## Facts

- Colony, Inc., a corporate taxpayer, developed and sold residential lots and reported income from lot sales for fiscal years ending October 31, 1946 and 1947.
- The Commissioner determined Colony understated gross profits by overstating the lots’ basis, including unallowable development expenses in cost.
- The Commissioner did not allege fraud and did not claim Colony failed to report gross receipts from the sales.
- Deficiency notices were issued more than three but less than five years after the returns were filed, within the period covered by written waivers.
- The timeliness of assessment depended on whether the five-year limitations period for substantial “omissions from gross income” applied.

## Issues

1. Whether a taxpayer “omits from gross income an amount properly includible therein” under § 275(c) of the Internal Revenue Code of 1939 when the understatement of gross income results from overstating basis (cost) rather than leaving out a distinct item of gross income.
2. Whether, on these facts, the Commissioner’s assessments were time-barred by the general three-year limitations period in § 275(a).

## Decision

- The Supreme Court reversed the Sixth Circuit.
- Section 275(c) did not apply because Colony did not omit specific items of gross income; it miscomputed gross income by overstating cost.
- The general three-year limitations period in § 275(a) governed, so the assessments made after three years were barred.

## Legal Principles

- In § 275(c), “omits from gross income an amount properly includible therein” refers to leaving out specific items of income from the computation of gross income, not to errors caused by overstating basis or cost in a reported transaction.
- The extended limitations period targets situations where unreported income items place the Commissioner at a special disadvantage in detecting the error from the return.
- The applicability of § 275(c) turns on the type of reporting error (omitted income item versus computational misstatement), not merely on the size of the understatement.

## Conclusion

Because Colony reported its receipts and the understatement stemmed from overstated basis rather than omitted income items, the five-year period in § 275(c) was inapplicable and the Commissioner’s assessments were barred by § 275(a)’s three-year statute of limitations.


Colony, Inc. v. Commissioner, 357 U.S. 28 (1958)