CCA 200922035: Separately stated S corporation losses did not offset income in the omission test

Plain-English summary

Chief Counsel addressed whether a sole S corporation shareholder had omitted enough income from Form 1040 to meet the 25-percent gross-income test for an extended assessment period. The email distinguished that shareholder-level omission from the rule for omitted business gross receipts. It instructed the examiner to determine which corporate items were netted before passing through and which were stated separately. Separately stated deductions and losses were not to offset the S corporation income and gains when applying the gross-income test. Because the corporation had filed no return and issued no Schedule K-1 for the year, those amounts first had to be established.

Ruling snapshot

• Question: How should an S corporation shareholder's omitted pass-through income be measured for the 25-percent test?
• Outcome: Advice given: determine the pass-through items first and do not offset income with separately stated deductions or losses.
• Key authorities: IRC § 6501(e)(1)(A)(i); Gmelin v. Commissioner, T.C. Memo. 1988-338.

Full text (IRS public release)

ID: CCA_2009042415001407 Number: 200922035
Release Date: 5/29/2009
Office: --------------
UILC: 6501.04-14

From: ------------------
Sent: Friday, April 24, 2009 3:02:55 PM
To: ----------------------
Cc:
Subject: RE: S corporation and 25% omission on individual's 1040

Section 6501(e)(1)(A)(i) addresses the omission of gross income by a trade or business. The subsection states that only an omission of gross receipts would qualify as an omission of gross income as it relates to a trade or business. An overstatement of the cost basis in computing gain from the sale of goods in a trade or business would otherwise create an omission of gross income for the business but because of section 6501(e)(1)(A)(i) this would not be enough to extend the period of limitations. This subsection does not apply to the current case. The current case involves an individual taxpayer who omitted income from his Form 1040. The gross income omitted was his share (100% because he was the sole shareholder) of the S corporation income. To determine the extent of this omission the taxpayer’s share of income from the corporation must be determined (See Form 1065 or Schedule K-1). -----should be consulted to determine which items are netted prior to flowing through and what items flow through separately. Any separately stated deductions or losses from the Schedule K-1 are not used to offset the income and gain from the S corporation prior to determining if the 25% gross income test is met, as the test is applied against gross income. See Gmelin v. Commissioner, T.C. Memo. 1988-338. Because the S corporation did not file a return for the year in question and did not issue it’s shareholder a Schedule K-1 these amounts must first be determined before the 25% gross income test is applied. Please let me know if you have any additional questions.