CCA 1118020: An amended return does not prevent the six-year assessment period for a substantial income omission

Plain-English summary

Chief Counsel considered a taxpayer who omitted more than 25 percent of gross income from a timely filed return and later filed an amended return reporting additional income. The advice concluded that the amended return did not prevent the six-year assessment period under IRC § 6501(e) from applying. The original return controls whether the omission exceeds the 25 percent threshold, and the later filing does not make the omission an adequate disclosure for this purpose. The memorandum also advised the Service to act within the ordinary three-year period when possible.

Ruling snapshot

• Question: Does an amended return reporting omitted income prevent the six-year assessment period from applying to the original return?
• Outcome: Advice given.
• Key authorities: IRC §§ 6501(a), 6501(e)(1)(A), 6501(e)(1)(B), and 6501(c)(1); Houston v. Commissioner, 38 T.C. 486 (1962); Chin v. Commissioner, T.C. Memo. 1994-54; Badaracco v. Commissioner, 464 U.S. 386 (1984).

Full text (IRS public release)

ID: CCA_2011040615084544 Number: 201118020
Release Date: 5/6/2011
Office: ----------------------------
UILC: 6501.07-00

From: ---------------------
Sent: Wednesday, April 06, 2011 3:08:58 PM
To: -----------------
Cc: ------------------
Subject: RE: The question we talked about

Section 6501(a) provides that an assessment of tax must be made within 3 years after
the return was filed.

Section 6501(e)(1)(A) provides that if a taxpayer omits from gross income an amount
properly includible and that omission is in excess of 25 percent of the amount of gross
income stated in the tax return, the tax may be assessed, or a proceeding in court for the
collection of such tax may begin without assessment, at any time within 6 years
after the return was filed.

For purposes of a trade or business, section 6501(e)(1)(B) specifies that gross income
is the “total amounts received or accrued from the sale of goods or services (if such
amounts are required to be shown on the return) prior to the diminution by the costs of
such sales or services.” Under section 6501(e)(1)(B), an amount is not considered to
be omitted from gross income, however, if the amount is disclosed on the return in a
manner adequate to apprise the IRS of the nature and amount of the item.

In your case, the taxpayer omitted over 25% of gross income on a timely filed original
tax return. Subsequently, but within the three year period under section 6501(a), the
taxpayer filed an amended return showing additional gross income. Your question is
whether the amended return reporting the additional income is a disclosure of income
that would prevent the amount omitted on the original from being considered to be
“omitted” for purposes of applying the six-year period under section 6501(e).

The filing of an amended return showing additional income will not operate to preclude
the application of section 6501(e). The original return governs for purposes of
determining whether the taxpayer has omitted from gross income an amount that is over
25% of the amount stated on the return. Houston v. Commissioner, 38 T.C. 486 (1962)
(amended return’s inclusion of salary omitted on original return did not prevent section
275(c) of the 1939 Code (predecessor to section 6501(e)) from applying); Chin v.
Commissioner T.C. Memo. 1994-54 (“…we ignore the amended return when applying
section 6501(e)”). Further, the Supreme Court in Badaracco v. Commissioner, 464 U.S.
386, 395-96 (1984) held that the filing of an amended return subsequent to a taxpayer’s

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filing of a fraudulent return does not affect the unlimited limitations period under section
6501(c)(1). In reaching it’s decision that the taxpayer could not use an amended return
to prevent the application of section 6501(c)(1), the Court recognized that a taxpayer
who non-fraudulently omits 25% of gross income “cannot benefit by filing an amended
return; instead he must live with the six-year period specified in § 6501(e)(1)(A).” The
Court concluded that Congress did not intend for taxpayers who file fraudulent returns
to be better off than taxpayers who understand their income without fraud. This
analysis is consistent with our conclusion that the amended return showing additional
gross income is not a disclosure of income that would prevent section 6501(e) from
applying when there has been a substantial omission with respect to the original return.

We note that the Service should act within the three-year period of section 6501(a)
whenever possible. To the extent that additional tax may be assessed and/or notices of
deficiencies issued in your case within the three-year period, the Service should take
that action even if it is determined that section 6501(e) applies.