Colony v. Commissioner of Internal Revenue

• Citation: 2 L.Ed.2d 1119,78 S.Ct. 1033,357 U.S. 28
• Decision Date: 09 June 1958
• Docket Number: No. 306,306
• Parties: The COLONY, Inc., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE
• Court: U.S. Supreme Court

357 U.S. 28

78 S.Ct. 1033

2 L.Ed.2d 1119

The COLONY, Inc., Petitioner,

v COMMISSIONER OF INTERNAL REVENUE.

No. 306.

Argued April 3, 1958.

Decided June 9, 1958.

Mr. A. Robert Doll, Louisville, Ky., for petitioner.

Mr. Joseph F. Goetten, Washington, D.C., for respondent.

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, 26 U.S.C.A. § 275(a), 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 per centum 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

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 its earlier decision in Reis v. Commissioner, 6 Cir., 142 F.2d 900, the Court of Appeals affirmed. 6 Cir., 244 F.2d 75. We granted certiorari because this decision conflicted with rulings in other Courts of Appeals on the same issue, ² and because the question as to the proper scope of § 275(c), although resolved for the future by § 6501(e)(1)(A) of the Internal Revenue Code of 1954, 26 U.S.C.A. § 6501(e)(1)(A), 78 S.Ct. 1037, 1038, infra, remains one of substantial importance in the administration of the income tax laws for earlier taxable years. 355 U.S. 811, 78 S.Ct. 51, 2 L.Ed.2d 29.

In determining the correct interpretation of § 275(c) we start with the critical statutory language, 'omits from gross income an amount properly includible therein.' The Commissioner states that the draftsman's use of the word 'amount' (instead of, for example, 'item') suggests a concentration on the quantitative aspect of the error—that is, whether or not gross income was understated by as much as 25%. This view is somewhat reinforced if, in reading the above-quoted phrase, one touches lightly on the word 'omits' and bears down hard on the words 'gross income,' for where a cost item is overstated, as in the case before us, gross income is affected to the same degree as when a gross-receipt item of the same amount is completely omitted from a tax return.

On the other hand, the taxpayer contends that the Commissioner's reading fails to take full account of the word 'omits,' which Congress selected when it could have chosen another verb such as 'reduces' or 'understates,' either of which would have pointed significantly in the Commissioner's direction. The taxpayer also points out that normally 'statutory words are presumed to be used in their ordinary and usual sense, and with the meaning commonly attributable to them.' De Ganay v. Lederer, 250 U.S. 376, 381, 39 S.Ct. 524, 525, 63 L.Ed. 1042. 'Omit' is defined in Webster's New International Dictionary (2d ed. 1939) as 'to leave out or unmentioned; not to insert, include, or name,' and the Court of Appeals for the Sixth Circuit has elsewhere similarly defined the word. Ewald v. Commissioner, 141 F.2d 750, 753. Relying on this definition, the taxpayer says that the statute is limited to situations in which specific receipts or accruals of income items are left out of the computation of gross income. For reasons stated below we agree with the taxpayer's position.

Although we are inclined to think that the statute on its face lends itself more plausibly to the taxpayer's interpretation, it cannot be said that the language is unambiguous. In these circumstances we turn to the legislative history of § 275(c). We find in that history persuasive evidence that Congress was addressing itself to the specific situation where a taxpayer actually omitted some income receipt or accrual in his computation of gross income, and not more generally to errors in that computation arising from other causes.

Section 275(c) first appeared in the Revenue Act of 1934. 48 Stat. 680. As introduced in the House the bill simply added the gross-income provision to § 276 of the Revenue Act of 1932, 47 Stat. 169, relating to fraudulent returns and cases where no return had been filed, and carried with it no period of limitations. The intended coverage of the proposed provision was stated in a Report of a House Ways and Means Subcommittee as follows:

'Section 276 provides for the assessment of the tax without regard to the statute of limitations in case of a failure to file a return or in case of a false or fraudulent return with intent to evade tax.

'Your subcommittee is of the opinion that the limitation period on assessment should also not apply to certain cases where the taxpayer has understated his gross income on his return by a large amount, even though fraud with intent to evade tax cannot be established. It is, therefore, recommended that the statute of limitations shall not apply where the taxpayer has failed to disclose in his return an amount of gross income in excess of 25 percent of the amount of the gross income stated in the return. The Government should not be penalized when a taxpayer is so negligent as to leave out items of such magnitude from his return.' Hearings before the House Committee on Ways and Means, 73d Cong., 2d Sess., p. 139.

This purpose of the proposal was related to the full Committee in the following colloquy between Congressman Cooper of Tennessee, speaking for the Subcommittee, and Mr. Roswell Magill, representing the Treasury:

'Mr. Cooper. What we really had in mind was just this kind of a situation: Assume that a taxpayer left out, say, a million dollars; he just forgot it. We felt that whenever we found that he did that we ought to get the money on it, the tax on it.

'Mr. Magill. I will not argue against you on that score.

'Mr. Cooper. In other words, if a man is so negligent and so forgetful, or whatever the reason is, that he overlooks an item amounting to as much as 25 percent of his gross income, that we simply ought to have the opportunity of getting the tax on that amount of money.' House Hearings, supra, p. 149.

The full Committee revealed the same attitude in its report:

'It is not believed that taxpayers who are so negligent as to leave out of their returns items of such magnitude should be accorded the privilege of pleading the bar of the statute.' H.R.Rep. No. 704, 73d Cong., 2d Sess., p. 35.

The Senate Finance Committee approved of the intended coverage and language of the bill, except that it believed the statute of limitations should not be kept open indefinitely in the case of an honest but negligent taxpayer. Its report stated:

'* * * Your committee is in general accord with the policy expressed in this section of the House bill. However, it is believed that in the case of a taxpayer who makes an honest mistake, it would be unfair to keep the statute open indefinitely. For instance, a case might arise where a taxpayer failed to report a dividend because he was erroneously advised by the officers of the corporation that it was paid out of capital or he might report as income for one year an item of income which properly belonged in another year. Accordingly, your committee has provided for a 5-year statute in such cases.' S.Rep. No. 558, 73d Cong., 2d Sess., pp. 43—44.

Except for embodying the five-year period of limitation, § 275(c), as passed, reflects no change in the original basic objective underlying its enactment.

As rebutting these persuasive indications that Congress merely had in mind failures to report particular income receipts and accruals, and did not intend the five-year limitation to apply whenever gross income was understated, the Commissioner stresses the occasional use of...