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Omissions From Gross Income and ‘Numerators and Denominators’

Patrick J. Smith
Tax Notes

As expected after the questioning during oral arguments, the D.C. Circuit’s recent Intermountain decision followed the Seventh Circuit’s Beard decision in basing its holding on the special rule defining gross income as gross receipts for sales of goods or services in a trade or business for purposes of the 25 percent omission from gross income test for extending the statute of limitations for assessments of tax. The D.C. Circuit, like the Seventh Circuit, concluded that the presence of this special rule in the current statute, and its absence from the statute at issue in the Supreme Court’s 1958 Colony decision, means that Colony is not controlling on whether an overstatement of basis resulting in an understatement of gross income is an omission under the 25 percent omission test.

Like the Seventh Circuit, the D.C. Circuit was mistaken in relying on this special gross receipts rule as the basis for concluding that Colony is no longer controlling, because the effects of Colony and the special gross receipts rule are similar only in the first step of the multi-step omission from gross income test — namely, in determining whether there has been an omission. In the later steps of the test, Colony and the special gross receipts rule are not at all similar, and these later steps cannot properly be dismissed, as by the Seventh Circuit, as mere ‘‘numerators and denominators.’’ 

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