[Federal Register Volume 75, Number 242 (Friday, December 17, 2010)]
[Rules and Regulations]
[Pages 78897-78900]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-31747]



[[Page 78897]]

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 301

[TD 9511]
RIN 1545-BI44


Definition of Omission From Gross Income

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains 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. The 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. Additionally, provisions related to estate, gift and excise tax 
are reinstated from the prior final regulation.

DATES: Effective Date: These regulations are effective on December 14, 
2010.
    Applicability Date: The regulations relating to income taxes apply 
to taxable years with respect to which the period for assessing tax was 
open on or after September 24, 2009, which is the date that the 
proposed and temporary regulations to which these regulations relate 
were filed with the Federal Register. For dates of applicability 
regarding the regulations relating to estate, gift and excise taxes, 
see Sec.  301.6501(e)-1(e)(2).

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

SUPPLEMENTARY INFORMATION: 

Background

    This document contains amendments to the Procedure and 
Administration Regulations (26 CFR part 301) under section 6229(c)(2) 
and section 6501(e) of the Internal Revenue Code. On September 28, 
2009, temporary regulations (TD 9466) regarding the definition of an 
omission from gross income for purposes of the six-year period for 
assessment were published in the Federal Register (74 FR 49321). A 
notice of proposed rulemaking (REG-108045-08) cross-referencing the 
temporary regulations was published in the Federal Register for the 
same day (74 FR 49354). One written comment was received from the 
public in response to the notice of proposed rulemaking. No public 
hearing was requested or held. After consideration of the comment, the 
proposed regulations are adopted as amended by this Treasury decision, 
and the corresponding temporary regulations are removed.

Summary of Comments and Explanation of Revisions

    These final regulations amend the Procedure and Administration 
Regulations (26 CFR part 301) relating to sections 6229(c)(2) and 
6501(e). In addition to the revisions set forth in the proposed 
regulations cross-referencing the temporary regulations, the final 
regulations reflect structural amendments to sections 6229(c)(2) and 
6501(e) in the Hiring Incentives To Restore Employment Act (Pub. L. 
111-147, 124 Stat. 112) to accommodate an additional threshold 
triggering the six-year period of limitations for omissions from gross 
income attributable to assets subject to certain reporting 
requirements, which is not otherwise addressed in these final 
regulations. The final regulations also clarify the effective/
applicability date provisions in the section 6229(c)(2) and section 
6501(e) regulations to eliminate a perceived ambiguity in the temporary 
regulations, that was brought to light by the Tax Court in 
Intermountain Insurance Service of Vail v. Commissioner, 134 T.C. No. 
11 (2010), appeal docketed, No. 10-1204 (DC Cir.).
    As explained in the preamble to the temporary regulations, the 
United States Courts of Appeals for the Ninth Circuit and the Federal 
Circuit construed section 6501(e)(1) in cases outside the trade-or-
business context contrary to the interpretation provided in these final 
regulations, holding that an overstatement of basis does not constitute 
an ``omission.'' 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). Those courts relied 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 under 
the predecessor of section 6501(e). The Treasury Department and the 
Internal Revenue Service disagree with those courts that the Supreme 
Court's reading of the predecessor to section 6501(e) in Colony applies 
to sections 6501(e)(1) and 6229(c)(2), for the reasons set forth in the 
preamble to the temporary regulations.
    After publication of the temporary regulations, the Tax Court 
declared the temporary regulations invalid, adhering to its prior 
opinion in Bakersfield Energy Partners v. Commissioner, 128 T.C. 207 
(2007). Intermountain Insurance Service of Vail v. Commissioner, 134 
T.C. No. 11 (2010), appeal docketed, No. 10-1204 (DC Cir.). In part, 
the Tax Court in Intermountain concluded that the Supreme Court's 
opinion in Colony was the only permissible interpretation of the 
statutory language in question (``omits from gross income''). The 
Treasury Department and the Internal Revenue Service disagree with 
Intermountain. The Supreme Court stated in Colony that the statutory 
phrase ``omits from gross income'' is ambiguous, meaning that it is 
susceptible to more than one reasonable interpretation. The 
interpretation adopted by the Supreme Court in Colony represented that 
court's interpretation of the phrase but not the only permissible 
interpretation of it. Under the authority of Nat'l Cable & Telecomms. 
Ass'n v. Brand X Internet Servs., 545 U.S. 967, 982-83 (2005), the 
Treasury Department and the Internal Revenue Service are permitted to 
adopt another reasonable interpretation of ``omits from gross income,'' 
particularly as it is used in a new statutory setting. See Hernandez-
Carrera v. Carlson, 547 F.3d 1237 (10th Cir. 2008) (agencies are free 
to promulgate a reasonable construction of an ambiguous statute that 
contradicts any court's interpretation, even the Supreme Court's). The 
interpretation of the phrase ``omits from gross income'' as used in 
section 6501(e)(1) is currently pending before several United States 
Courts of Appeals.
    Because these regulations are a clarification of the period of 
limitations provided in sections 6501(e)(1) 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, the section 61 definition of gross income applies), they are 
applicable to all cases with respect to which the period for assessing 
tax was open on or after September 24, 2009, the date the temporary 
regulations were filed with the Federal Register.

1. Retroactivity

    The sole written comment received in response to the notice of 
proposed rulemaking by cross-reference to the temporary regulations 
questioned the application of the regulations, characterizing them as 
retroactive, and

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recommended that they be applied only prospectively. The commentator 
stated that the temporary regulations apply with retroactive effect 
``in that taxable years which had closed are now reopened.'' The 
Treasury Department and the Internal Revenue Service disagree with the 
characterization of the regulations as retroactive. The final 
regulations have been clarified to emphasize that they only apply to 
open tax years, and do not reopen closed tax years as suggested by the 
commentator.
    The commentator also relied on the 1996 amendments to section 
7805(b) to argue that retroactively effective Treasury regulations are 
impermissible, with limited exceptions. The 1996 amendments to section 
7805(b), however, do not apply to the regulations under sections 
6229(c)(2) and 6501(e)(1). That is because those amendments are only 
effective for regulations that relate to statutory provisions enacted 
on or after July 30, 1996. Taxpayer Bill of Rights 2 (Pub. L. 104-168, 
section 1101(a), 110 Stat. 1469). Since section 6229(c)(2) was enacted 
in 1982 and section 6501(e)(1)(A) was enacted in 1954 (and redesignated 
as subparagraph (B) as part of the HIRE Act in 2010), the 1996 
amendments to section 7805(b) are inapplicable to the regulations. 
Prior to the 1996 amendments, section 7805(b) provided, ``The Secretary 
may prescribe the extent, if any, to which any ruling or regulation, 
relating to the internal revenue laws, shall be applied without 
retroactive effect.'' Although these regulations are not retroactive, a 
retroactive regulation interpreting sections 6229(c)(2) and 6501(e)(1) 
is expressly permitted by the applicable version of section 7805(b), 
which presumes regulations to apply retroactively unless otherwise 
provided.

2. Intermountain

    The Tax Court's majority in Intermountain erroneously interpreted 
the applicability provisions of the temporary and proposed regulations, 
which provided that the regulations applied to taxable years with 
respect to which ``the applicable period for assessing tax did not 
expire before September 24, 2009.'' The Internal Revenue Service will 
continue to adhere to the position that ``the applicable period'' of 
limitations is not the ``general'' three-year limitations period. The 
three-year limitations period is one of several limitations periods in 
the Internal Revenue Code, including the six-year limitations period 
under sections 6229(c)(2) and 6501(e)(1). The expiration of the three-
year period does not ``close'' a taxable year if a longer period 
applies. Consistent with that position, the final regulations apply to 
taxable years with respect to which the six-year period for assessing 
tax under section 6229(c)(2) or 6501(e)(1) was open on or after 
September 24, 2009. This includes, but is not limited to, all taxable 
years (1) for which six years had not elapsed from the later of the 
date that a tax return was due or actually filed, (2) that are the 
subject of any case pending before any court of competent jurisdiction 
(including the United States Tax Court and Court of Federal Claims) in 
which a decision had not become final (within the meaning of section 
7481) or (3) with respect to which the liability at issue had not 
become fixed pursuant to a closing agreement entered into under section 
7121. The Internal Revenue Service's position is consistent with the 
effective/applicability date provisions of these final regulations.

3. Other Revisions

    The final regulations are amended to reinstate estate, gift and 
excise tax provisions that were inadvertently removed by the temporary 
regulations.

Special Analyses

    It has been determined that these 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, and because these regulations do 
not impose a collection of information on small entities, the 
Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. 
Pursuant to section 7805(f) of the Internal Revenue Code, the NPRM 
cross-referencing the temporary regulations preceding these regulations 
was 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.

Adoption of 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 
an entry in numerical order to read in part as follows:

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


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


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

    (a) Partnership return--(1) General rule. (i) If any partnership 
omits from the gross income stated in its return an amount properly 
includible therein and that amount is described in clause (i) of 
section 6501(e)(1)(A), 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.
    (b) Effective/applicability date. This section applies to taxable 
years with respect to which the period for assessing tax was open on or 
after September 24, 2009.

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Sec.  301.6229(c)(2)-1T  [Removed]

0
Par. 3. Section 6229(c)(2)-1T is removed.
0
Par. 4. Section 301.6501(e)-1 is added to read as follows:


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

    (a) Income taxes--(1) General rule. (i) If a 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.
    (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)(i).
    (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) Estate and gift taxes--(1) If the taxpayer omits from the gross 
estate as stated in the estate tax return, or from the total amount of 
the gifts made during the period for which the gift tax return was 
filed (see Sec.  25.6019-1 of this chapter) as stated in the gift tax 
return, an item or items properly includible therein the amount of 
which is in excess of 25 percent of the gross estate as stated in the 
estate tax return, or 25 percent of the total amount of the gifts as 
stated in the gift tax return, the tax may be assessed, or a proceeding 
in court for the collection thereof may be begun without assessment, at 
any time within 6 years after the estate tax or gift tax return, as 
applicable, was filed.
    (2) For purposes of this paragraph (b), an item disclosed in the 
return or in any schedule or statement attached to the return in a 
manner sufficient to apprise the Commissioner of the nature and amount 
thereof shall not be taken into account in determining items omitted 
from the gross estate or total gifts, as the case may be. Further, 
there shall not be taken into account in computing the 25 percent 
omission from the gross estate stated in the estate tax return or from 
the total gifts stated in the gift tax return, any increases in the 
valuation of assets disclosed on the return.
    (c) Excise taxes--(1) In general. If the taxpayer omits from a 
return of a tax imposed under a provision of subtitle D an amount 
properly includible thereon, which amount is in excess of 25 percent of 
the amount of tax reported thereon, the tax may be assessed or a 
proceeding in court for the collection thereof may be begun without 
assessment, at any time within 6 years after the return was filed. For 
special rules relating to chapter 41, 42, 43 and 44 taxes, see 
paragraphs (c)(2), (3), (4), and (5) of this section.
    (2) Chapter 41 excise taxes. If an organization discloses an 
expenditure in its return (or in a schedule or statement attached 
thereto) in a manner sufficient to apprise the Commissioner of the 
existence and nature of the expenditure, the three-year limitation on 
assessment and collection described in section 6501(a) shall apply with 
respect to any tax under chapter 41 arising from the expenditure. If a 
taxpayer fails to so disclose an expenditure in its return (or in a 
schedule or statement attached thereto), the tax arising from the 
expenditure not so disclosed may be assessed, or a proceeding in court 
for the collection of the tax may be begun without assessment, at any 
time within 6 years after the return was filed.
    (3) Chapter 42 excise taxes. (i) If a private foundation omits from 
its annual return with respect to the tax imposed by section 4940 an 
amount of tax properly includible therein that is in excess of 25 
percent of the amount of tax imposed by section 4940 that is reported 
on the return, the tax may be assessed, or a proceeding in court for 
the collection of the tax may be begun without assessment, at any time 
within 6 years after the return was filed. If a private foundation 
discloses in its return (or in a schedule or statement attached 
thereto) the nature, source, and amount of any income giving rise to 
any omitted tax, the tax arising from the income shall be counted as 
reported on the return in computing whether the foundation has omitted 
more than 25 percent of the tax reported on its return.
    (ii) If a private foundation, trust, or other organization (as the 
case may be) discloses an item in its return (or in a schedule or 
statement attached thereto) in a manner sufficient to apprise the 
Commissioner of the existence and nature of the item, the three-year 
limitation on assessment and collection described in section 6501(a) 
shall apply with respect to any tax imposed under sections 4941(a), 
4942(a), 4943(a), 4944(a), 4945(a), 4951(a), 4952(a), 4953 and 4958, 
arising from any transaction disclosed by the item. If a private 
foundation, trust, or other organization (as the case may be) fails to 
so disclose an item in its return (or in a schedule or statement 
attached thereto), the tax arising from any transaction not so 
disclosed may be assessed or a proceeding in court for the collection 
of the tax may be begun without assessment, at any time within 6 years 
after the return was filed.
    (4) Chapter 43 excise taxes. If a taxpayer discloses an item in its 
return (or in a schedule or statement attached thereto) in a manner 
sufficient to apprise the Commissioner of the existence and nature of 
the item, the three-year limitation on assessment and collection 
described in section 6501(a) shall apply with respect to any tax 
imposed under sections 4971(a), 4972, 4973, 4974 and 4975(a), arising 
from any transaction disclosed by the item. If a taxpayer fails to so 
disclose an item in its return (or in a schedule or statement attached 
thereto), the tax arising from any transaction not so disclosed may be 
assessed, or a proceeding in court for the collection of the tax may be 
begun without assessment, at any time within 6 years after the return 
was filed. The applicable return for the tax under sections 4971, 4972, 
4973 and 4974, is the return designated by the Commissioner for 
reporting the respective tax. The applicable return for the tax under 
section 4975 is the return filed by the plan used to report the act 
giving rise to the tax.
    (5) Chapter 44 excise taxes. If a real estate investment trust 
omits from its annual return with respect to the tax imposed by section 
4981 an amount of tax properly includible therein that is in excess of 
25 percent of the amount of tax imposed by section 4981 that is 
reported on the return, the tax may be assessed, or a proceeding in 
court for

[[Page 78900]]

the collection of the tax may be begun without assessment, at any time 
within 6 years after the return was filed. If a real estate investment 
trust discloses in its return (or in a schedule or statement attached 
thereto) the nature, source, and amount of any income giving rise to 
any omitted tax, the tax arising from the income shall be counted as 
reported on the return in computing whether the trust has omitted more 
than 25 percent of the tax reported on its return.
    (d) Exception. The provisions of this section do not limit the 
application of section 6501(c).
    (e) Effective/applicability date--(1) Income taxes. Paragraph (a) 
of this section applies to taxable years with respect to which the 
period for assessing tax was open on or after September 24, 2009.
    (2) Estate, gift and excise taxes. Paragraphs (b) through (d) of 
this section continue to apply as they did prior to being removed 
inadvertently on September 28, 2009. Specifically, paragraph (b) of 
this section applies to returns filed on or after May 2, 1956, except 
for the amendment to paragraph (b)(1) of this section that applies to 
returns filed on or after December 29, 1972. Paragraph (c) of this 
section applies to returns filed on or after October 7, 1982, except 
for the amendment to paragraph (c)(3)(ii) of this section that applies 
to returns filed on or after January 10, 2001. Paragraph (d) of this 
section applies to returns filed on or after May 2, 1956.


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

0
Par. 5. Section 301.6501(e)-1T is removed.

Steven T. Miller,
Deputy Commissioner for Services and Enforcement.

    Approved: December 13, 2010.
Michael Mundaca,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2010-31747 Filed 12-14-10; 4:15 pm]
BILLING CODE 4830-01-P