Jake, an individual calendar year taxpayer, incurred the following transactions. Assuming that any error in timely reporting these amounts was inadvertent, how much omission from gross income would be required before the six-year statute of limitations would apply?

Question

Jake, an individual calendar year taxpayer, incurred the following transactions.  Assuming that any error in timely reporting these amounts was inadvertent, how much omission from gross income would be required before the six-year statute of limitations would apply?

Quizplus · Accepted Answer

The six-year statute of limitations only applies in cases where gross income is understated by more than 25%. Here, based on the transactions provided, the total gross income is $300,000. Therefore, an omission from gross income of more than 25% of this amount, which is $75,000, would trigger the six-year statute of limitations.

From the given transactions, only option C involves an amount that exceeds this threshold:

- Jake sold stock for $125,000, realizing a gain of $75,000 that was not reported on his tax return. If this amount was omitted from gross income, the total gross income would be $375,000, and the omission from gross income would be $75,000, which exceeds the 25% threshold. Therefore, the six-year statute of limitations would apply in this case.

Therefore, the correct answer is C.

Jake, an Individual Calendar Year Taxpayer, Incurred the Following Transactions