## Facts

- Stephen and Susan Colestock filed a joint federal income tax return for 1984 and later filed a timely amended return in October 1985.
- In 1991, the Commissioner issued a notice of deficiency for 1984 asserting the Colestocks omitted gain from corporate transactions in an amount exceeding 25% of gross income stated in the return.
- The Commissioner relied on the six-year limitations period for substantial omissions of gross income under I.R.C. § 6501(e)(1)(A), because the notice issued more than three years after the return was filed.
- During the Tax Court proceeding, the Commissioner obtained leave to amend the answer to assert an increased deficiency by disallowing a depreciation deduction claimed for 1984.
- The depreciation adjustment, viewed alone, did not constitute a substantial omission of gross income sufficient to trigger § 6501(e)(1)(A).
- The Colestocks moved for partial summary judgment, arguing the general three-year period in § 6501(a) barred the Commissioner from asserting the new depreciation-based deficiency.

## Issues

1. When the six-year limitations period in I.R.C. § 6501(e)(1)(A) is triggered by a substantial omission from gross income, may the Commissioner assess additional deficiencies for the same year that are unrelated to the omitted-income item (e.g., disallowed depreciation), even if those items would otherwise be time-barred under § 6501(a)?

## Decision

- The Tax Court denied the Colestocks’ motion for partial summary judgment.
- The court held that once § 6501(e)(1)(A) is triggered, the six-year period applies to the taxpayer’s entire tax liability for that year.
- Because the extended period applied to 1984, the Commissioner could assert the increased deficiency based on disallowed depreciation even though the depreciation issue was not itself a substantial omission from gross income.

## Legal Principles

- Under I.R.C. § 6501(a), tax generally must be assessed within three years after the return is filed, subject to statutory exceptions.
- Under I.R.C. § 6501(e)(1)(A), if a taxpayer omits from gross income more than 25% of the gross income stated in the return, the tax may be assessed within six years after the return is filed.
- When § 6501(e)(1)(A) applies, the extended six-year period permits assessment and recomputation of the entire tax liability for the year, not only adjustments directly tied to the omitted gross income.
- Statutory interpretation of limitations provisions may consider text, structure, and purpose; a substantial omission justifies a broader examination of the year’s return within the extended period.

## Conclusion

The Tax Court held that a substantial omission of gross income that triggers § 6501(e)(1)(A) opens the full tax year to assessment within six years, allowing the Commissioner to assert additional, unrelated adjustments such as disallowance of depreciation that would otherwise be barred by the three-year limitations period.


Colestock v. Comm’r, 102 T.C. 380 (1994)