The Colony, Inc. v. Commissioner - 357 U.S. 28 (1958)
U.S. Supreme Court
The Colony, Inc. v. Commissioner, 357 U.S. 28 (1958)
The Colony, Inc. v. Commissioner
Argued April 3, 1958
Decided June 9, 1958
357 U.S. 28
Under the Internal Revenue Code of 1939, the Commissioner assessed deficiencies in a taxpayer's income taxes within an extended period provided in waivers executed by the taxpayer more than three but less than five years after the returns were filed. There was no claim that the returns were fraudulent or that the taxpayer had inaccurately reported its gross receipts. Instead, the deficiencies were based upon the Commissioner's determination that the taxpayer had understated the gross profits on sales of certain lots of land for residential purposes as a result of having erroneously included in their cost certain unallowable items of development expense. This resulted in an understatement of the taxpayer's gross income by more than 25% of the amount reported.
Held: the five-year period of limitations prescribed in § 275(c) for cases in which the taxpayer "omits from gross income an amount properly includible therein" which exceeds 25% of the gross income reported is not applicable, and the assessment was barred by the three-year limitation of § 275(a). Pp. 357 U. S. 29-38.
(a) In § 275(c), the words "omits from gross income an amount properly includible therein" refers to situations in which specific items of income are left out of the computation of gross income, and they do not apply to errors in the computation of gross income resulting from a mistaken overstatement of the cost of property sold. Pp. 357 U. S. 32-33.
(b) The legislative history of § 275(c) supports this conclusion. Pp. 357 U. S. 33-35.
(c) In enacting § 275(c), Congress was not concerned with the mere size of an error in reporting gross income, but with a restricted type of situation where the taxpayer's failure to report some items of taxable income put the Commissioner at a special disadvantage in detecting errors. Pp. 357 U. S. 36-38.
244 F.2d 75 reversed.