nue 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).

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.

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 corporation). 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 "Income from Partnerships, Estates, Trusts, and Other Sources," provides only one line for reporting partnership income together with the name and address of the partnership from which that income was derived. Schedule H speaks in terms of "[t]otal income (or loss)," the reference to losses obviously suggesting only a net (adjusted gross) rather than a gross income figure. Given that limitation upon the scope of the Form 1040, it is clear that the return neither intends nor purports to show a taxpayer's gross income when that taxpayer has partnership income. Indeed, gross income is not "stated in the return" in the case of such a taxpayer unless one looks at the partnership return as being a part of the personal income tax return.

***

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 second-tier partnerships.

When we take the partnership's information return into consideration as part of the partner's tax return, we find the same limitations in the former document that the Court of Appeals described in Estate of Klein v. Commissioner, supra, as to the latter document. That is, the 1985 partnership information returns for Pacific and Carlyle (Ridge's first-tier partnerships) and for Mission Resources (Theodore's first-tier partnership) do not provide for a showing of "gross income". There is a line for "total income (loss) (combine lines 3 through 10)”, (Form 1065, p. 1, 1. 11), but it is evident that several of the components of total income are themselves net amounts. In those instances, recourse must be had to other forms, schedules, statements, and other documents attached to the first-tier partnership's information return in order to determine the amount of gross income stated on the partnership's information return, which in turn is necessary in order to determine the amount of the taxpayer partner's gross income stated in the taxpayer's tax return. There does not appear to be any dispute that these other forms, schedules, statements, and other documents of the first-tier partnership's information return are treated collectively as adjuncts to, and part of, the taxpayer partner's tax return for purposes of determining the amount of gross income stated on the taxpayer partner's tax return, even though they are not attached to the taxpayer partner's tax return.

If the first-tier partnership's information return discloses net income or loss from a second-tier partnership, then the same analysis requires us to consider the second-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 first-tier partnership which in turn reports net partnership income from a second-tier partnership unless one looks at the first-tier partnership's information return together with all its adjuncts-among them being the second-tier partnership's information return-as being part of the taxpayer partner's tax return.

Thus, we conclude that petitioners are correct in their contention that second-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

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 first-tier partnerships' information returns. Petitioners assert that "Therefore, under this explicit statutory rule [sec. 702(c)], * * * respondent must necessarily" take account of the second-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 second-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 for 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 second-tier partnership matter, especially in the context of the denominator of the 25-percent fraction. Respondent contends as follows:

The partnership return (Form 1065) itself further supports looking only to the direct partnership return to determine gross income for section 6501(e) purposes. The total gross income of the partnership is the sum of the amounts on lines 1 through 7 with the exception of the I.R.C. § 6501(e)(1)(A)(i) exclusion for cost of goods sold. * * *

These contentions do not support respondent's position. The sum of the items on lines 1 through 7 frequently is not "The total gross income of the [first-tier] partnership." Firstly, an element of gross income may appear on another line, after line 7. Secondly, several of the items on lines 1 through 7 are net amounts, and the underlying gross income may have to be determined by inspection of other parts of the partnership information return, Form 1065. This may be illustrated in the instant cases by comparing lines 1 through 11 of the stipulated 1985 Pacific partnership information return with the parties' stipulation as to Pacific's gross income.

1 Lines 1,2,3,5,7,8, and 10 do not have any entries.

2 The stipulation specifically excludes any gross income from Pacific's second-tier partnership.

As is apparent, more than 90 percent of Pacific's stipulated gross income shown on its partnership information return is related to line 9, and not lines 1 through 7. Further, line 9 does not tell the whole story-it shows only $34,935 net income from Form 4797, but the parties' stipulation shows a total of $949,950 gross income from Form 4797. Thus, contrary to the implications of respondent's contentions, respondent's actions in the stipulations show that it is necessary to examine more than lines 1 through 7 of Pacific's Form 1065 in order to determine Pacific's gross income. When we do that, we find that on line 4 of Pacific's Form 1065 we are told to "See STMT #2".

TOTAL STATEMENT # 2-TO FORM 1065, LINE 4

-1,072

-7,705

The record does not include information about the gross income stated in the information return of Pacific's secondtier partnership.

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 firsttier partnership's information return is treated as an adjunct to, and a part of, the taxpayer's tax return, (b) the secondtier partnership's information return is treated as an adjunct to, and a part of, the first-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. Respondent's brief closes as follows:

Finally, respondent's interpretation of Section 6501(e) yields a sensible, administrable result. Looking through to the lower tiers might require an audit of each of those partnerships. This would impose an excessive administrative burden both on the Service and on taxpayers.

Petitioners respond as follows:

Respondent claims that following statutory mandate of Code section 702(c) would cause an "excessive administrative burden" on the IRS and taxpayers. Incredibly, respondent states that adopting a "look-through" rule to lower-tier partnerships "might require an audit of each of those partnerships." In this case, respondent was able to make computations of gross income of the Upper-Tier Partnerships without an audit. There is no reason to suggest an audit of the Lower-Tier Partnerships would be required.

The record in the instant cases thus far does not disclose either the magnitude of the problem respondent warns against or the extent of respondent's activities with regard to the gross income stated in the first-tier partnerships' information returns. We note that the parties' stipulations deal with the components of the gross incomes stated on the