Colony, Inc. v. Commissioner

The Colony, Inc. (plaintiff) agreed to extend the statute of limitations for the Internal Revenue Service (IRS) to assess potential additional tax with respect to Colony’s 1946 and 1947 tax returns. Colony did so more than three years but fewer than five years after Colony filed the returns. The IRS subsequently determined that Colony understated its gross profits on the sale of land because Colony overstated the land’s basis by mistakenly including certain unallowable expenses. The IRS did not contend that Colony’s returns were fraudulent. Colony challenged the assessments, arguing, among other things, that the assessments were untimely because the IRS made the assessments more than three years after Colony filed the returns. The IRS commissioner (defendant) responded that the then-five-year limitations period for instances in which the taxpayer “omits” from gross income an “amount properly includable therein” if such amount exceeded 25 percent of stated gross income applied. The United States Tax Court ruled for the commissioner. Colony appealed, arguing that the tax code used the word “omits” instead of words like “reduces” or “understates” because Congress meant to reserve the longer limitations period for cases involving a taxpayer’s actual failure to include an income receipt or accrual. The commissioner responded that the tax code used the word “amount” instead of a word like “item,” indicating Congress’s intent to increase the limitations period if a taxpayer understated its gross income by at least 25 percent.