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TAX NEWS - 2010

IRS Tax: Gross income is not reduced by returns and allowances for purposes of computing substantial omission

On June 11, 2010, Internal Revenue Service (IRS) Office of Chief Counsel issued CCA 201023053, addressing the definition of "gross income" for purposes of the substantial omission rules for statute of limitations on assessments and whether it is computed before or after returns and allowances. The Office of Chief Counsel concluded that in a case involving a trade or business, amounts received or accrued should not be reduced by returns and allowances when calculating gross income for purposes of the extended period of limitations under IRC Section 6501(e)(1)(A)(i).

Statute of limitations on assessment

In general, under IRC Section 6501(a), the IRS has three years from the later of: (1) the date on which the return is filed; or
(2) the unextended due date of the return to assess tax. However, there is an extension to the assessment period if the taxpayer substantially omits items from gross income.

Extended statute of limitations on assessment in cases of substantial omission

IRC Section 6501(e)(1)(A) sets forth the general rule for substantial omission of items from gross income. It provides that "[i]f the taxpayer omits from gross income an amount properly includible therein," and the amount is "in excess of 25 percent of the amount of gross income stated in the return," tax may be assessed or a court proceeding to collect the tax can advance without assessment "at any time within 6 years after the return [is] filed."

Definition of "gross income" for purposes of the substantial omission rules

IRC Section 6501(e)(1)(A)(i) addresses the determination of gross income in the case of a trade or business, including setting forth a separate definition of "gross income." It provides:

In 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 (if such amounts are required to be shown on the return) prior to diminution by the cost of such sales or services.

In its analysis, the Office of Chief Counsel acknowledged that some code provisions and regulations require returns and allowances be subtracted from gross receipts, and that others do not. However, because IRC Section 6501(e)(1)(A)(i) creates its own definition for gross income, the general definition found in other statutes, regulations, and cases does not apply.


Under a plain reading of the statute, it was concluded that gross income is the amount reported on the business return as gross receipts and sales. As such, for purposes of IRC Section 6501(e)(1)(A)(i), gross income is gross receipts and sales without reduction by returns or allowances.
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