357 U.S. 28 (1958), 306, The Colony, Inc. v. Commissioner
|Docket Nº:||No. 306|
|Citation:||357 U.S. 28, 78 S.Ct. 1033, 2 L.Ed.2d 1119|
|Party Name:||The Colony, Inc. v. Commissioner|
|Case Date:||June 09, 1958|
|Court:||United States Supreme Court|
Argued April 3, 1958
CERTIORARI TO THE UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
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. 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. 32-33.
(b) The legislative history of § 275(c) supports this conclusion. Pp. 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. 36-38.
244 F.2d 75 reversed.
HARLAN, J., lead opinion
MR. JUSTICE HARLAN delivered the opinion of the Court.
The sole question in this case is whether assessments by the Commissioner of two asserted tax deficiencies were barred by the three-year statute of limitations provided in the Internal Revenue Code of 1939.
Under the 1939 Code, the general statute of limitations governing the assessment of federal income tax deficiencies is fixed at three years from the date on which the taxpayer filed his return, § 275(a), 53 Stat. 86, except in cases involving a fraudulent return or failure to file a return, where a tax may be assessed at any time. § 276(a), 53 Stat. 87. A special five-year period of limitations is provided when a taxpayer, even though acting in good faith, "omits from gross income an amount properly includible therein which is in excess of 25 percentum of the amount of gross income stated in the return. . . ." § 275(c), 53 Stat. 86. In either case, the period of limitation may be extended by a written waiver executed by the taxpayer within the statutory or any extended period of limitation. § 276(b), 53 Stat. 87.1
[78 S.Ct. 1035] The Commissioner assessed deficiencies in the taxpayer's income taxes for each of the fiscal years ending October 31, 1946, and 1947, within the extended period provided in waivers which were executed by the taxpayer more than three but less than five years after the returns were filed. There was no claim 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 the sales of certain lots of land for residential purposes as a result of having overstated the "basis" of such lots by erroneously including in their cost certain unallowable items of development expense. There was no claim that the returns were fraudulent.
The Tax Court sustained the Commissioner. It held that substantial portions of the development costs were properly disallowed, and that these errors by the taxpayer
had resulted in the understatement of the taxpayer's total gross income by 77.2% and 30.7%, respectively, of the amounts reported for the taxable years 1946 and 1947. In addition, the Tax Court held that, in these circumstances, the five-year period of limitation provided for in § 275(c) was applicable. It took the view that the statutory language, "omits from gross income an amount properly includible therein," embraced not merely the omission from a return of an item of income received by or accruing to a taxpayer, but also an understatement of gross income resulting from a taxpayer's miscalculation of profits through the erroneous inclusion of an excessive item of cost. 26 T.C. 30. On the taxpayer's appeal to the Court of Appeals, the only question raised was whether the three-year or the five-year statute of limitations governed the assessment of these deficiencies. Adhering to...
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