to establish that petitioner and Richard omitted from any one of their joint Federal income tax returns for2001 U.S. Tax Ct. LEXIS 4">*48 the years 1958, 1959, and 1960 an amount of gross income properly includable therein in excess of 25 percent of the amount of gross income stated in such return and therefore respondent has failed to show that the 6-year statute is applicable.
* * * * * * *
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
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.
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 BY2001 U.S. Tax Ct. LEXIS 4">*50 THE DECIDED CASES, compare
<9> See also
[
Taking into account the taxpayers' share of the gross income shown on their partnership's information return 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. See
As we read the first sentence [of the Finance Committee report on the 1970 enactment of sec. 6013(e)] we think "the income reported" by a partner includes his share of the gross income, as defined in
<6> Respondent cites
In affirming our determination and agreeing with our analysis, the Court of Appeals took the occasion to state agreement with our comment on
116 T.C. 31">*53 2001 U.S. Tax Ct. LEXIS 4">*54 We further note that we share the tax court's opinion that the example in
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 consistently 12 drawn a line between (1) documents that have been filed as tax returns of other taxpayers, and (2) documents that, even if filed as tax returns, were not tax returns of other taxpayers. 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.,
2001 U.S. Tax Ct. LEXIS 4">*55 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 return". This approach has been applied to partnership tax returns (see, e.g.,
However, taxpayers' tax returns ordinarily do not provide any place for stating gross income. 13 See, e.g., Estate of Klein v. Commissioner, 537 F.2d at 704;
2001 U.S. Tax Ct. LEXIS 4">*57 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.,
Schedule H [more recently, Schedule E] of Form 1040, labelled "Income from Partnerships, Estates, Trusts, and 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. Schedule H speaks in terms of "[t]otal income (or loss)," the reference to losses obviously suggesting only a net (adjusted gross) rather than a gross income figure. Given that limitation upon the scope of the Form 1040, it is clear that the return neither intends nor purports to show a taxpayer's gross income2001 U.S. Tax Ct. LEXIS 4">*58 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. * * *
116 T.C. 31">*55 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 the Court of Appeals described in
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's2001 U.S. Tax Ct. LEXIS 4">*60 information return together with all its adjuncts -- among them being the 2d-tier 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 116 T.C. 31">*56 are to be taken into account in determining, for purposes of
Both sides rely on
Respondent contends as follows:
The partnership return (Form2001 U.S. Tax Ct. LEXIS 4">*62 1065) itself further supports looking only to the direct partnership return to determine gross income for
116 T.C. 31">*57 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 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 | Pacific's Stipulated | ||
(Form 1065, 1st. page) 1 | Gross Income 2 | ||
4. Ordinary income (loss) | -7,705 | Rental income (gross) | $ 13,708 |
from other partnerships | Rental income (gross) | 11,730 | |
and fiduciaries See | Rental income (gross) | 17,048 | |
See STMT#2 | Rental income (gross) | 9,024 | |
6a. Gross rents $ 63,723 | -275,383 | Rental income (gross) | 12,213 |
6b. Minus rental | Total rental income | 63,723 | |
expenses | Form 4797, line 19 | 703,950 | |
$ STMT ATTACHED | |||
6c. Rental income | Form 4797, line 1d | 246,000 | |
(loss) | |||
Total | 1,013,673 | ||
9. Net gain (loss) (Form | 34,935 | ||
4797, line 17) | |||
11. TOTAL income (loss) | -248,153 | ||
(combine lines 3 | |||
through 10) |
2001 U.S. Tax Ct. LEXIS 4">*63 As is apparent, more than 90 percent of Pacific's stipulated gross income shown on its partnership2001 U.S. Tax Ct. LEXIS 4">*64 information return is related to line 9, and not lines 1 through 7. Further, line 9 does not tell the whole story -- it shows only $ 34,935 net income from Form 4797, but the parties' stipulation shows a total of $ 949,950 gross income from Form 4797. Thus, contrary to the implications of respondent's contentions, respondent's actions in the stipulations show that it is necessary to examine more than lines 1 through 7 of Pacific's Form 1065 in order to determine Pacific's gross income. When we do that, we find that on line 4 of Pacific's Form 1065 we are told to "See STMT #2".
116 T.C. 31">*58 That statement is as follows:
STATEMENT # 2 | INC OTH PARTNERSHIPS |
TEROS-PER K-1 | -6,633 |
94-2735621 | |
INTEREST-33% | |
SECTION 743 (B) ADJ | -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' 2001 U.S. Tax Ct. LEXIS 4">*65 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
Petitioners respond as follows:
Respondent claims that following statutory mandate of Code
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 gross income stated in the 1st-tier partnerships' information returns. We note that the parties' stipulations deal with the components of the gross incomes stated on the 116 T.C. 31">*59 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
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 entered2001 U.S. Tax Ct. LEXIS 4">*68 in these cases when all the other issues are resolved. 14
1. Unless otherwise indicated, all subtitle, chapter, subchapter, and section references are to subtitles, chapters, subchapters, and sections of the Internal Revenue Code of 1954 as in effect for 1985; except that references to
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;
Unless otherwise indicated, all Rule references are to the Tax Court Rules of Practice and Procedure.↩
1. 50 percent of interest due on $ 548,186. ↩
2. 50 percent of interest due on $ 62,490. ↩
3. Cases of the following petitioners had originally 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. 15654-92; (4) Theodore S. Ockels and Rosemarie G. Ockels, docket No. 24609-92; (5) Ridge L. Harlan and Marjory C. Harlan, docket No. 21214-92; and (6) Estate of William H. Abildgaard, deceased, William Abildgaard, Jr., Executor, and Marlene Abildgaard, docket No. 15653-92. See
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.↩
5. 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.↩
6. The question of whether petitioners omitted any gross income -- whether the 1985 conversions of the Velobind stock produced gross income and, if so, then in what amounts -- has been set aside for determination at a later date.↩
7. As is the case in the Harlan's docket, even if the taxpayer does state such an amount and clearly labels it as such, that may not be the correct amount for purposes of
8.
(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 amount is disclosed in the return, or in a statement attached to the return, in a manner adequate to apprise the Secretary of the nature and amount of such item.↩
9. Note that a taxpayer's omission of gross income does not necessarily result in an adjustment to the taxpayer's taxable income. See
10. One-half of $ 30,462.96, less the $ 5,014.60 that was reported.↩
11.
It is well recognized that gross income, as earned, belongs to some taxable entity, and that a partnership is not a taxable entity. It logically follows that the partners should be considered as the owners of partnership gross income.
* * * * * * *
* * * it is held that for the purpose of
12. In
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.↩
1. Lines 1,2,3,5,7,8, and 10 do not have any entries.↩
2. The stipulation specifically excludes any gross income from Pacific's 2d-tier partnership. ↩
14. 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