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the amount of income stated in the return (i.e.
$8,038,677) by 205 percent.
Respondent argues:
Overstating deductions is not considered an
omission of gross income for purposes of I.R.C. secs.
6229(c)(2) and 6501(e)(1)(A). However, overstating the
basis resulting in underreporting net I.R.C. sec. 1231
gain is not considered overstating deductions. Rather,
the underreporting (or omitting) of I.R.C. sec. 1231
gain is the omission of gross income regardless of
whether the gross sales price is underreported (or
omitted) or the basis is overstated. The relevant
issue is not whether an income item was completely
omitted from the return, but whether, for purposes of
I.R.C. secs. 6229(c)(2) and 6501(e)(1)(A), gross income
is omitted when a taxpayer underreports the gain from
the sale of property used in a trade or business as the
result of overstating the cost or other basis of such
property. [Emphasis added.]
Respondent relies on cases defining “gross income” for general
purposes of section 6501(e) by reference to section 61.
Respondent cites section 6501(e)(1)(A)(i), which defines gross
income in the context of sale of goods or services, and argues:
Any uncertainty in analyzing the sales of business
property under I.R.C. sec. 6501(e)(1)(A) results only
from trying to apply statements in Colony, Inc. v.
Commissioner, 357 U.S. 28 (1958), concerning the
extended period for omissions in the I.R.C. of 1939 to
the revised provision of the I.R.C., and from taking
statements about equating gross receipts with gross
income in the case of a trade or business out of
context. * * *
Respondent continues:
In Colony, Inc., the taxpayer understated the gross
profits on the sales of certain lots of land for
residential purposes as a result of having overstated
the basis of such lots by erroneously including in
their cost certain unallowable items of development
expense. Colony, Inc., 357 U.S. at 30. Respondent
acknowledges that Colony, Inc. suggests that an
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