GROSS INCOME STATED IN RETURN INCLUDES 2ND-TIER PARTNERSHIP INFORMATION RETURN INFO.

                       UNITED STATES TAX COURT

[1] CHABOT, JUDGE: This matter is before us for determination as to whether, in applying the 6-year period of limitations (sec. 6501(e)(1)(A)) /1/, when a petitioner's tax return reflects income from a partnership (hereinafter sometimes referred to as the 1st- tier partnership) that is itself a partner in another partnership (hereinafter sometimes referred to as the 2d-tier partnership), the statutory phrase "gross income stated in the return" (the denominator in the 25-percent test) requires a tracing of the flow of gross income from not only the 1st-tier partnership's information return but also from the 2d-tier partnership's information return in order to determine petitioners' appropriate distributive share of partnership gross income from the 1st-tier partnership's tax return. ²

[2] Respondent determined deficiencies in individual income tax and additions to tax under sections 6653(a) (negligence, etc.) and 6661 (substantial understatement) against (1) petitioners Ridge L. Harlan (hereinafter sometimes referred to as Ridge) and Marjory C. Harlan (hereinafter sometimes referred to as Marjory) (Ridge and Marjory are hereinafter sometimes referred to collectively as the Harlans) and (2) petitioners Theodore S. Ockels (hereinafter sometimes referred to as Theodore) and Rosemarie G. Ockels (Theodore and Rosemarie G. Ockels are hereinafter sometimes referred to collectively as the Ockels) for 1985 as follows:

                                          Additions to Tax

[4] The 2d-tier partnership issue has been submitted fully stipulated; the stipulations and the stipulated exhibits are incorporated herein by this reference.

BACKGROUND

[5] When the respective petitions in the instant cases were filed, the Harlans resided in Hillsborough, California, and the Ockels resided in Lafayette, California.

A. THE HARLANS

[6] The Harlans filed their joint 1985 tax return on or about August 12, 1986. On June 26, 1992, respondent issued a notice of deficiency to the Harlans for 1985.

[7] The 3-year period of limitations for assessment of tax under section 6501(a) with respect to the Harlans for 1985 expired before the notice of deficiency was mailed. The Harlans did not execute any extensions of the period of limitations on assessment with respect to 1985.

[8] The Harlans' 1985 tax return has attached to the Form 1040, the following: Schedules A, B, C, D, E, and SE; Forms 3468, 3800, 4136, 4797, 4868, 6251, 1116, 2210, 4562, 4835, 4952; 27 numbered "statements"; and a Treasury Department Form TD F 90-22.1.

[9] The Harlans' 1985 tax return shows an ordinary loss of $56,069 from several partnerships, identified by name, address, and employer identification number. The record includes 1985 partnership information returns, or parts of those returns, from each of the identified partnerships, as well as stipulations as to the Harlans' shares of the partnerships' gross incomes, determined without regard to the 2d-tier partnership gross incomes.

[10] During 1985, Ridge was a partner in three single-tier partnerships, and Marjorie was a partner in one single-tier partnership.

[11] During 1985, Ridge was a partner in two multiple tier partnerships: (1) Pacific Real Estate Investors Partnership (hereinafter sometimes referred to as Pacific) and (2) Carlyle Real Estate Limited Partnership-VI (hereinafter sometimes referred to as Carlyle).

[12] Pacific was a partner in at least one other partnership. Pacific's 1985 information return shows an ordinary loss of $7,705 from another partnership, identified by name and employer identification number. The record does not include information as to the amount of the gross income stated on this 2d-tier partnership's 1985 information return.

[13] Carlyle was a partner in several other partnerships. Carlyle's 1985 information return shows ordinary income of $674,791.81 from four other partnerships, each identified by name and employer identification number. The record does not include information as to the amounts of Carlyle's shares of the gross incomes stated on these 2d-tier partnerships' 1985 information returns.

[14] On one of the schedules attached to their 1985 tax return, the Harlans show their gross income as $1,216,099. This schedule is for purposes of Form 1116, part I, line 2.d.(v), and is an element of the formula used in the computation of their foreign tax credit. Nevertheless, the parties have stipulated that the gross income for purposes of section 6501(e) that is "reflected on the Harlan's 1985 Form 1040 and on the first-tier partnership returns of the partnerships in which Ridge or Marjory Harlan owned a direct interest", i.e., excluding "the flow of gross income from" the 2d- tier partnerships, is $1,410,077.

B. THE OCKELS

[15] The Ockels filed their 1985 joint tax return on October 15, 1986. On August 11, 1992, respondent issued a notice of deficiency to the Ockels for 1985.

[16] The 3-year period of limitations for assessment of tax under section 6501(a) with respect to the Ockels for 1985 expired before the notice of deficiency was mailed. The Ockels did not execute any extensions of the period of limitations on assessment with respect to 1985.

[17] The Ockels' 1985 tax return has, attached to the Form 1040, the following: Schedules A, B, C, D, E, and SE; Forms 2688, 3468, 4797, 6198, 6251, 4684, 8283, 4255, 4562, 4868, 4952, 8082, 6248; and numerous schedules, attachments, and other documents.

[18] The Ockels' 1985 tax return shows net income of $7,900 from several partnerships and one independent oil producer, identified by name and employer identification number. The record includes 1985 partnership information returns, or parts of those returns, from each of the identified partnerships, and a 1985 windfall profit tax information return (Form 6248) from the oil producer, as well as stipulations as to Theodore's shares of the partnerships' gross incomes, and the oil producer's gross sales price, determined without regard to the 2d-tier partnerships' gross incomes.

[19] During 1985, Theodore was a partner in nine single-tier partnerships.

[20] During 1985, Theodore was a partner in one multiple tier partnership, Mission Resources Development Drilling Program -- Belridge II (hereinafter sometimes referred to as Mission Resources). Mission Resources was a partner in at least one other partnership. Mission Resources' 1985 information return shows ordinary income of $286,137 from another partnership, identified by name but not otherwise. The record does not include information as to the amount of the gross income stated on this 2d-tier partnership's 1985 information return.

[21] The Ockels do not claim a foreign tax credit on their 1985 tax return, and so do not have any equivalent of the Harlans' above- noted schedule. The parties have stipulated that the gross income for purposes of section 6501(e) that is "reflected on the Ockels' 1985 Form 1040 and on the first-tier partnership return [sic] of the partnerships in which the Ockels owned a direct interest", i.e., excluding "the flow of gross income from" the 2d-tier partnerships, is $407,819. This total includes Theodore's share of the gross receipts of the independent oil producer.

C. THE VELOBIND STOCK

[22] At the start of 1985, Ridge owned 80,000 shares of junior common stock in VeloBind that he had bought in 1983 for $3 per share. In 1985, Theodore owned 7,500 shares of junior common stock in VeloBind that he had bought in 1983 for $3 per share. In Steiner v. Commissioner, T.C. Memo. 1995-122, we determined that these shares converted to VeloBind common stock in 1985. The VeloBind common stock traded at $17 per share on February 12, 1985.

[23] In the respective notices of deficiency, respondent determined that the Harlans ⁴ and the Ockels ⁵ received 1985 income from the stock conversion.

DISCUSSION

I. THE PARTIES' CONTENTIONS; SUMMARY OF COURT'S CONCLUSION

[24] Petitioners have properly raised in their petitions the affirmative defense of the statute of limitations for 1985. See Rule 39.

[25] The parties have stipulated that the 3-year period of limitations (sec. 6501(a)) expired for both the Harlans and the Ockels before respondent issued the respective notices of deficiency.

[26] Respondent contends that the instant cases fall within an exception to the 3-year rule -- the 6-year statute of limitations set forth in section 6501(e)(1)(A) -- because each set of petitioners has omitted from gross income more than "25 percent of the amount of gross income stated in the return" for that set of petitioners.

[27] Petitioners contend that the income that respondent contends was omitted from their 1985 tax returns ⁶ is less than 25 percent of the amounts of gross income stated in their respective tax returns because (1) their tax returns are treated as having set forth their shares of the gross incomes set forth on the information returns of their 1st-tier partnerships and (2) the information returns of their 1st-tier partnerships should be treated as setting forth their 1st-tier partnerships' respective shares of the gross incomes set forth on the information returns of their 2d-tier partnerships.

[28] Respondent argues that the 2d-tier partnerships' information returns are to be ignored because (1) "The plain language of the Code and the regulations" require consideration of only petitioners' tax returns and not the partnerships' information returns, (2) the regulations' concept of setting forth on a tax return applies only to what is set forth on petitioners' tax returns, and (3) a contrary interpretation "would impose an excessive administrative burden on the Service and on taxpayers."

[29] Petitioners maintain that section 702(c) and the regulations plainly require that whenever it is necessary to determine the amount of a partner's gross income, that amount is to include the partner's distributive share of the partnership's gross income. As applied to the instant cases, in order to determine the amount of petitioners' gross income from the 1st-tier partnerships, there must first be determined the amount of each 1st-tier partnership's gross income. Section 702(c)'s rule then applies, petitioners contend, so that in order to determine the amount of any 1st-tier partnership's gross income, there must first be determined the amount of each 2d-tier partnership's gross income. Petitioners maintain that this rule is consistent with the "look-through" approaches of other subchapter K provisions (e.g., in secs. 1.704- 3(a)(8), 1.704-2(k), and 1.752-4, Income Tax Regs.), and provisions outside subchapter K, such as sections 108(a)(1)(C) and 904(d).

[30] Under section 6501(e)(1)(A), the denominator of the 25- percent fraction is "the amount of gross income stated in the return". But the taxpayer ordinarily does not state the amount of gross income anywhere on the tax return. ⁷ As a result, we must look through the various forms, etc., attached to the taxpayer's basic tax return form in order to identify the components of gross income that must be added together in order to determine the total amount of gross income stated in the taxpayer's tax return. It has long been accepted that, for these purposes, the information return of the taxpayer's properly identified 1st-tier partnership is treated as part of the taxpayer's tax return. But the 1st-tier partnership's information return suffers from the same "defect" in that we must look through the various forms, etc., attached to the 1st-tier partnership's information return in order to identify the components of gross income that must be added together in order to determine the total amount of gross income stated in the 1st-tier partnership's information return. Every explanation that has been drawn to our attention, or that we have discovered, as to why we must treat the properly identified 1st-tier partnership's information return as part of the taxpayer's tax return applies with equal force to treating the properly identified 2d-tier partnership's information return as part of the 1st-tier partnership's information return.

[31] Accordingly, we agree with petitioners' conclusion.

II. OVERVIEW

[32] In general, section 6501(a) ⁸ bars assessment of an income tax deficiency more than 3 years after the later of the date the tax return was filed or the due date of the tax return. The parties stipulated that the 3-year general period of limitations on assessment under section 6501(a) expired for petitioners' 1985 tax year before the respective notices of deficiency were sent. Respondent has the burden of proving the applicability of an exception to the general limitations period. See Rule 142; Reis v. Commissioner, 142 F.2d 900 (6th Cir. 1944), affg. 1 T.C. 9, 12 (1942), as modified by a Memorandum Opinion of this Court dated June 4, 1943. In particular, as respondent acknowledges, in order for the 6-year period of limitations under section 6501(e) to apply, respondent must show that the taxpayer has omitted an amount of gross income which is more than 25 percent of the amount of gross income stated in the tax return. See Davenport v. Commissioner, 48 T.C. 921, 928 (1967) (taxpayers' tax returns showed net losses from a partnership; 6-year statute of limitations did not apply because the Commissioner "has not shown whether a partnership return was filed for those years and if so the gross income reported thereon"); Hurley v. Commissioner, 22 T.C. 1256, 1264-1265 (1954), affd. 233 F.2d 177 (6th Cir. 1956) (using net worth method, Commissioner showed omission of net income; held, Commissioner failed to carry burden of proving how much of this omission was due to omission of gross income); Seltzer v. Commissioner, 21 T.C. 398, 402-403 (1953) (Commissioner failed to prove taxpayer's basis in a sold capital asset, and so "has not sustained his burden of proof to show" that taxpayer omitted gross income which was more than 25 percent of the gross income stated in her tax return); see also Colestock v. Commissioner, 102 T.C. 380, 383, 390-391 (1994); Estate of Fry v. Commissioner, 88 T.C. 1020, 1023 n.8 (1987); Stratton v. Commissioner, 54 T.C. 255, 289 (1970), and cases there cited; Philipp Bros. Chemicals, Inc. v. Commissioner, 52 T.C. 240, 254-255 (1969), affd. 435 F.2d 53 (2d Cir. 1970); Rhombar Co. v. Commissioner, 47 T.C. 75, 85 (1966), affd. 386 F.2d 510 (2d Cir. 1967); Bardwell v. Commissioner, 38 T.C. 84, 92 (1962), affd. on another issue 318 F.2d 786 (10th Cir. 1963); Green v. Commissioner, 7 T.C. 263, 277 (1946), affd. 168 F.2d 994 (6th Cir. 1948).

[33] The test for the extended limitations period under section 6501(e) may be expressed as a fraction. The numerator is the amount of properly includable gross income that was omitted from a taxpayer's return, and the denominator is "the amount of gross income stated in the return". Sec. 6501(e)(1)(A). If the fraction exceeds 25 percent, then the 6-year limitations period under section 6501(e) applies. In the instant cases, the parties' dispute focuses on the denominator.

[34] Two aspects of this dispute make it clear that more is involved than meets the eye, as follows:

[35] FIRSTLY, although the statutory language is "the amount of gross income stated in the return" (emphasis added), both sides agree that, where the taxpayer is a partner in a 1st-tier partnership, the language is treated as including amounts that do not appear anywhere on the only document that has been filed as the taxpayer's tax return.

[36] SECONDLY, although the potential for the parties' dispute herein has existed since the 1934 enactment of the predecessor of section 6501(e)(1)(A), both sides agree that this is a matter of first impression.

[37] In light of the foregoing, we start our analysis with matters that are not in dispute between the parties, in order better to understand the context in which the disputed matters operate.

III. EVOLUTION OF THE STATUTE

[38] Section 250(d) of the Revenue Act of 1918 (Pub. L. 65-254, 40 Stat. 1057, 1083) provided a general 5-year statute of limitations, but no limit in the case of fraud.

[39] Section 250(d) of the Revenue Act of 1921 (Pub. L. 67-98, 42 Stat. 227, 265) reduced the general period of limitations to 4 years.

[40] The Revenue Act of 1924 (Pub. L. 68-176, 43 Stat. 253, 299) kept the 4-year general statute of limitations, as section 277(a)(1); it provided that there was no limit in the case of fraud or failure to file a tax return, as section 278(a).

[41] Section 277(a)(1) of the Revenue Act of 1926 (Pub. L. 69- 20, 44 Stat. 9, 58, 59) reduced the general period of limitations to 3 years; the 1926 Act left unchanged the fraud and failure-to-file rule.

[42] Section 275(a) of the Revenue Act of 1928 (Pub. L. 70-562, 45 Stat. 791, 856, 857) reduced the general statute of limitations to 2 years; section 276(a) of the 1928 Act left unchanged the fraud and failure-to-file rule. Both of these rules remained unchanged by the Revenue Act of 1932. Pub. L. 72-154, 47 Stat. 169, 237, 238.

[43] In what became the Revenue Act of 1934 (Pub. L. 73-216, 48 Stat. 680), the House Bill provided (1) that the general statute of limitations be lengthened to 3 years and (2) that the fraud and failure-to-file rule be expanded to apply also to substantial understatements of gross income. The Ways and Means Committee report (H. Rept. 73-704, pp. 34, 35 (1934), 1939-1 C.B. (Part 2) 554, 580) explains these changes as follows:

          Section 275. Period for assessment and collection. The

          SECTION 275. PERIOD FOR ASSESSMENT AND COLLECTION

[46] In conference, the House receded and the Senate amendments were agreed to. See H. Rept. (Conference Report) 73-1385, at 25 (1934), 1939-1 C.B. (Part 2) 627, 634. None of the referenced committee reports explains the intended meaning of the phrase "the amount of gross income stated in the return". Also, we have not found in the hearings or the floor debates any discussion of the meaning of that phrase. See Estate of Klein v. Commissioner, 63 T.C. 585, 594 (1975), affd. 537 F.2d 701 (2d Cir. 1976).

[47] The language of section 275(c) continued unchanged in the later revenue acts and through the Internal Revenue Code of 1939.

[48] Section 275(c), I.R.C. 1939, became section 6501(e)(1)(A), I.R.C. 1954, with three modifications, as follows:

          (1) the 5-year limitations period of former law was changed

          (2) The period of limitation for assessment is made 6 years

[51] In addition, in section 702(c) (no corresponding provision in prior law) the Congress provided as follows:

     SEC. 702. INCOME AND CREDITS OF PARTNER.

     A. GENERAL RULES (SECS. 701-707)

[53] In 1956, the Treasury Department promulgated regulations (T.D. 6175, 1956-1 C.B. 211, 214-216) dealing with the extended limitations period, as follows:

     Sec. 1.702-1. Income and credits of partner. --

IV. EVOLUTION OF THE CASELAW

[55] In Masterson v. Commissioner, 1 T.C. 315 (1942), revd. on another issue 141 F.2d 391 (5th Cir. 1944), the taxpayer had filed two 1935 income tax returns on the same day, one for herself and the other signed by her "individually, and as independent executrix of the Estate of" her late husband. See id. at 322-323. Each of these tax returns referred to the other. See id. at 323. The Commissioner determined that the taxpayer should have reported on her individual tax return the corrected net income of the estate. See id. at 323. The notice of deficiency was issued more than 3 years, but less than 5 years, after the due date of the taxpayer's tax return. We held that the two tax returns would not be treated together as "the return" within the meaning of section 275(c) of the Revenue Act of 1934. See id. at 324. We said that the statute would not be construed to permit such combining because (1) the tax returns were of different taxpayers and (2) the estate's income tax return was of a different type of taxpayer and it might be that the "facts necessary to a correct determination of the tax due would not appear from two returns of the type before us here". See id. The Circuit Court of Appeals reversed because the panel's majority concluded that the Commissioner's adjustment was incorrect; the Circuit Court of Appeals did not indicate any disagreement with our statute of limitations analysis.

[56] In Ratto v. Commissioner, 20 T.C. 785 (1953), the taxpayer and her husband were California residents, operated a liquor business owned by them in community, and filed separate 1946 tax returns. See id. at 786. The taxpayer's husband reported the liquor business operations on his Schedule C, on which he showed "gross profit" of $30,462.96 and "net profit" of $10,029.19. He then "computed his income tax on one-half of this amount [the net profit] with the explanation '1/2 Community Income Reported By Wife,' and which he listed as a deduction." Id. The taxpayer reported on her Schedule E $5,014.60 as "1/2 community income." See id. at 786. Apparently, she did not show on her tax return any other information about the liquor business. The Commissioner determined that the taxpayer omitted $10,216.88 gross profits from the liquor business, ¹⁰ together with about $3,600 of other small items. See id. at 787. The notice of deficiency was sent more than 3 years, but less than 5 years, after the taxpayer filed her 1946 tax return. We held that the taxpayer's husband's tax return was separate from the taxpayer's tax return. We concluded as follows (id. at 789-790):

     This Court and the circuit courts of appeals have specifically

[58] In Rose v. Commissioner, supra, the taxpayer-husband (H) owned and operated a retail store as a sole proprietorship in Ventura, California, and another retail store as a partnership with his brother in Santa Barbara, California. See id. at 757. H's interests in the Ventura store and the Santa Barbara partnership constituted community property. See id. at 758-759, 768. H and W filed separate tax returns for 1943. See id. at 757. The Santa Barbara partnership filed a partnership information return for 1943. See id. at 758, 768. The Ventura store filed a partnership information return for 1943, at the suggestion of a revenue agent, in order to facilitate the reporting of H's and W's community income derived from that store. See id. at 758-759, 769. If H and W were treated as having stated in their tax returns their shares of the gross income of the Ventura store, then the denominators of their section 275(c) fractions were more than four times the gross income that the Commissioner determined H and W omitted, the regular 3-year statute of limitations applied, and the notices of deficiency for 1943 were untimely. See Rose v. Commissioner, 24 T.C. at 760, 766- 770. We analyzed the situation as follows (id. at 768-769):

          The Ventura store was not operated by a partnership. It was

[60] In Davenport v. Commissioner, 48 T.C. 921 (1967), the taxpayers' 1958, 1959, and 1960 tax returns reported losses from a specified partnership. See id. at 924-925. The taxpayer-wife contended that assessment of any deficiencies for these 3 years was barred by the statute of limitations; the Commissioner contended that the 6-year limitations period applied. See id. at 927-928. We held that the Commissioner failed to carry the burden of proving an omission of more than 25 percent of the gross incomes stated in the taxpayers' tax returns, as follows (id. at 928, 929):

          To satisfy his burden in proving the omission, respondent

     the only way "the amount of gross income stated in the return"

Taking into account the taxpayers' share of the gross income shown on their partnership's information return as having been shown on the taxpayers' tax return, we held that the gross income omitted from the taxpayers' tax return was less than 25 percent of the gross income stated on the taxpayers' tax return. See Estate of Klein v. Commissioner, 63 T.C. at 588. We concluded from this that the taxpayer-wife failed to qualify for relief from joint liability under the law then in effect. See id. at 589. Although we ruled for the Commissioner based on the language of sections 6013 and 6501, we commented as follows on the Commissioner's argument under section 702(c) (Estate of Klein v. Commissioner, 63 T.C. at 591 & n.6):

     As we read the first sentence [of the Finance Committee report

     We further note that we share the tax court's opinion that the

[65] On the other hand, the second category -- documents that were not filed as tax returns of other taxpayers -- have been treated as adjuncts to and part of the taxpayers' tax returns for purposes of determining "the amount of gross income stated in the return". This approach has been applied to partnership tax returns (see, e.g., Davenport v. Commissioner, supra), S corporation tax returns (see, e.g., Roschuni v. Commissioner, supra), and other documents which are not tax returns of taxpayers, see, e.g., Rose v. Commissioner, supra.

V. ANALYSIS

[66] Section 6501(e) and its predecessors require omitted gross income to be compared to gross income stated in the return. In Green v. Commissioner, 7 T.C. 263, 277 (1946), affd. 168 F.2d 994 (6th Cir. 1948), we concluded that "'Gross income' has a well established meaning in the revenue laws, denoting statutory gross income as defined by section 22 [of the Revenue Act of 1938, predecessor of present sec. 61]." In enacting the Internal Revenue Code of 1954, the Congress added clause (i) to section 6501(e)(1)(A) to modify the definition of gross income in the case of trades or businesses. Except for that modification, "the general definition of gross income found in the Code applies." Northern Ind. Pub. Serv. Co. & Subs. v. Commissioner, 101 T.C. 294, 299 n.7 (1993).

[67] However, taxpayers' tax returns ordinarily do not provide any place for stating gross income. ¹³ See, e.g., Estate of Klein v. Commissioner, 537 F.2d at 704; Davis v. Hightower, 230 F.2d 549, 552, 553 (5th Cir. 1956). We have held that "total income", as used in the Form 1040 is not the equivalent of "gross income" for purposes of the extended statute of limitations. See Green v. Commissioner, 7 T.C. at 276-277. As a result, we have dealt with the taxpayers' tax returns by determining whether one or another item was properly an item of gross income within the appropriate contemporary statutory definition of gross income.

[68] As noted, supra, when the taxpayers' tax returns stated taxable income from partnerships or S corporations, we declared that the information returns of these pass-through entities would be treated as adjuncts to, and part of, the taxpayers' tax returns. See, e.g., Davenport v. Commissioner, supra (partnership), Roschuni v. Commissioner, supra (S corp.). Indeed, the Court of Appeals for the Second Circuit described the process thusly in Estate of Klein v. Commissioner, 537 F.2d at 704:

     Schedule H [more recently, Schedule E] of Form 1040, labelled

[70] If the 1st-tier partnership's information return discloses net income or loss from a 2d-tier partnership, then the same analysis requires us to consider the 2d-tier partnership's information return as merely another document that is an adjunct to, and part of, the taxpayer partner's tax return. That is, to paraphrase the Court of Appeals for the Second Circuit (see Estate of Klein v. Commissioner, 537 F.2d at 704), gross income is not "stated in the return" of a taxpayer partner who reports net partnership income from a 1st-tier partnership which in turn reports net partnership income from a 2d- tier partnership unless one looks at the 1st-tier partnership's information return together with all its adjuncts -- among them being the 2d-tier partnership's information return -- as being part of the taxpayer partner's tax return.

[71] Thus, we conclude that petitioners are correct in their contention that 2d-tier partnerships' information returns are to be taken into account in determining, for purposes of section 6501(e)(1)(A), the amount of gross income stated in the taxpayer's tax return.

VI. OTHER CONSIDERATIONS

[72] Both sides rely on section 702(c) and section 1.702- 1(c)(2), Income Tax Regs. Respondent asserts that "The plain language of the Code and the regulations requires" consideration of only the 1st-tier partnerships' information returns. Petitioners assert that "Therefore, under this explicit statutory rule [sec. 702(c)], * * * respondent must necessarily" take account of the 2d-tier partnerships' gross income. The short answer is that the texts of both section 702(c) and section 1.702-1(c)(2), Income Tax Regs., are silent on the matter of 2d-tier partnerships. The little legislative history we have found regarding section 702(c) also is silent on this matter. We have not found any indication that the Congress was aware of the question when it considered and crafted section 702(c), or that the Treasury Department was aware of the question when it issued the regulation. Indeed, it may be argued that the statutory language ("determine the gross income of a partner") may apply to the numerator of the 25-percent fraction of section 6501(e)(1)(A) ("omits from gross income an amount properly includible therein") but not to the denominator -- "amount of gross income stated in the return" (emphasis added). See also the comments of this Court and the Court of Appeals of the Second Circuit in Estate of Klein v. Commissioner, 63 T.C. at 591 n.6, affd. 537 F.2d at 705 n.9, pointing out that "gross income" within the meaning of section 702(c) differs from "gross income" within the meaning of section 6501(e)(1)(A). Thus, notwithstanding both sides' reliance, we conclude that neither section 702(c) nor section 1.702-1(c)(2), Income Tax Regs., leads us to a resolution of the 2d-tier partnership matter, especially in the context of the denominator of the 25-percent fraction.

[73] Respondent contends as follows:

          The partnership return (Form 1065) itself further supports

                              TABLE 1

[76] That statement is as follows:

      STATEMENT # 2 -                         INC OTH PARTNERSHIPS

[77] We conclude that (1) respondent's contentions are contrary to the parties' stipulations and (2) the parties' stipulations are consistent with the Court's analysis. That is, (a) the 1st-tier partnership's information return is treated as an adjunct to, and a part of, the taxpayer's tax return, (b) the 2d-tier partnership's information return is treated as an adjunct to, and a part of, the 1st-tier partnership's tax return, and (c) in determining the amount of gross income stated in the taxpayer's tax return, neither the Court nor the parties are limited to what is stated on the first page of the tax return.

[78] Respondent's brief closes as follows:

          Finally, respondent's interpretation of Section 6501(e)

[81] In addition, the Supreme Court's opinion in Colony, Inc. v. Commissioner, 357 U.S. at 36-37, suggests that respondent is not obligated to audit or otherwise examine beyond what is disclosed on the tax return, for purposes of applying the amount of the denominator in the 25-percent fraction. Clearly, it is now accepted that respondent must deal with the 1st-tier partnerships' information returns. This was established before 1958, when the Supreme Court ruled in Colony, Inc. We have no reason to believe that the standards for respondent's work on the 1st-tier partnerships' information returns were intended to be any different from those applicable to the taxpayers' tax returns. Given that these obligations exist as to the 1st-tier partnerships' information returns, we do not see any principled basis for concluding that the 2d-tier partnerships' information returns require so heightened a level of examination or audit, that our analysis of the law ought to be affected by that heightened level. Respondent's brief, almost afterthought, speculation is far short of a cogent argument that principled distinction can be drawn between 1st-tier partnerships' information returns and all 2d-tier partnerships' information returns.

[82] We do not change our analysis on account of respondent's warning.

[83] Our holding in this opinion will be incorporated into the decision to be entered in these cases when all the other issues are resolved. ¹⁴

² On brief, petitioners state that this is a jurisdictional issue. However, the instant cases are deficiency cases; thus, the statute of limitations is an affirmative defense and not a jurisdictional issue. See sec. 7459(e); Rule 39; Davenport Recycling Associates v. Commissioner, 220 F.3d 1255, 1259-1260 (11th Cir. 2000), affg. T.C. Memo. 1998-347 (in deficiency cases, assertion of the bar of the statute of limitations is an affirmative defense, not a jurisdictional question); Columbia Building, Ltd. v. Commissioner, 98 T.C. 607, 611 (1992) (same); compare Commissioner v. Lundy, 516 U.S. 235 (1996) (in refund cases in the Tax Court, the statute of limitations is a jurisdictional question).

Unless otherwise indicated, all Rule references are to the Tax Court Rules of Practice and Procedure.

³ Cases of the following petitioners had originally been consolidated: (1) Alan B. Steiner and Barbara W. Steiner, docket No. 28182-92; (2) Estate of James Beaton, deceased, Shirley Beaton, Executrix, and Shirley Beaton, docket No. 28181-92; (3) James F. Ottinger and Bonnie J. Ottinger, docket No. 15654-92; (4) Theodore S. Ockels and Rosemarie G. Ockels, docket No. 24609-92; (5) Ridge L. Harlan and Marjory C. Harlan, docket No. 21214-92; and (6) Estate of William H. Abildgaard, deceased, William Abildgaard, Jr., Executor, and Marlene Abildgaard, docket No. 15653-92. See Steiner v. Commissioner, T.C. Memo. 1995-122. The Beaton, docket No. 28181-92, and Steiner, docket No. 28182-92, cases were severed from the group and were disposed of on another issue. See Beaton v. Commissioner, T.C. Memo. 1997-140.

⁴ In the notice of deficiency, respondent determined that the Harlans' income from the VeloBind stock conversion was $1,275,200. However, in respondent's answer and on brief, respondent asserts the correct income amount was $1,120,000.

⁵ In the notice of deficiency, respondent determined that the Ockels' income from the VeloBind stock conversion was $119,550. However, in respondent's answer and on brief, respondent asserts the correct income amount was $105,000.

⁶ The question of whether petitioners omitted any gross income -- whether the 1985 conversions of the Velobind stock produced gross income and, if so, then in what amounts -- has been set aside for determination at a later date.

⁷ As is the case in the Harlan's docket, even if the taxpayer does state such an amount and clearly labels it as such, that may not be the correct amount for purposes of sec. 6501(e)(1)(A), even if it is the correct amount for other purposes.

⁸ Sec. 6501 provides, in pertinent part, as follows:

SEC. 6501. LIMITATIONS ON ASSESSMENT AND COLLECTION.

          (a) General Rule. -- Except as otherwise provided in this

¹⁰ One-half of $30,462.96, less the $5,014.60 that was reported.

¹¹ Rev. Rul. 55-415, 1955-1 C.B. 412, although issued after the enactment of the Internal Revenue Code of 1954, is the Commissioner's interpretation of section 275(c) of the Internal Revenue Code of 1939. The ruling states, in pertinent part, as follows (1955-1 C.B. at 413):

     It is well recognized that gross income, as earned, belongs to

¹³ See supra our findings with regard to the Harlans' 1985 tax return. Note that the parties have stipulated that the Harlans' gross income stated on their tax return ($1,410,077) is almost $200,000 more than the amount that the Harlans' tax return labeled as gross income ($1,216,099), even without taking account of flow of gross income from the 2d-tier partnerships.

¹⁴ The parties' stipulations and stipulated exhibits are not treated as exhausting the record as to the subject matter of the instant opinion. In further proceedings, the parties will be free to provide such additional evidence on this subject matter as is not inconsistent with our holdings and is otherwise admissible. See also Reis v. Commissioner, 142 F.2d 900, 902, 903 (6th Cir. 1944), affg. 1 T.C. 9 (1942), as modified by a Memorandum Opinion of this Court dated June 4, 1943.