G. Douglas Barkett & Rita M. Barkett v. Commissioner , 143 T.C. 149 ( 2014 )

G. DOUGLAS BARKETT AND RITA M. BARKETT, PETITIONERS v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
Docket No. 28223–12. Filed August 28, 2014.
R issued a notice of deficiency concerning Ps’ Federal
income tax for taxable years 2006 to 2009. R sent the notice
more than three years but less than six years after Ps filed
their 2006 and 2007 returns. Ps argue under I.R.C. sec.
6501(a) that the notice is invalid as it relates to 2006 and
2007 because R sent it more than three years after they filed
their returns for those years. R contends that the six-year
limitations period under I.R.C. sec. 6501(e) applies because
Ps’ omitted gross income exceeded 25% of the gross income
they stated in their returns. On their 2006 and 2007 returns
Ps reported amounts realized from the sale of investments of
more than $7 million and $4 million, respectively, and total
gains from such sales of approximately $123,000 and
$314,000, respectively. Ps argue that the amounts they
realized, not their gains, should be included in ‘‘gross income
they stated in their return’’ for purposes of I.R.C. sec. 6501(e).
R contends that only their gains should be included. Our reso-
lution of this dispute will determine the appropriate limita-
tions period. We have held in other cases that gross income
includes only a taxpayer’s gains from the sale of investment
property, not the taxpayer’s entire amounts realized from
such sales. Ps argue that those cases are inconsistent with the
Supreme Court’s recent decision in United States v. Home
149
150 143 UNITED STATES TAX COURT REPORTS (149)
Concrete & Supply, LLC, 566 U.S. ll, ll, 132 S. Ct. 1836,
1842 (2012). We must decide whether the Home Concrete deci-
sion affects our prior cases. Held: The Home Concrete decision
does not affect our prior cases holding that ‘‘gross income’’
includes only gains from the sale of investments, not amounts
realized from such sales. Held, further, the gross income Ps
omitted from their 2006 and 2007 returns exceeds 25% of the
gross income they stated in those returns, and therefore the
six-year limitations period applies.
Ernest S. Ryder, Richard V. Vermazen, and Lauren A.
Rinsky, for petitioners.
Mistala M. Cullen and Monica D. Polo, for respondent.
OPINION
GOEKE, Judge: This matter is before us on petitioners’
motion for partial summary judgment under Rule 121(a). 1
Respondent issued a notice of deficiency concerning peti-
tioners’ Federal income tax for the taxable years 2006 to
2009. Petitioners contend that the notice is invalid as it
relates to 2006 and 2007 because respondent did not send it
within the three-year limitations period provided by section
6501(a). Respondent argues that a six-year limitations period
applies under section 6501(e) because petitioners omitted
from their returns gross income exceeding 25% of the gross
income they reported. We must determine the appropriate
limitations period; we hold that a six-year limitations period
applies.
Background
Petitioners resided in California when they filed their peti-
tion.
Petitioners filed their 2006 and 2007 Forms 1040, U.S.
Individual Income Tax Return, on September 17, 2007, and
October 2, 2008, respectively. Respondent sent petitioners a
notice of deficiency on September 26, 2012, determining
income tax deficiencies for taxable years 2006 to 2009.
In the notice of deficiency, respondent alleged that peti-
tioners had omitted from their 2006 and 2007 returns gross
1 Unless otherwise indicated, all section references are to the Internal
Revenue Code in effect for the years at issue, and all Rule references are
to the Tax Court Rules of Practice and Procedure.
(149) BARKETT v. COMMISSIONER 151
income of $629,850 and $431,957, respectively. 2 On those
returns petitioners reported gross income totaling $271,440
and $340,591, respectively, excluding their shares of the
passthrough entity activity we describe below.
During the years at issue petitioners were 80.04% partners
in Barkett Family Partners, a limited partnership. They
were also 100% shareholders of Unicorn Investments, Inc.,
an S corporation. These entities reported extensive invest-
ment activity on their 2006 and 2007 returns. Combined,
they reported capital gains from the sale of investments of
approximately $123,000 for 2006 and $314,000 for 2007. 3
They reported amounts realized from the sale of investments
of more than $7 million for 2006 and more than $4 million
for 2007. 4 On their 2006 and 2007 returns petitioners
reported their shares of the entities’ gains and losses. For
simplicity’s sake, we will refer to the investment activities as
if petitioners had engaged in them directly, i.e., not via the
passthrough entities.
Discussion
I. Summary Judgment
Summary judgment is intended to expedite litigation and
avoid unnecessary and expensive trials. Fla. Peach Corp. v.
Commissioner, 90 T.C. 678, 681 (1988). The Court may grant
summary judgment when there is no genuine dispute of
material fact and a decision may be rendered as a matter of
law. Rule 121(a) and (b); Sundstrand Corp. v. Commissioner,
98 T.C. 518, 520 (1992), aff ’d, 17 F.3d 965 (7th Cir. 1994).
The moving party bears the burden of proving that there is
no genuine dispute of material fact, and the Court will draw
any factual inferences in the light most favorable to the non-
moving party. Dahlstrom v. Commissioner, 85 T.C. 812, 821
(1985).
2 These omissions are unrelated to the investment activities we discuss
below. Respondent determined that petitioners omitted compensation they
received for dental services they provided to Barkett Dental Corporation,
a C corporation they wholly owned.
3 Respondent concedes that these amounts represent gross income peti-
tioners stated in their return.
4 These amounts include proceeds petitioners reported from sales that
generated losses.
152 143 UNITED STATES TAX COURT REPORTS (149)
II. Limitations Periods
Under the general rule set forth in section 6501(a), the
Internal Revenue Service (IRS) must assess tax or send a
notice of deficiency within three years after a return is filed.
The limitations period extends to six years under section
6501(e)(1) ‘‘[i]f the taxpayer omits from gross income an
amount properly includible therein and * * * such amount is
in excess of 25 percent of the amount of gross income stated
in the return’’.
Respondent issued the notice of deficiency here more than
three years but less than six years after petitioners filed
their 2006 and 2007 returns. Thus, the notice is timely with
respect to those returns only if the six-year limitations period
applies.
III. Analysis
To determine the appropriate limitations period, we must
divide the amount of gross income petitioners omitted from
their return by the amount of gross income they stated in
their return. If the omitted amount is more than 25% of the
included amount, the six-year limitations period applies. The
parties agree that for the purpose of this calculation, the
omitted amounts are $629,850 and $431,957 for taxable
years 2006 and 2007, respectively. They disagree over the
amounts of gross income petitioners stated in their returns.
Petitioners argue that the gross income they stated in their
returns should include the amounts realized they reported
from the sale of investment assets; respondent argues that it
should include only the gain they reported from those sales,
i.e., amounts realized less bases of assets sold.
We have considered this issue before and have held that
‘‘capital gains, and not the gross proceeds, 5 are to be treated
as the ‘amount of gross income stated in the return’ for pur-
poses of section 6501(e).’’ Insulglass Corp. v. Commissioner,
84 T.C. 203, 203 (1985); see also Schneider v. Commissioner,
T.C. Memo. 1985–139. We decided those cases on the basis
of section 61(a), which defines gross income as ‘‘all income
5 Gross proceeds in these cases referred to the amounts the taxpayers re-
alized and reported on their returns.
(149) BARKETT v. COMMISSIONER 153
from whatever source derived’’, including ‘‘[g]ains derived
from dealings in property’’. (Emphasis added.)
In 2010 the Secretary promulgated section 301.6501(e)–1,
Proced. & Admin. Regs., which provides instructions con-
sistent with our jurisprudence. T.D. 9511, 2011–6 I.R.B. 455.
The regulation also explains how to determine whether gross
income has been omitted from a taxpayer’s return. The
Supreme Court addressed the validity of the regulation in
United States v. Home Concrete & Supply, LLC, 566 U.S.
ll, ll, 132 S. Ct. 1836, 1842 (2012), and determined that
the portion concerning omitted gross income was invalid.
Petitioners argue that the Home Concrete decision also
invalidated the regulation’s instructions concerning the cal-
culation of gross income and consequently our cases on the
matter. For the reasons we discuss below, we disagree.
To fully explain the import of the Home Concrete decision,
we must first discuss the Supreme Court’s decision in
Colony, Inc. v. Commissioner, 357 U.S. 28 (1958). In Colony
the taxpayer had overstated its basis in property it had sold
and had consequently underreported its gain on the sale. The
Commissioner argued that the underreported gain con-
stituted ‘‘omitted gross income’’ for the purpose of deter-
mining whether the extended limitations period applied. The
Court disagreed, citing the limitations statute’s legislative
history. The Court determined that in enacting the statute,
Congress intended to give the Commissioner additional time
to review a taxpayer’s return when the taxpayer had
reported no information about a given transaction. In such
cases, the Court said, the Commissioner is particularly dis-
advantaged because the return does not alert him to sus-
picious activity requiring further investigation. When an
understatement results from misreported information, rather
than a complete omission, the IRS is at no such disadvan-
tage, and the understatement should not contribute to trig-
gering the limitations period extension.
As we noted above, in 2010 the Secretary promulgated sec-
tion 301.6501(e)–1, Proced. & Admin. Regs., which explained
when gross income should be considered omitted for the pur-
pose of triggering the extended limitations period. The regu-
lation provides that when taxpayers understate their income
from a property sale because they overstated their basis in
the property, the amount of the understatement shall be
154 143 UNITED STATES TAX COURT REPORTS (149)
considered omitted income. Sec. 301.6501(e)–1(a)(1)(iii),
Proced. & Admin. Regs. The regulation’s guidance directly
conflicts with Colony, which held that such an understate-
ment is not omitted gross income.
The Court resolved the conflict between the regulation and
the Colony holding in Home Concrete. There the taxpayer
had overstated its basis in a partnership it had sold and had
consequently underreported its gain on the sale. The
Commissioner again argued, this time under the regulation,
that the underreported gain constituted ‘‘omitted gross
income’’. The Court held, after an administrative law discus-
sion we will omit here, that the regulation was invalid
because it conflicted with the Colony holding. The Court fol-
lowed its Colony analysis and held that the underreported
gain was not omitted gross income and that it did not belong
in the numerator of the statute of limitations calculation.
The Home Concrete holding addressed only when gross
income is to be considered omitted. It did not address how to
calculate gross income. 6
Petitioners attempt to use the Home Concrete decision to
support their position that ‘‘gross income’’ includes amounts
realized from the sale of investment property without a cor-
responding basis adjustment. They state their argument as
follows:
Only when * * * [amounts realized7] are left out of the computation of
gross income are they omitted for purposes of the six-year statute of
limitations of section 6501(e)(1)(A). If * * * [amounts realized] are not
left out of the computation of gross income, they are not omitted; when
they are not omitted, they are included; when they are included, they
are stated in the return; when they are stated in the return, they are
included in the denominator of the 25% percent omitted calculation of
section 6501(e)(1)(A).
We see nothing wrong with petitioners’ logic, but it proves
only that ‘‘gross income stated in the return’’ includes
amounts realized stated in the return. That point is undis-
6 In dictum, the Court did note that ‘‘the Code itself define[s] ‘gross in-
come’ in this context as the difference between gross revenue (often the
amount the taxpayer received upon selling the property) and basis (often
the amount the taxpayer paid for the property).’’ United States v. Home
Concrete & Supply, LLC, 566 U.S. ll, ll, 132 S. Ct. 1836, 1840 (2012).
7 Petitioners use the term ‘‘gross receipts’’, but we believe petitioners
mean ‘‘amounts realized’’ and will evaluate their argument accordingly.
(149) BARKETT v. COMMISSIONER 155
puted; one component of gain is amount realized, 8 and
respondent concedes that ‘‘gross income stated in the return’’
includes reported gains from the sale of investment property.
The disputed issue, which petitioners’ argument does not
address, is whether ‘‘gross income stated in the return’’
includes only the excess of the amount realized over the
bases of the assets sold. We have consistently held that it
does, and the Home Concrete decision does not disturb our
precedents on the matter.
Our Court’s history with the issue the Supreme Court
faced in Home Concrete and Colony demonstrates the dif-
ference between that issue and the one we face in this case.
As we mentioned earlier, we have previously resolved the
issue petitioners raise here. In Insulglass and Schneider, we
determined that gross income includes gains from the sale of
investment assets, not simply the amounts realized from
such sales. Since we decided those cases, we have addressed
the issue the Supreme Court decided in Home Concrete and
Colony at least twice. See Intermountain Ins. Serv. of Vail,
LLC v. Commissioner, 134 T.C. 211 (2010), rev’d, 650 F.3d
691 (D.C. Cir. 2011); Bakersfield Energy Partners, LP v.
Commissioner, 128 T.C. 207 (2007), aff ’d, 568 F.3d 767 (9th
Cir. 2009). In Bakersfield, which we decided before the Sec-
retary promulgated section 301.6501(e)–1, Proced. & Admin.
Regs., we held consistently with Colony. In Intermountain,
which we decided after the Secretary promulgated the regu-
lation but before the Supreme Court decided Home Concrete,
we determined that the regulation was invalid and again
held consistently with Colony. We did not discuss Insulglass
or Schneider in either of those cases, because they did not
address the same issue. Insulglass and Schneider addressed
how to calculate gross income (the issue we face here).
Bakersfield and Intermountain addressed when gross income
is omitted from the return (the issue the Supreme Court
faced in Home Concrete and Colony).
Although the Home Concrete holding does not affect the
issue in this case, we find support for our conclusion in
dictum. In addressing one of the Commissioner’s arguments,
8 Sec. 1001 provides that ‘‘[t]he gain from the sale or disposition of prop-
erty shall be the excess of the amount realized therefrom over the adjusted
basis’’.
156 143 UNITED STATES TAX COURT REPORTS (149)
the Court explained how to calculate income under the gen-
eral statutory definition of ‘‘gross income’’:
the general statutory definition of ‘‘gross income’’ requires subtracting
the cost from the sales price. Under such a definition of ‘‘gross income,’’
the calculation would take (1) total revenue from sales, $40,000, minus
(2) ‘‘the cost of such sales,’’ say, $25,000. The $10,000 of revenue would
thus amount to 67% of the ‘‘gross income’’ of $15,000. * * * [Home Con-
crete & Supply, LLC, 566 U.S. at ll, 132 S. Ct. at 1842.]
Our holding is consistent with this example.
An exception to the general statutory definition appears in
section 6501(e)(1)(B)(i), which provides that ‘‘[i]n 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 * * * prior to diminution by the cost of such sales
or services. The Court demonstrated the operation of this
exception with the following example: ‘‘a merchant who fails
to include $10,000 of revenue from sold goods has not met
the 25% test if total revenue is more than $40,000, regard-
less of the cost paid by the merchant to acquire those goods.’’
Id.
Petitioners essentially argue that we should calculate their
gross income under this exception rather than under the gen-
eral statutory definition of gross income. But they have not
argued that the amounts realized at issue here resulted from
sales of goods or services. They concede that they sold invest-
ment assets. Accordingly, the exception does not apply, and
we calculate the gross income petitioners stated in their
return under the general statutory definition of gross income.
IV. Conclusion
The Home Concrete decision invalidated a portion of a
regulation that coincidentally included instructions for calcu-
lating gross income from the sale of investment assets. The
decision treated favorably, however, the regulation’s instruc-
tions for calculating gross income stated in the return, which
are consistent with our caselaw. Accordingly, we see no rea-
son to stray from our precedents; we hold that ‘‘gross income’’
includes gains from the sale of investment assets, not the
entire amounts realized from such sales. Under this rule,
petitioners’ omitted gross income for 2006 and 2007 exceeds
25% of the gross income they stated in their returns for those
(149) BARKETT v. COMMISSIONER 157
years. Therefore, the six-year limitations period applies to
those years and respondent’s notice of deficiency is timely
with respect to them.
In reaching our holdings herein, we have considered all
arguments the parties made, and, to the extent not men-
tioned above, we conclude they are moot, irrelevant, or with-
out merit.
To reflect the foregoing,
An appropriate order will be issued
denying petitioners’ motion for partial sum-
mary judgment.
f